<PAGE>
SUBJECT TO COMPLETION MAY 8, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 6, 1996)
[LOGO]
APPLE SOUTH, INC.
$150,000,000
% SENIOR NOTES DUE 2006
INTEREST PAYABLE JUNE 1 AND DECEMBER 1
ISSUE PRICE: %
The % Senior Notes due 2006 (the "Notes") are being offered by Apple South,
Inc., a Georgia corporation. The Notes will mature on June 1, 2006. Interest on
the Notes is payable semi-annually on June 1 and December 1 of each year,
commencing December 1, 1996. The Notes are not redeemable prior to maturity and
are not entitled to the benefit of a sinking fund. The Notes will be represented
by one or more Global Securities ("Global Securities") registered in the name of
The Depository Trust Company (the "Depositary"), as Depositary. Beneficial
interests in the Global Securities will be shown on, and transfers thereof will
be effected only through, records maintained by the Depositary and its
participants. Except as described in this Prospectus Supplement, Notes in
definitive form will not be issued in exchange for Global Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC (1) COMMISSIONS (2) COMPANY (1)(3)
<S> <C> <C> <C>
Per Note.................................................... % % %
Total....................................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) Apple South, Inc. has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting estimated expenses of $400,000 payable by the Company.
The Notes are being offered by the Underwriters subject to prior sale, when, as,
and if accepted by the Underwriters, and subject to various prior conditions,
including their right to reject orders in whole or in part, and subject to
approval of certain legal matters by Davis Polk & Wardwell, counsel for the
Underwriters. It is expected that delivery of the Notes will be made through the
book-entry facilities of the Depositary, against payment therefor in New York
funds, on or about May , 1996.
J.P. MORGAN & CO. RAYMOND JAMES & ASSOCIATES, INC.
, 1996
<PAGE>
[MAP]
[4 CHARTS]
Number of Restaurants Restaurant Sales
(millions of dollars)
'91 - 77 '91 - 114.7
'92 - 101 '92 - 151.4
'93 - 133 '93 - 217.8
'94 - 188 '94 - 300.6
'95 - 274 '95 - 440.2
Restaurants Operating Margins Net Earnings
(percent) (millions of dollars)
'91 - 12.2 '91 - 3.8
'92 - 13.5 '92 - 6.2
'93 - 15.1 '93 - 11.9
'94 - 15.9 '94 - 19.1
'95 - 16.7 '95 - 20.3
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained or
incorporated in this Prospectus Supplement or the accompanying Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriters, dealers, or agents.
This Prospectus Supplement and the accompanying Prospectus do not constitute an
offer to sell or a solicitation of an offer to buy Notes by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus Supplement or the accompanying Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein or in the accompanying Prospectus is correct as
of any date subsequent to the date hereof or thereof or that there has been no
change in the affairs of the Company since the date hereof or thereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................. S-4
Use of Proceeds........................................................... S-8
Capitalization............................................................ S-9
Selected Consolidated Financial Data...................................... S-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... S-11
Business.................................................................. S-16
Management................................................................ S-24
Principal Shareholders.................................................... S-26
Description of Notes...................................................... S-27
Underwriting.............................................................. S-48
Legal Matters............................................................. S-48
Index to Financial Statements............................................. F-1
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 5
Ratio of Earnings to Fixed Charges........................................ 6
Description of Debt Securities............................................ 6
Plan of Distribution...................................................... 12
Legal Matters............................................................. 13
Experts................................................................... 13
</TABLE>
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT OR INCORPORATED BY
REFERENCE HEREIN. UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT REFLECTS STOCK DIVIDENDS OF FOUR-TENTHS OF A SHARE FOR EACH SHARE
OUTSTANDING ON SEPTEMBER 10, 1991, ONE-HALF SHARE FOR EACH SHARE OUTSTANDING ON
NOVEMBER 2, 1992, ONE-HALF SHARE FOR EACH SHARE OUTSTANDING ON JANUARY 29, 1993,
ONE-HALF SHARE FOR EACH SHARE OUTSTANDING ON AUGUST 30, 1993, AND ONE-HALF SHARE
FOR EACH SHARE OUTSTANDING ON JUNE 1, 1994. IN NOVEMBER 1995, THE COMPANY MERGED
WITH DF&R RESTAURANTS, INC. ("DF&R") IN A TRANSACTION ACCOUNTED FOR AS A POOLING
OF INTERESTS, AND ACCORDINGLY ALL FINANCIAL AND OTHER INFORMATION CONCERNING THE
COMPANY SET FORTH IN THIS PROSPECTUS SUPPLEMENT INCLUDES DF&R FOR ALL PERIODS
UNLESS OTHERWISE INDICATED. REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO THE
"COMPANY" OR "APPLE SOUTH" INCLUDE APPLE SOUTH, INC. AND ITS SUBSIDIARIES AND
PREDECESSORS UNLESS THE CONTEXT INDICATES OTHERWISE.
THE COMPANY
Apple South is a rapidly growing, multi-concept restaurant operating company.
Since its inception, the Company has grown and increased its profitability
through the efficient management of restaurant operations and through a series
of strategic restaurant openings and acquisitions. Over the last five fiscal
years, restaurant sales have increased at a compound annual growth rate of 36%,
and restaurant margins have risen from 11.1% in 1990 to 16.7% in 1995.
At March 31, 1996, the Company operated 274 restaurants, consisting of 198
casual dining restaurants operated under the name "Applebee's Neighborhood Grill
& Bar"; 48 "Don Pablo's" restaurants featuring traditional Mexican and Tex-Mex
dishes; 12 "Harrigan's" restaurants offering traditional classics such as
mesquite-smoked prime rib and hickory-grilled steaks and chicken; six
restaurants operated under the name "Tomato Rumba's Pastaria Grill" offering
pasta creations and grilled items; and ten franchised Hardee's fast-food
hamburger restaurants. For the year ended December 31, 1995, total restaurant
sales were $440.2 million.
As a franchisee of Applebee's International, Inc. (the "Franchisor"), the
Company holds the exclusive development rights for Applebee's restaurants in all
or parts of 22 states in the Southeast, Mid-Atlantic, and Midwest regions. The
Company opened its first Applebee's restaurant in South Carolina in 1986 and is
currently the nation's largest Applebee's operator. In November 1995, the
Company merged with DF&R, the owner and operator of Don Pablo's and Harrigan's
restaurants. The Don Pablo's restaurants are concentrated in Texas and the
Midwest region, while the Harrigan's restaurants are located in Texas, Oklahoma,
and New Mexico. Tomato Rumba's is a proprietary casual dining concept which the
Company is continuing to refine.
APPLEBEE'S. Applebee's restaurants are intended to fill a market niche between
traditional full service and fast-food segments of the restaurant industry. The
restaurants are designed to appeal to a customer base consisting primarily of
the 21 to 54 year old group that grew up on traditional fast-food, but now
prefers a more sophisticated menu, the availability of alcoholic beverages, and
a comfortable ambiance in addition to the traditional qualities of fast-food
restaurants - speed, value, and convenience. Each Applebee's restaurant is
designed and marketed as a friendly "neighborhood establishment" featuring a
varied selection of moderately priced, high-quality food and beverage items with
table service dining. Patronage by both family and adult groups is encouraged.
The Applebee's concept was initiated in 1980 with the opening of the first
Applebee's restaurant in Atlanta, Georgia, by a predecessor of the Franchisor.
The Franchisor is a publicly held company headquartered in Overland Park,
Kansas. As of March 31, 1996, the Applebee's restaurant system consisted of 699
restaurants in 45 states, Canada, the Caribbean, and Europe. Approximately 19%
of these restaurants are operated by the Franchisor, 28% by the Company, and the
remainder by other franchisees. During 1995, system-wide revenues from
Applebee's restaurants totaled approximately $1.25 billion.
S-4
<PAGE>
DON PABLO'S. Don Pablo's restaurants feature traditional Mexican and Tex-Mex
dishes served in a distinctive, festive dining atmosphere reminiscent of a
Mexican village plaza. Each restaurant is staffed with a highly experienced
management team that is visible in the dining area and interacts with both
customers and the staff to ensure attentive customer service and consistent food
quality. The Company strives to differentiate Don Pablo's by offering a wide
variety of items prepared fresh on-site using high-quality ingredients at
relatively low prices. The diverse menu, generous portions, and attractive
price/value relationship appeal to a broad customer base, including families.
The first Don Pablo's was opened in Arlington, Texas in 1987. The Company
believes that the growing popularity of Mexican and Tex-Mex food and the
relatively few Mexican food restaurants in certain regions of the United States,
combined with the success of its Midwest and Mid-Atlantic restaurants, support
the Company's commitment to continue expanding the Don Pablo's chain in targeted
markets.
DEVELOPMENT PLANS. Including the 15 restaurants opened in the first quarter,
the Company expects to open a total of 68 restaurants in 1996, including at
least 46 Applebee's and 18 Don Pablo's restaurants. Expansion efforts during the
next few years will be focused on the development of additional Applebee's
restaurants in the Company's existing development territories and Don Pablo's
restaurants principally in the Midwest and Mid-Atlantic regions and Florida.
Under development agreements with the Franchisor, the Company is required to
open a specified number of Applebee's restaurants in each of its development
territories over specified intervals. Management believes that the Company's
existing development territories will support over 400 Applebee's restaurants
and will accommodate planned Applebee's restaurant development for approximately
five to seven years. In March 1996, the Company closed 15 restaurants in its
Tomato Rumba's division and intends to focus its near term efforts on further
development of the Tomato Rumba's concept rather than building new Tomato
Rumba's restaurants. Management is currently exploring whether to undertake an
effort to refine the Harrigan's concept as a future growth vehicle. The Company
expects to sell its Hardee's restaurants before the end of the third quarter of
1996.
The Company attempts to balance its new restaurant development by (i)
selectively locating restaurants in areas where an appropriate level of market
penetration has been achieved, (ii) increasing the level of market penetration
in areas that are not yet "efficient," and (iii) expanding into new markets. As
a market area becomes more fully developed, each restaurant normally benefits
from increased customer recognition, greater advertising capabilities, and
economies of scale with respect to food costs, advertising and promotion, and
certain other expenses. Markets which have reached this minimum level of
penetration are characterized as "efficient" and typically are more profitable
than emerging markets.
S-5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED............................. $150 million principal amount of % Senior Notes
due 2006 (the "Notes").
MATURITY DATE.................................. June 1, 2006.
INTEREST RATE.................................. The Notes will bear interest at the rate of %
per annum, payable semi-annually.
INTEREST PAYMENT DATES......................... June 1 and December 1, commencing December 1,
1996.
RANKING........................................ The Notes will be senior unsecured obligations of
the Company and will rank PARI PASSU in right of
payment with all other senior unsecured
indebtedness of the Company. Although the
Company's obligations under its principal bank
line of credit are unsecured, they are guaranteed
by certain of the Company's subsidiaries.
Accordingly, the Notes will effectively be
subordinated to the Company's obligations under
such line of credit with respect to any right to
participate in any distribution of assets of any
such subsidiary.
CERTAIN COVENANTS.............................. The indenture for the Notes, among other things,
contains restrictions (with certain exceptions) on
the ability of the Company and its Restricted
Subsidiaries (as therein defined) to: (i) incur
additional indebtedness; (ii) make dividend
payments or other restricted payments; (iii)
create liens; (iv) make asset sales; (v) enter
into transactions with affiliates; (vi) enter into
sale-leaseback transactions; and (vii) enter into
mergers, consolidations, or sales of all or
substantially all of their assets.
CHANGE OF CONTROL.............................. Holders of the Notes may require the Company to
repurchase the Notes upon a "Change of Control" of
the Company (as defined under "Description of
Notes").
ABSENCE OF PUBLIC MARKET....................... There is no public market for the Notes. The
Company does not intend to list the Notes on any
securities exchange or to arrange for their
quotation on the Nasdaq system. The Company has
been advised by the Underwriters that they
presently intend to make a market in the Notes
after the consummation of this offering, although
they are under no obligation to do so. No
assurance can be given, however, as to the
liquidity of the trading market for the Notes or
that an active public market for the Notes will
develop.
USE OF PROCEEDS................................ The Company intends to use the net proceeds of
this offering for the development of new
restaurants, the acquisition of additional
restaurants and concepts if appropriate
opportunities arise, and for other general
corporate purposes. See "Use of Proceeds."
</TABLE>
S-6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND RESTAURANT DATA
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31 APRIL 2 MARCH 31
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- --------- -------- ---------
DOLLARS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
DATA
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS:
Restaurant sales........................ $114,690 $151,359 $217,755 $300,559 $440,190 $ 91,064 $126,333
Operating income (loss)................. 8,372 12,502 21,298 32,452 41,329(1) 9,659 (6,223)(2)
Interest expense........................ 2,824 2,193 2,205 3,131 6,189 1,276 1,943
Net earnings (loss)..................... 3,770 6,162 11,943 19,060 20,279(1) 5,396 (5,487)(2)
Earnings (loss) per common and common
equivalent share....................... $ 0.17 $ 0.22 $ 0.36 $ 0.54 $ 0.52(1) $ 0.15 $ (0.14)(2)
Weighted average number of common and
common equivalent shares outstanding
(in thousands)......................... 22,333 27,806 33,395 35,444 38,880 35,874 39,905
RESTAURANT DATA:
Applebee's:
Sales................................. $ 71,037 $102,464 $150,921 $201,359 $300,928 $ 62,231 $ 89,577
Restaurants open at end of period..... 48 68 90 120 187 137 198
Don Pablo's:
Sales................................. $ 13,129 $ 17,039 $ 31,132 $ 57,192 $ 88,820 $ 17,350 $ 27,095
Restaurants open at end of period..... 7 9 17 33 44 34 48
Harrigan's:
Sales................................. $ 22,767 $ 23,183 $ 23,044 $ 23,021 $ 22,781 $ 5,681 $ 5,773
Restaurants open at end of period..... 12 12 12 12 12 12 12
Tomato Rumba's/Gianni's:
Sales................................. $ -- $ 10 $ 2,718 $ 9,973 $ 19,399 $ 3,660 $ 1,858
Restaurants open at end of period..... -- 2 4 13 21 15 6
Hardee's:
Sales................................. $ 7,757 $ 8,663 $ 9,940 $ 9,014 $ 8,262 $ 2,142 $ 2,030
Restaurants open at end of period..... 10 10 10 10 10 10 10
BALANCE SHEET DATA:
Working capital (deficit)............... $ (388) $(17,801) $ 6,175 $ 2,200 $(17,778) $ (4,729) $(19,151)
Premises and equipment, net............. 36,222 61,874 103,708 188,009 303,077 217,434 309,470
Total assets............................ 52,490 74,337 137,201 226,087 369,138 262,254 380,237
Long-term debt.......................... 15,947 18,225 32,227 70,190 118,726 56,437 140,260
Shareholders' equity.................... 22,069 28,859 79,899 120,341 203,221 168,176 191,602
OTHER DATA:
Depreciation and amortization(3)........ $ 4,113 $ 4,932 $ 7,483 $ 11,119 $ 18,852 $ 3,774 $ 5,706
EBITDA (4).............................. 12,485 17,434 28,781 43,571 60,181(1) 13,433 (517)(2)
Capital expenditures:
Restaurant construction, acquisitions,
and other............................ 7,182 28,712 46,971 92,930 165,836 42,203 28,731
Restaurant remodeling and
refurbishment........................ 137 1,890 3,686 6,461 10,289 2,380 1,880
Ratio of earnings to fixed charges(5)... 2.12 2.99 4.53 5.04 3.83(1) 4.37 --(6)
</TABLE>
- ------------------------------
(1) After a one-time charge for merger and conversion charges of $10.0 million
before tax ($8.2 million or $0.21 per share after tax).
(2) After asset revaluation charges of $19.8 million before tax ($12.7 million
or $0.32 per share after tax).
(3) Includes depreciation and amortization related to restaurant operations and
corporate facilities and excludes amortization of goodwill, which is
included in non-operating expenses.
(4) EBITDA represents operating income plus depreciation and amortization
expense included in the determination of operating income, EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity.
(5) Earnings represent income from continuing operations before income taxes and
fixed charges, net of capitalized interest. Fixed charges consist of
interest expense before reduction for capitalized interest, debt
amortization costs, and one-third (the percent deemed representative of the
interest factor) of total restaurant lease payments.
(6) As a result of the asset revaluation charge of $19.8 million in the first
quarter of 1996, earnings were insufficient to cover fixed charges by $8.6
million. The ratio of earnings to fixed charges excluding the asset
revaluation charge would have been 4.31 for the first quarter of 1996.
S-7
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be used for the development of
new restaurants, the acquisition of additional restaurants and concepts if
appropriate opportunities arise, and for other general corporate purposes.
Pending such use, such funds will be used to pay down existing revolving bank
lines of credit or invested in short-term marketable securities.
S-8
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996, (i) the actual consolidated
short-term debt and capitalization of the Company and (ii) the pro forma
consolidated short-term debt and capitalization of the Company as adjusted to
give effect to the sale by the Company of the Notes and the application of
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the notes thereto appearing elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
AS OF MARCH 31
1996
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
DOLLARS IN THOUSANDS EXCEPT SHARE DATA
SHORT-TERM DEBT:
Current installments of long-term debt...................... $ 2,456 $ 2,456
-------- -----------
-------- -----------
LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS:
Revolving credit agreements................................. $122,500 $ --
% Notes due 2006.................................. -- 150,000
Other long-term debt........................................ 17,760 17,760
-------- -----------
Total long-term debt...................................... 140,260 167,760
-------- -----------
SHAREHOLDERS' EQUITY: (1)
Preferred stock; $.01 par value, 10,000,000 shares
authorized, none outstanding............................... -- --
Common stock; $.01 par value, 75,000,000 shares authorized,
39,084,032 shares issued(2)................................ 391 391
Additional paid-in capital.................................. 139,704 139,704
Retained earnings........................................... 54,753 54,753
Treasury stock; 149,942 shares.............................. (3,246) (3,246)
-------- -----------
Total shareholders' equity................................ 191,602 191,602
-------- -----------
Total capitalization........................................ $331,862 $359,362
-------- -----------
-------- -----------
</TABLE>
- ------------------------------
(1) See Note 11 of Notes to Consolidated Financial Statements.
(2) Does not include 4,975,595 shares reserved for issuance under the Company's
stock option plans, of which 2,698,795 shares are issuable upon exercise of
outstanding options.
S-9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data for,
and as of the end of, each of the fiscal years in the five-year period ended
December 31, 1995. The selected consolidated financial data for each of the
years in the three-year period ended December 31, 1995, have been derived from
consolidated financial statements of Apple South, Inc., which have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated balance sheets as of December 31, 1994 and 1995, and the
consolidated statements of earnings for each of the years in the three-year
period ended December 31, 1995, and the report thereon, are included elsewhere
herein. The consolidated balance sheets as of April 2, 1995 and March 31, 1996
and the consolidated statements of earnings for each of the quarters ended
thereon are derived from unaudited financial statements. All amounts reflect the
1995 merger with DF&R, which was accounted for as a pooling of interests.
<TABLE>
<CAPTION>
QUARTER ENDED
DOLLARS IN THOUSANDS, EXCEPT RATIOS AND YEAR ENDED DECEMBER 31 APRIL 2 MARCH 31
PER SHARE DATA 1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Restaurant sales:
Applebee's............................ $ 71,037 $102,464 $150,921 $201,359 $300,928 $ 62,231 $ 89,577
Don Pablo's........................... 13,129 17,039 31,132 57,192 88,820 17,350 27,095
Harrigan's............................ 22,767 23,183 23,044 23,021 22,781 5,681 5,773
Tomato Rumba's/Gianni's............... -- 10 2,718 9,973 19,399 3,660 1,858
Hardee's.............................. 7,757 8,663 9,940 9,014 8,262 2,142 2,030
-------- -------- -------- -------- --------- -------- ---------
Total restaurant sales.............. 114,690 151,359 217,755 300,559 440,190 91,064 126,333
-------- -------- -------- -------- --------- -------- ---------
Restaurant operating expenses:
Food and beverage..................... 34,674 44,756 63,329 84,910 120,630 25,032 34,732
Payroll and benefits.................. 33,314 43,589 62,425 87,236 129,424 27,305 38,158
Depreciation and amortization......... 4,113 4,932 7,483 11,119 17,662 3,543 5,295
Other operating expenses.............. 28,619 37,663 51,636 69,483 98,850 20,858 28,129
-------- -------- -------- -------- --------- -------- ---------
Total restaurant operating
expenses........................... 100,720 130,940 184,873 252,748 366,566 76,738 106,314
-------- -------- -------- -------- --------- -------- ---------
Income from restaurant operations....... 13,970 20,419 32,882 47,811 73,624 14,326 20,019
12.2% 13.5% 15.1% 15.9% 16.7% 15.7% 15.8%
General and administrative expenses..... 5,598 7,917 11,584 15,359 22,298 4,667 6,442
Merger and asset revaluation charges.... -- -- -- -- 9,997 -- 19,800
-------- -------- -------- -------- --------- -------- ---------
Operating income (loss)................. 8,372 12,502 21,298 32,452 41,329(1) 9,659 (6,223)(2)
-------- -------- -------- -------- --------- -------- ---------
Other income (expense):
Interest expense...................... (2,824) (2,193) (2,205) (3,131) (6,189) (1,276) (1,943)
Interest income....................... 132 184 590 789 638 212 57
Other, net............................ 165 (606) (490) (150) (1,349) (99) (478)
-------- -------- -------- -------- --------- -------- ---------
Total other income (expense)........ (2,527) (2,615) (2,105) (2,492) (6,900) (1,163) (2,364)
-------- -------- -------- -------- --------- -------- ---------
Earnings (loss) before income taxes..... 5,845 9,887 19,193 29,960 34,429 8,496 (8,587)
Income taxes............................ 2,075 3,725 7,250 10,900 14,150 3,100 (3,100)
-------- -------- -------- -------- --------- -------- ---------
Net earnings (loss)..................... $ 3,770 $ 6,162 $ 11,943 $ 19,060 $ 20,279(1) $ 5,396 $ (5,487)(2)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
Earnings (loss) per common and common
equivalent share....................... $ 0.17 $ 0.22 $ 0.36 $ 0.54 $ 0.52(1) $ 0.15 $ (0.14)(2)
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
Weighted average number of common and
common equivalent shares outstanding... 22,333 27,806 33,395 35,444 38,880 35,874 39,905
BALANCE SHEET DATA:
Working capital (deficit)............... $ (388) $(17,801) $ 6,175 $ 2,200 $(17,778) $ (4,729) $(19,151)
Premises and equipment, net............. 36,222 61,874 103,708 188,009 303,077 217,434 309,470
Total assets............................ 52,490 74,337 137,201 226,087 369,138 262,254 380,237
Long-term debt.......................... 15,947 18,225 32,227 70,190 118,726 56,437 140,260
Shareholders' equity.................... 22,069 28,859 79,899 120,341 203,221 168,176 191,602
OTHER DATA:
Depreciation and amortization(3)........ $ 4,113 $ 4,932 $ 7,483 $ 11,119 $ 18,852 $ 3,774 $ 5,706
EBITDA (4).............................. 12,485 17,434 28,781 43,571 60,181(1) 13,433 (517)(2)
Capital expenditures:
Restaurant construction, acquisitions,
and other............................ 7,182 28,712 46,971 92,930 165,836 42,203 28,731
Restaurant remodeling and
refurbishment........................ 137 1,890 3,686 6,461 10,289 2,380 1,880
Ratio of earnings to fixed charges
(5).................................... 2.12 2.99 4.53 5.04 3.83(1) 4.37 --(6)
</TABLE>
- ------------------------------
(1) After a one-time charge for merger and conversion charges of $10.0 million
before tax ($8.2 million or $0.21 per share after tax).
(2) After asset revaluation charges of $19.8 million before tax ($12.7 million
or $0.32 per share after tax).
(3) Includes depreciation and amortization related to restaurant operations and
corporate facilities and excludes amortization of goodwill, which is
included in non-operating expenses.
(4) EBITDA represents operating income plus depreciation and amortization
expense included in the determination of operating income. EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity.
(5) Earnings represent income from continuing operations before income taxes and
fixed charges, net of capitalized interest. Fixed charges consist of
interest expense before reduction for capitalized interest, debt
amortization costs, and one-third (the percent deemed representative of the
interest factor) of total restaurant lease payments.
(6) As a result of the asset revaluation charge of $19.8 million in the first
quarter of 1996, earnings were insufficient to cover fixed charges by $8.6
million. The ratio of earnings to fixed charges excluding the asset
revaluation charge would have been 4.31 for the first quarter of 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the Company's
performance during the periods indicated, the following discussion should be
read in conjunction with the consolidated financial statements appearing
elsewhere in this Prospectus Supplement.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages which
certain items of income and expense bear to total restaurant sales:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31 APRIL 2 MARCH 31
1993 1994 1995 1995 1996
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
RESTAURANT SALES:
Applebee's................................................ 69.3% 67.0% 68.3% 68.3% 70.9%
Don Pablo's............................................... 14.3 19.0 20.2 19.1 21.4
Harrigan's................................................ 10.6 7.7 5.2 6.2 4.6
Tomato Rumba's/Gianni's................................... 1.2 3.3 4.4 4.0 1.5
Hardee's.................................................. 4.6 3.0 1.9 2.4 1.6
------ ------ ------ ------- --------
Total restaurant sales.................................. 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- --------
RESTAURANT OPERATING EXPENSES:
Food and beverage......................................... 29.1 28.3 27.4 27.5 27.5
Payroll and benefits...................................... 28.7 29.0 29.4 30.0 30.2
Depreciation and amortization............................. 3.4 3.7 4.0 3.9 4.2
Other operating expenses.................................. 23.7 23.1 22.5 22.9 22.3
------ ------ ------ ------- --------
Total restaurant operating expenses..................... 84.9 84.1 83.3 84.3 84.2
------ ------ ------ ------- --------
Income from restaurant operations........................... 15.1 15.9 16.7 15.7 15.8
General and administrative expenses......................... 5.3 5.1 5.1 5.1 5.1
Merger and asset revaluation charges........................ -- -- 2.2 -- 15.6
------ ------ ------ ------- --------
Operating income (loss)..................................... 9.8 10.8 9.4 10.6 (4.9)
------ ------ ------ ------- --------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1.0) (1.0) (1.4) (1.4) (1.5)
Interest income........................................... 0.2 0.2 0.1 0.2 --
Other, net................................................ (0.2) -- (0.3) (0.1) (0.4)
------ ------ ------ ------- --------
Total other income (expense)............................ (1.0) (0.8) (1.6) (1.3) (1.9)
------ ------ ------ ------- --------
Earnings (loss) before income taxes......................... 8.8 10.0 7.8 9.3 (6.8)
Income taxes................................................ 3.3 3.7 3.2 3.4 (2.5)
------ ------ ------ ------- --------
Net earnings (loss)......................................... 5.5% 6.3% 4.6% 5.9% (4.3)%
------ ------ ------ ------- --------
------ ------ ------ ------- --------
</TABLE>
COMPARISON OF HISTORICAL RESULTS -- QUARTERS ENDED MARCH 31, 1996 AND APRIL 2,
1995
Restaurant sales for the first quarter of 1996 increased 39% to $126 million
from $91 million for the same period in 1995. This $35 million increase in sales
for 1996 is primarily due to sales from 11 Applebee's and four Don Pablo's
opened in the first quarter of 1996 and 50 Applebee's and ten Don Pablo's opened
or acquired in the last three quarters of 1995. Sales at existing restaurants
which were collectively operating at normal capacity (average annual sales as a
group of approximately $2.25 million at Applebee's and $2.75 million at Don
Pablo's) in 1995 were approximately 4% lower at Applebee's and 6% higher at Don
Pablo's in the first quarter of 1996 as compared with the same period in 1995.
Sales at those restaurants which were operating below capacity in 1995 were
approximately 4% lower at Applebee's and 13% higher at Don Pablo's for the first
quarter of 1996. Management believes that the sales decrease at its Applebee's
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restaurants is attributable to the severe weather experienced in the
Mid-Atlantic and Midwest regions in the first quarter of 1996. Management
believes that the sales increase at its Don Pablo's restaurants is primarily the
result of initiating television advertising during the first quarter of 1996.
For the first quarter of 1996, restaurant operating expenses as a percent of
sales decreased 0.1% to 84.2% as compared with 84.3% for the same period in
1995. The resulting increase in restaurant operating margins is principally due
to a decrease in preopening and training expenses as a percent of sales,
partially offset by an increase in depreciation and amortization expense as a
larger percentage of restaurants are owned.
Preopening and training expenses as a percent of sales decreased to 1.6% in the
first quarter of 1996 from 2.0% for the same period in 1995 as a result of a
having a larger base of restaurants (274 at December 31, 1995 versus 188 at
December 31, 1994) with which to leverage these new opening costs.
General and administrative expenses as a percent of sales remained at 5.1% in
the first quarter of 1996 as compared with the same period in 1995.
In the first quarter of 1996, the Company announced its decision to redeploy a
significant portion of the assets in its Tomato Rumba's division and to
accelerate its efforts to sell its ten Hardee's restaurants. The Company's
decision regarding the Tomato Rumba's and Hardee's divisions resulted in the
closing of 12 of its 18 Tomato Rumba's restaurants and all three of its Gianni's
Little Italy restaurants and prompted an evaluation of the fair value of the
assets in these divisions in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed of." Fair value of the assets in the Tomato
Rumba's and Hardee's divisions was determined by comparing expected future cash
flows to the carrying amount of these assets. The asset revaluation charge of
$19.8 million consisted primarily of the asset impairment loss and included
certain operating losses related to the Tomato Rumba's division.
Interest expense as a percent of sales increased slightly in 1996 compared with
1995 due to higher average borrowings partially offset by lower average interest
rates for the quarter. Other expenses increased in 1996 compared with 1995
primarily due to the amortization of goodwill and other intangible assets
recorded as a part of the purchase price allocations for acquisitions made by
the Company in 1995.
The Company's effective tax rate for the full year 1996 is expected to be 36%,
which approximates the effective tax rate on 1995 earnings before merger costs
associated with DF&R.
In the first quarter of 1996, the Company had a net loss as a percent of sales
of 4.3% compared with net income of 5.9% in the same period of 1995. The current
period net loss resulted from asset revaluation charges (10.0% of sales, net of
tax).
COMPARISON OF HISTORICAL RESULTS -- YEARS ENDED 1995, 1994, AND 1993
Restaurant sales for 1995 increased 46% to $440 million from $301 million in
1994, primarily due to a full-year's sales from 30 Applebee's, 16 Don Pablo's,
and ten Gianni's restaurants opened in 1994 and a partial-year's sales from
restaurants opened or acquired in 1995, including 67 Applebee's, 11 Don Pablo's,
and nine Tomato Rumba's. One Gianni's restaurant was closed in each of 1995 and
1994. Sales at existing restaurants which were collectively operating at normal
capacity (average annual sales as a group of approximately $2.25 million at
Applebee's and $2.75 million at Don Pablo's) in 1994 were approximately 1% lower
in 1995 at Applebee's and 3% lower at Don Pablo's. Sales at those restaurants
which were operating below capacity in 1994 were approximately 1% higher at
Applebee's and 5% higher at Don Pablo's in 1995.
Restaurant sales for 1994 increased by 38% to $301 million from $218 million for
1993. The $83 million increase in sales for 1994 is mainly due to a full-year's
sales from 22 Applebee's, eight Don Pablo's, and two Gianni's restaurants added
in 1993 and a partial year's sales for 30 Applebee's, 16 Don Pablo's, and ten
Gianni's restaurants opened in 1994. Sales at capacity restaurants in 1994 rose
2% over 1993 at Applebee's and decreased 2% at Don Pablo's, while sales at below
capacity restaurants in 1994 were up 4% over 1993 at Applebee's and were down 1%
at Don Pablo's.
In 1995, the Company increased restaurant sales and income from restaurant
operations by accelerating its restaurant acquisition program. In March 1995,
the Company acquired certain assets, including eight operating Applebee's
restaurants and the exclusive Applebee's development rights for most of Iowa,
northwest Illinois, and contiguous areas in
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Wisconsin and Missouri, for approximately $17 million (the "Iowa Acquisition").
In June 1995, the Company acquired certain assets, including 18 operating
Applebee's restaurants and the exclusive Applebee's development rights for the
Chicago metropolitan area, most of Wisconsin, and contiguous areas in Minnesota
and Michigan, from Marcus Restaurants, Inc. for approximately $48 million (the
"Marcus Acquisition"). The results of operations from the acquired restaurants
are included in the Company's consolidated operating results from the time of
acquisition.
On November 17, 1995, the Company merged with DF&R in a pooling-of-interests
transaction. The merger was effected through the exchange of 1.5 shares of Apple
South, Inc. common stock for each share of DF&R common stock, which resulted in
the issuance of approximately 9.3 million shares of Apple South, Inc. common
stock. Accordingly, all consolidated financial statement information has been
restated to include DF&R.
Restaurant operating expenses as a percent of sales decreased to 83.3% in 1995
and 84.1% in 1994 from 84.9% in 1993. The resulting increase in restaurant
operating margins is principally due to (i) lower food and beverage costs as a
percent of sales and (ii) a decrease in preopening and training expenses as a
percent of sales, as well as a decrease in net occupancy costs as a percent of
sales in 1994. These margin improvements were partially offset by the increased
operating expenses at the Tomato Rumba's division, which were primarily a result
of start-up costs.
The Company continuously reviews its vendor relationships to take advantage of
cost savings. Pursuant to the terms of a revised agreement with the Company's
primary food distributor, effective in July 1994, the Company took advantage of
early payment discounts and reduced days payable from 30 to 14 which
significantly lowered food and beverage costs in the Applebee's and Tomato
Rumba's divisions for a partial year in 1994. Effective in January 1995, the
Company further reduced food and beverage costs by lowering days payable from 14
to zero. These efforts resulted in a decrease in food and beverage costs as a
percent of sales at Applebee's of 1.1% in 1995 and 0.4% in 1994. On a
consolidated basis, food and beverage costs as a percent of sales decreased 0.9%
in 1995, which was in addition to the 0.8% achieved in 1994. Management expects
food costs as a percent of sales to decrease at the Don Pablo's and Harrigan's
divisions as purchasing efficiencies are realized in 1996.
Preopening and training expenses as a percent of sales decreased to 2.1% in 1995
from 2.4% in 1994 due to incremental sales increases from the 26 restaurants
acquired in 1995 which did not incur preopening and training costs that
generally arise from a new restaurant opening. The increase from 2.2% in 1993 to
2.4% in 1994 primarily resulted from the opening of 56 newly constructed
restaurants in 1994 compared with 32 in 1993.
Net occupancy costs (rent and depreciation expense) as a percent of sales
increased 0.2% in 1995 and decreased 0.4% in 1994. The Company's policy of
owning rather than leasing new restaurants has historically decreased occupancy
costs as a percent of sales; however, this decrease was offset by the relatively
large number of leases assumed in the acquisition of 26 Applebee's restaurants
in 1995. Options to acquire restaurant facilities under ten existing operating
leases were exercised in 1995 and four additional options were exercised in
1994, which lowered occupancy costs as a percent of sales. The Company plans to
own rather than lease an increasing number of new locations which should resume
the trend of reducing occupancy costs as a percent of sales.
During 1995, the Company continued expansion of its Tomato Rumba's division by
adding nine newly constructed restaurants, ending the year with 21 restaurants.
In April 1995, the Company changed the name of the "Gianni's Little Italy"
concept to "Tomato Rumba's Pastaria Grill" to avoid trademark conflicts in
certain markets. In addition, the menu was expanded to include more grilled
items, and the prototype decor was changed to create a more entertaining
ambiance. During 1995, all but three restaurants in this division were opened
as, or converted to, Tomato Rumba's.
General and administrative expenses as a percent of sales remained at 5.1% in
1995 as compared with 1994 and decreased 0.2% in 1994 from 5.3% in 1993,
primarily due to spreading relatively fixed corporate management costs over a
growing number of restaurants. Merger and conversion expenses (2.2% of sales in
1995) are nonrecurring costs related predominately to the merger with DF&R as
well as the conversion of Gianni's Little Italy restaurants to Tomato Rumba's
Pastaria Grill. These expenses include investment banking fees, accounting and
legal fees, printing and other costs related to the DF&R merger, as well as
conversion costs which include decor and menu changes and the write-off of
specific assets and certain operating losses related to the Gianni's Little
Italy restaurants prior to conversion.
Interest expense increased to $6 million in 1995 from $3 million in 1994 due to
higher average borrowings partially offset by lower average interest rates for
the year. Interest expense was higher in 1994 than in 1993 due to higher average
debt balances, again partially offset by lower borrowing rates. The Company's
weighted average interest rate on borrowings was
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<PAGE>
approximately 7.3% in 1995, 8.0% in 1994, and 8.5% in 1993. Since 1993, the
Company has retired higher-rate term debt while negotiating new lower-rate
credit facilities. The higher debt balances in all three years reflect financing
of the Company's restaurant construction and acquisition program. Other expenses
increased in 1995 compared with 1994 primarily due to the amortization of
goodwill and other intangible assets recorded as a part of the allocation of
purchase price for the Iowa and Marcus Acquisitions. Other expenses decreased in
1994 compared with 1993 due to certain non-recurring concept development costs
incurred in 1993 associated with the Gianni's restaurants.
Income tax expense as a percent of earnings before income taxes was 41.1% in
1995, 36.4% in 1994, and 37.8% in 1993. The increase in the effective tax rate
for 1995 compared with 1994 is due to certain non-deductible costs associated
with the DF&R merger. The decrease in the effective income tax rate from 1993 to
1994 was principally due to the beneficial impact of the tax credit for FICA
taxes paid on tipped employee wages in excess of the minimum wage as a result of
a change in tax law enacted in 1993. Management expects to return to an
effective tax rate of approximately 36%.
Net earnings as a percent of sales decreased to 4.6% in 1995 from 6.3% in 1994
primarily as a result of merger and conversion expenses (1.9% of sales, net of
tax), higher interest expense, and goodwill amortization which were only
partially offset by improved restaurant-level margins. Net earnings as a percent
of sales increased to 6.3% in 1994 from 5.5% in 1993 primarily as a result of an
increase in the Company's average sales per restaurant that leveraged many fixed
restaurant-level expenses, reduced food and beverage costs, and lower occupancy
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's recent historical and projected future growth cause it to be a net
user of cash, even after a significant amount of expansion financing is
generated from operations. The Company's cash and cash equivalents increased
approximately $0.7 million in the quarter ended March 31, 1996. Principal
sources of funds in the first quarter of 1996 consisted of (i) cash flow from
operations ($14 million) and (ii) additional borrowings under the Company's
revolving credit facilities ($22 million). The primary uses of funds consisted
of (i) costs associated with expansion, principally land, building, and
equipment associated with the construction of new Applebee's and Don Pablo's
restaurants ($27 million) and (ii) the purchase of 411,000 shares of treasury
stock ($8 million).
Principal financial sources in 1995 consisted of (i) cash flow from operations
($51 million), (ii) proceeds from the June 1995 issuance of 0.9 million shares
of common stock (approximately $16 million) and the March 1995 issuance of 3.2
million shares of common stock (approximately $41 million), and (iii) reduction
of cash resources ($16 million) and additional borrowings under the Company's
revolving credit facilities ($56 million). The primary uses of funds consisted
of (i) the Marcus Acquisition for approximately $48 million (of which $35
million was in cash and $13 million was financed as an operating lease through
the Company's leveraged lease agreement) and the Iowa Acquisition for
approximately $17 million in cash, (ii) costs associated with expansion --
principally land, building, and equipment associated with the construction of
new Applebee's, Don Pablo's, and Tomato Rumba's restaurants ($124 million), and
(iii) repayments of debt ($10 million).
Since substantially all sales in the Company's restaurants are for cash and
accounts payable are generally due in 15 to 45 days, the Company is able to
operate with negative working capital. The increases in inventory, premises and
equipment, franchise costs, and accrued liabilities are principally due to the
15 restaurants opened during the first quarter of 1996. The increase in other
assets is principally due to the increase in cash surrender value of an
officer's life insurance policy (approximately $0.9 million) and land held for
corporate office development (approximately $1.5 million) purchased in the first
quarter of 1996. The decrease in accounts payable is primarily due to the timing
of construction payments at the end of the first quarter of 1996. Further
increases in current assets and liabilities are expected as the Company
continues its restaurant development program.
The Company's 1995 capital expenditure program provided for the opening of 41
Applebee's, 11 Don Pablo's, and nine Tomato Rumba's restaurants as well as
significant technological improvements in the restaurants and the corporate
office.
The Company expects to open 68 restaurants in 1996 and 85 in 1997. The
associated capital requirements will depend upon the mix of owned and leased
units. In the last three years, the Company has purchased 71% of its new
restaurant sites. The annual capital requirement for new construction is
expected to approximate $100 million to $110 million in 1996 and $145 million to
$155 million in 1997. In addition, purchase options on nine of the Company's
existing operating leases become exercisable over the next two years. In order
to eliminate these high-cost leases and to continue
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<PAGE>
to reduce occupancy costs, the Company expects to exercise these options. The
capital costs associated with these purchase options are estimated at $10
million in 1996 and $4 million in 1997. Management believes that the proceeds
from this offering, together with cash flow from operations and remaining
borrowings available under existing credit agreements, will provide funding
sufficient to achieve the Company's expansion plans at least through the next
two years.
In connection with obtaining the consent of the Franchisor for the transfer of
the restaurants and the exclusive development rights to territories in Wisconsin
and the Chicago area acquired in the Marcus Acquisition, the Company agreed to
establish new annual development schedules through the year 2000. At March 31,
1996, the Company was obligated to open 163 additional restaurants by the end of
the year 2000, including 18 required to be opened by the end of 1996.
In the first quarter of 1996, the Company expanded its unsecured revolving bank
credit agreements from $120 million to $185 million with interest payable at a
margin above LIBOR or at prime. Approximately $123 million was outstanding under
these revolving bank credit agreements as of March 31, 1996.
The terms of the Company's revolving credit agreements and term loans include
various covenants which, among other things, require the Company to maintain a
debt to total capital ratio of less than 65%. The Company is in compliance with
all provisions of these agreements. In 1995, the Company's net financing,
operating, and investing activities slightly lowered the debt to total capital
ratio to 38% in 1995 from 39% in 1994.
In the first quarter of 1995, the Company negotiated a $30 million leveraged
lease commitment, which was structured as a series of individual operating
leases for financial reporting purposes, with lease rates approximately the same
as the borrowing rates available under the Company's revolving credit
agreements. These properties can later be purchased at their original cost.
Through this facility, the Company was able to reduce the overall cost of
occupancy without leveraging its equity capital.
On February 8, 1996, the Company announced that it may from time to time,
depending on market conditions, purchase up to one million shares of its common
stock through open market transactions to satisfy obligations under stock option
and employee stock ownership plans. As of March 31, 1996, the Company had
purchased 411,000 shares of its common stock under this program.
IMPACT OF INFLATION
Management believes that inflation has not had a material effect on earnings
during the past several years. Inflationary increases in the cost of labor,
food, and other operating costs could adversely affect the Company's restaurant
operating margins. In the past, however, the Company generally has been able to
modify its operations to offset increases in its operating costs.
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<PAGE>
BUSINESS
GENERAL
Apple South is a rapidly growing, multi-concept restaurant operating company.
Since its inception, the Company has grown and increased its profitability
through the efficient management of restaurant operations and through a series
of strategic restaurant openings and acquisitions. Over the last five fiscal
years, restaurant sales have increased at a compound annual growth rate of 36%,
and restaurant margins have risen from 11.1% in 1990 to 16.7% in 1995.
At March 31, 1996, the Company operated 274 restaurants, consisting of 198
casual dining restaurants operated under the name "Applebee's Neighborhood Grill
& Bar"; 48 "Don Pablo's" restaurants featuring traditional Mexican and Tex-Mex
dishes; 12 "Harrigan's" restaurants offering traditional classics such as
mesquite-smoked prime rib and hickory-grilled steaks and chicken; six
restaurants operated under the name "Tomato Rumba's Pastaria Grill" offering
pasta creations and grilled items; and ten franchised Hardee's fast-food
hamburger restaurants. For the year ended December 31, 1995, total restaurant
sales were $440.2 million.
As a franchisee of Applebee's International, Inc., the Company holds the
exclusive development rights for Applebee's restaurants in all or parts of 22
states in the Southeast, Mid-Atlantic, and Midwest regions. The Company opened
its first Applebee's restaurant in South Carolina in 1986 and is currently the
nation's largest Applebee's operator. In November 1995, the Company merged with
DF&R, the owner and operator of Don Pablo's and Harrigan's restaurants. The Don
Pablo's restaurants are concentrated in Texas and the Midwest region, while the
Harrigan's restaurants are located in Texas, Oklahoma, and New Mexico. Tomato
Rumba's is a proprietary casual dining concept which the Company is continuing
to refine.
Each concept is established as an operating division and functions on a
decentralized basis with individual recruiting, training, marketing, and
restaurant operations. Each division is supported by various centralized
functions such as human resources, finance and accounting, treasury, and capital
formation.
DEVELOPMENT PLANS. Including the 15 restaurants opened in the first quarter,
the Company expects to open a total of 68 restaurants in 1996, including at
least 46 Applebee's and 18 Don Pablo's restaurants. Expansion efforts during the
next few years will be focused on the development of additional Applebee's
restaurants in the Company's existing development territories and Don Pablo's
restaurants principally in the Midwest and Mid-Atlantic regions and Florida. In
March 1996, the Company closed 15 restaurants in its Tomato Rumba's division and
intends to focus its near term efforts on further development of the Tomato
Rumba's concept rather than building new Tomato Rumba's restaurants. Management
is currently exploring whether to undertake an effort to refine the Harrigan's
concept as a future growth vehicle. The Company expects to sell its Hardee's
restaurants before the end of the third quarter of 1996.
APPLEBEE'S
GENERAL. The Applebee's concept was initiated in 1980 with the opening of the
first Applebee's restaurant in Atlanta, Georgia, by a predecessor of the
Franchisor. The Franchisor is a publicly held company headquartered in Overland
Park, Kansas. As of March 31, 1996, the Applebee's restaurant system consisted
of 699 restaurants in 45 states, Canada, the Caribbean, and Europe.
Approximately 19% of these restaurants are operated by the Franchisor, 28% by
the Company, and the remainder by other franchisees. During 1995, system-wide
revenues from Applebee's restaurants totaled approximately $1.25 billion.
The Company is an active participant in the Franchisor's Franchise Business
Council, which consists of seven representatives of the Applebee's franchisees
and three representatives of the Franchisor. The council participates in regular
meetings with management of the Franchisor and serves as a mechanism for
franchisees to obtain and exchange information regarding operations, marketing,
facilities, product development, and improvements in all aspects of restaurant
operations. The council also provides a forum for input by franchisees
concerning franchisee issues and concerns applicable to the entire system. Due
to the number of Applebee's restaurants operated by the Company, the Company has
the right to have a continuing representative on the council.
CONCEPT. Applebee's restaurants are intended to fill a market niche between
traditional full service and fast-food segments of the restaurant industry. The
restaurants are designed to appeal to a customer base consisting primarily of
the 21 to 54 year old group that grew up on traditional fast-food, but now
prefers a more sophisticated menu, the availability
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of alcoholic beverages, and a comfortable ambiance, in addition to the
traditional qualities of fast-food restaurants - speed, value, and convenience.
Each Applebee's restaurant is designed and marketed as a friendly "neighborhood
establishment" featuring a varied selection of moderately priced, high-quality
food and beverage items with table service dining. Patronage by both family and
adult groups is encouraged.
MENU. Each Applebee's restaurant offers a diverse menu of a variety of
traditional and innovative dishes. Entrees include various international dishes,
hamburgers, and a variety of sandwiches. Also included is a full range of
appetizers, such as nachos, Buffalo chicken wings, and other similar items, and
soups, salads, and desserts. Pursuant to requirements of the Franchisor,
approximately 60% of the selections on each Applebee's menu consist of required
national core items and approximately 40% of the selections are chosen by the
Company from an approved list of optional items. The list of available menu
items is revised by the Franchisor every six months to reflect changes in
customer tastes. Typically there are only a small number of changes at the time
of each revision. The Company actively participates in the search for new menu
items to replace slower-selling items. Alcoholic beverages are also available
and during 1995 represented approximately 14% of total revenues from the
Company's Applebee's restaurants. The cost of a typical meal at the Company's
Applebee's restaurants, including beverages, currently ranges from $5.75 to
$7.25 per person for lunch and $7.25 to $8.75 for dinner. Applebee's restaurants
also offer a separate lower-priced children's menu.
RESTAURANT LAYOUT. The Company's Applebee's restaurants normally contain
between 4,400 and 5,000 square feet of space in a free-standing building of
brick and glass construction. Existing restaurants generally have 38 dining
tables seating approximately 150 customers, with a centrally located bar seating
18 additional customers.
UNIT ECONOMICS. During 1995, the Company's average cost of developing and
opening an Applebee's restaurant was approximately $1.6 million, including land,
construction or improvement costs, fixtures and equipment, franchise fees, and
excluding approximately $45,000 to $65,000 in preopening expenses. Preopening
expenses consist principally of nonrecurring costs, such as hourly employee
recruiting, license fees, meals and lodging, and travel. Preopening costs are
incurred in connection with opening each restaurant and are expensed during the
restaurant's first full month of operations. The cost of land for these
restaurants ranged from approximately $200,000 to $700,000.
EXPANSION STRATEGY. The Company currently intends to expand its operations
during the next few years through the development of additional Applebee's
restaurants in the Company's existing development territories. As a market area
becomes more fully developed, each restaurant normally benefits from increased
customer recognition, greater advertising capabilities, and economies of scale
with respect to food costs, advertising and promotion, and certain other
expenses. Markets which have reached this minimum level of penetration are
characterized as "efficient" and typically are more profitable than emerging
markets. The Company attempts to balance its new restaurant development by (i)
selectively locating restaurants in areas where an appropriate level of market
penetration has been achieved, (ii) increasing the level of market penetration
in territories that are not yet "efficient," and (iii) expanding into new
territory. Under development agreements with the Franchisor, the Company is
required to open a specified number of Applebee's restaurants in each
development territory over specified intervals. See "Franchise and Development
Agreements." Management believes that the Company's existing development
territory will support over 400 Applebee's restaurants and will accommodate
planned Applebee's restaurant development for approximately five to seven years.
The Company has also expanded in recent years by acquiring other Applebee's
franchisees, thereby obtaining new development territory as well as additional
restaurants. In two separate transactions in 1995, the Company acquired 26
Applebee's restaurants and the development territory for the Chicago
metropolitan area, most of Wisconsin and Iowa, northwest Illinois, and certain
contiguous counties in Minnesota, Michigan, and Missouri. In 1992, the Company
acquired five Applebee's restaurants and the related development territory in
the Jacksonville, Florida area; and in April 1994, the Company acquired nine
restaurants and the development territory for eastern Tennessee and contiguous
areas of adjacent states. The Company's growth strategies do not include the
acquisition of any additional Applebee's development territory.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. Responsibility for the Company's Applebee's
restaurant operations is organized geographically with ten regional directors of
operations that report to one of two regional vice presidents of operations each
of whom reports directly to the Applebee's division president. Each regional
director of operations oversees several area supervisors, each of whom is
responsible for several restaurants. A typical restaurant has a general manager
and three
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associate managers and employs approximately 65 people, approximately 45 of whom
are part-time. Area supervisors and restaurant management are eligible for
monthly bonuses based on performance of their restaurants. Regional directors,
vice presidents, and the president of operations are eligible for quarterly
bonuses based on the performance of the Company.
QUALITY CONTROL. The Company's general and associate managers are responsible
for assuring compliance with Company and Franchisor operating procedures. Both
the Company and the Franchisor have uniform operating standards and
specifications relating to the quality, preparation, and selection of menu
items, maintenance and cleanliness of the premises, and employee conduct.
Compliance with these standards and specifications is monitored by periodic
on-site visits and quarterly inspections by area supervisors and directors of
operations and by quarterly inspections by representatives of the Franchisor.
Additional inspections are made by the Company and the Franchisor when
necessary. Monthly ratings of each restaurant are published internally to all
management personnel.
TRAINING. The Company places a great deal of emphasis on the proper training of
its employees. The Company supplements the formal Franchisor training program
with additional training and monitoring as necessary. The Franchisor training
program includes an operations training program for general and associate
managers. The outline for the program is based on the individual expertise of
the trainee and typically lasts 12 weeks. To complete the program, an employee
must be certified in a number of skills in restaurant management, which include
technical proficiency in job functions, management techniques, and
profit-and-loss responsibilities. These skills are taught primarily in the
restaurant along with classroom training and assigned projects. The Company
maintains geographically dispersed training restaurants which are operating
restaurants qualified by the Franchisor to train managers. Standard manuals
regarding training and operations, products and equipment, and local marketing
programs are provided to the Company by the Franchisor. The Franchisor also
provides ongoing advice and assistance to the Company in connection with the
operation and management of each restaurant through additional training
sessions, seminars, and other written material. When the Company opens a new
restaurant, management positions are almost always staffed with personnel who
have had previous experience in a management position at another Applebee's
restaurant. In addition, a highly experienced opening team assists in opening
the restaurant. Prior to opening, all staff personnel undergo a week of
intensive training conducted by the restaurant opening team. The training
includes drills in which test meals and beverages are served.
PURCHASING. As a franchisee, the Company must comply with the uniform recipe
and ingredient specifications provided by the Franchisor. The Company, however,
can purchase the necessary food and beverage inventories and restaurant supplies
from independent vendors approved by the Franchisor. Although most Applebee's
food items other than produce are purchased through PYA/Monarch, Inc., the
Company negotiates prices directly with the vendors. Due to growth in the volume
of purchases by the Company, it has been able to obtain increasingly favorable
pricing from vendors. The Company believes that alternative distributors and
vendors are available on short notice. Beverages and produce are typically
purchased from local distributors. The Company has not experienced any
significant delays in receiving food and beverage inventories or restaurant
supplies.
ADVERTISING AND MARKETING. Pursuant to its franchise agreements, the Company
contributes 1% of gross sales from each restaurant to the Franchisor for a
national advertising and marketing fund to benefit all franchisees. The
Franchisor uses this fund to develop advertising and sales promotion materials
and concepts. The Company contributes an additional 0.5% of gross sales
primarily for the purchase of media in the Company's markets. Further, the
Company is required to spend 1.5% of gross sales from each restaurant on local
advertising. The Company's franchise agreements provide that the Franchisor may
increase the required contribution to the national fund and the required
expenditure for local advertising; however, the increase may not result in total
expenditures for both purposes exceeding 5% of gross sales. The Company has
recently added divisional marketing personnel to develop marketing strategies
for its Applebee's division and typically spends its advertising dollars on
television and radio.
RESTAURANT REPORTING. Financial controls are maintained through a centralized
accounting system. The Company has a point-of-sale reporting system installed in
each Applebee's restaurant. The restaurant managers also submit weekly sales
reports, customer counts, and payroll. Physical inventories of all food,
beverage, and supply items are taken at least twice monthly. Operating results
compared to prior periods and budgets are closely monitored by both divisional
and corporate personnel. Management believes that its current systems are
adequate to support planned expansion.
S-18
<PAGE>
FRANCHISE AND DEVELOPMENT AGREEMENTS
The Company operates its Applebee's restaurants under individual franchise
agreements that are part of broader exclusive development agreements with the
Franchisor. The exclusive development agreements require the Company to develop
a specific number of Applebee's restaurants in a specified territory, and the
separate franchise agreements each provide the Company the right to operate a
specific Applebee's restaurant for a period of twenty years, with an additional
twenty-year renewal option.
Each development agreement grants the Company exclusive rights to develop and
operate Applebee's restaurants within a defined territory, provided that a
certain number of restaurants are opened over scheduled intervals. At December
31, 1995, the Company was obligated to open 174 additional Applebee's
restaurants by the end of 2000, including 29 required to be opened by the end of
1996. If the Company opens fewer restaurants than required by the development
schedule in any development territory and does not open the designated number of
restaurants within the applicable cure period, the Franchisor has the right to
terminate the Company's development rights in the territory where the deficiency
occurs and in the recently acquired Chicago and Wisconsin development
territories. In addition, the Franchisor would be entitled to collect a 4%
royalty based on the Company's average restaurant sales with respect to each
restaurant not opened in accordance with the development schedule.
Each development agreement prohibits the Company from owning or operating other
restaurants whose menus and methods of operation are similar to those employed
by Applebee's restaurants and which are located within the geographic area
covered by the development agreement or within five miles of an Applebee's
restaurant during the term of and for a period of two years following the
termination of the development agreement.
Under the development agreements, the Company is responsible for all costs and
expenses incurred in locating, acquiring, and developing restaurant sites,
although the Franchisor must approve each proposed restaurant site and the
related purchase contract or lease agreement. The Franchisor must also approve
the architectural and engineering plans for each of the Company's new Applebee's
restaurants. The Franchisor may refuse to grant a franchise for any proposed
Applebee's restaurant if the Franchisor believes that the Company is not
conducting the operation of each of its Applebee's restaurants in compliance
with the Applebee's franchise requirements. The Franchisor may terminate each
development agreement if the Company defaults in its performance under such
development agreement or under any franchise agreement. The Franchisor
periodically monitors the operations of its franchised restaurants and notifies
the franchisees of any failure to comply with franchise or development
agreements. The Company does not believe that any material default exists with
respect to any of its franchise or development agreements.
The franchise agreements convey the right to use the Franchisor's trade names,
trademarks, and service marks with respect to specific restaurant units. The
Franchisor also provides general construction specifications, designs, color
schemes, signs and equipment, recipes for food and beverage products, marketing
concepts, and materials. Each franchise agreement prohibits the Company from
transferring a franchise without the prior approval of the Franchisor.
Generally, each new franchise agreement requires an initial $30,000 franchise
fee and a monthly royalty fee of 4% of gross sales and a monthly advertising fee
of 1.5% of gross sales, in each case payable to the Franchisor. The Franchisor
has the right to increase the advertising fee up to an amount that would equal,
when added to the Company's expenditures for local advertising, 5% of gross
sales.
DON PABLO'S
CONCEPT. The first Don Pablo's was opened in Arlington, Texas in 1987. Don
Pablo's restaurants feature traditional Mexican and Tex-Mex dishes served in a
distinctive, festive dining atmosphere reminiscent of a Mexican village plaza.
Each restaurant is staffed with a highly experienced management team that is
visible in the dining area and interacts with both customers and the staff to
ensure attentive customer service and consistent food quality. The Company
strives to differentiate Don Pablo's by offering a wide variety of items
prepared fresh on-site using high-quality ingredients at relatively low prices.
The diverse menu, generous portions, and attractive price/value relationship
appeal to a broad customer base, including families.
MENU. Don Pablo's menu offers a wide variety of entrees, including traditional
enchiladas and tacos served with various sauces and award-winning salsa, and
mesquite grilled items such as fajitas, carne asada, and chicken. The menu also
S-19
<PAGE>
includes tortilla soup, a selection of salads, mexican-style appetizers such as
quesadillas, and a unique apple pie dessert. In addition to its regular menu,
Don Pablo's offers 13 lunch specials priced from $4.85 to $6.45 each. Don
Pablo's also offers a lower-priced children's menu.
During 1995, the cost of a typical meal at Don Pablo's, including beverages,
ranged from $6.75 to $8.75 for lunch and $8.75 to $10.50 for dinner. Don Pablo's
emphasizes its dining experience, although full bar service is available.
Alcoholic beverage sales accounted for approximately 20% of Don Pablo's total
revenues during 1995.
RESTAURANT LAYOUT. Don Pablo's distinctive Mexican architecture and interior
decor provide a casual, fun dining atmosphere. The restaurants have an open,
spacious feel, created with the use of sky-lights and a Mexican village plaza
design, including an indoor fountain. The Mexican village plaza design is
enhanced by the use of stucco, brick, and tile, as well as plants, signs, and
art work. Homemade tortillas cooked in the dining area remind customers of Don
Pablo's commitment to fresh, authentic Mexican food.
Don Pablo's utilizes both one-story and two-story buildings. Its two-story
building designs feature a second-story balcony which provides seating for bar
patrons and dining customers waiting to be seated. The single-story designs
incorporate a smaller bar adjacent to the dining area. The company selects
between its one and two-story designs based on several factors, including deed
restrictions, location size, demographics, and competition. Both designs
incorporate high ceiling architecture and have similar dining capacities.
Don Pablo's restaurants range in size from 6,000 square feet to 9,900 square
feet, with the average restaurant containing approximately 8,000 square feet.
Don Pablo's generally have dining room seating for approximately 225 customers
and some restaurants have bar seating for approximately 70 additional customers.
UNIT ECONOMICS. During 1995, the Company's average cost of developing and
opening a Don Pablo's restaurant was approximately $1.7 million, excluding
preopening expenses of approximately $70,000 to $90,000 and land costs. The
Company expects the average cost of opening a Don Pablo's restaurant in 1996 to
be approximately $2.4 million, excluding preopening expenses and including land
costs of approximately $800,000.
EXPANSION STRATEGY. The Company believes that the growing popularity of Mexican
and Tex-Mex food and the relatively few Mexican food restaurants in certain
regions of the United States, combined with the success of its Midwest and Mid-
Atlantic restaurants, support the Company's commitment to continue developing
Don Pablo's restaurants in targeted markets. New restaurants will be located
principally in the Midwest and Mid-Atlantic regions of the United States and in
Florida. Where feasible, the Company intends to cluster its restaurants in
various markets to achieve operating and advertising efficiencies. The number of
restaurants actually opened will vary depending upon, among other things, the
Company's ability to locate suitable sites, the availability of financing, and
general economic conditions.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. Responsibility for managing Don Pablo's restaurant
operations is currently shared by 16 regional and area managers who report to
both the vice president of operations and the director of food. The Company's
strategy is to have each area manager responsible for a limited number of Don
Pablo's restaurants, thus enabling each area manager to focus on quality of
operations and unit profitability.
The management staff of a typical restaurant consists of one general manager,
one kitchen manager, and three assistant managers. The general managers
typically have been promoted after working in one or more service positions. The
Company spends considerable effort training and developing its Don Pablo's
employees, allowing for promotion from within. General managers and kitchen
managers are eligible to receive bonuses equal to a percentage of their
restaurant's revenues, subject to the ability to operate within budgeted costs.
QUALITY CONTROL. The Company's area managers, general managers, and assistant
managers are all responsible for ensuring that Don Pablo's restaurants are
operated in accordance with strict quality requirements. The Company employs a
kitchen manager in each Don Pablo's restaurant, which allows each restaurant
general manager to spend most of his time in the dining area of the restaurant
supervising his staff and providing service to customers. Compliance with the
Company's quality requirements is monitored by periodic on-site visits and
formal periodic inspections by the area managers.
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<PAGE>
TRAINING. The Company requires each employee to participate in a formal
training program that utilizes departmental training manuals, tests, and a
scheduled evaluation process. Management training encompasses three general
areas, including (i) all service positions; (ii) management accounting,
personnel management, and dining room and bar operations; and (iii) kitchen
management, which entails food preparation and quality controls, cost controls,
training, ordering and receiving, and sanitation operations. Management training
customarily lasts 8 to 16 weeks, depending upon the trainee's prior experience
and performance relative to the Company's objectives. When the Company opens a
new restaurant, management positions are almost always staffed with personnel
who have had previous experience in a management position at another Don Pablo's
restaurant. In addition, a highly experienced opening team assists in opening
the restaurant. Prior to opening, all staff personnel undergo a week of
intensive training conducted by the restaurant opening team. The training
includes drills in which test meals and beverages are served.
PURCHASING. The Company strives to obtain consistent quality items at
competitive prices from reliable sources. The Company continually researches and
tests various products in an effort to maintain the highest quality products
possible and to be responsive to changing customer tastes. Substantially all of
Don Pablo's purchasing needs are handled through the DF&R divisional
headquarters. Although the Company currently uses one distributor for
substantially all of its Don Pablo's food purchases other than produce, which is
purchased locally, all food and beverage products necessary to operate the
restaurants are available on short notice from alternative qualified suppliers.
The Company has not experienced any significant delays in receiving its food and
beverage inventories, restaurant supplies, or equipment.
ADVERTISING AND MARKETING. Don Pablo's historical success has been achieved
with minimal expenditures on advertising and marketing, relying primarily on the
curb appeal of its buildings and customer word-of-mouth. In the future, the
Company expects to devote more resources to advertising and marketing Don
Pablo's. The Company has recently added divisional marketing personnel to
develop marketing strategies for its Don Pablo's division.
RESTAURANT REPORTING. Financial controls are maintained through a centralized
accounting system. The DF&R division has a proprietary point-of-sale reporting
system installed in each of its locations. The restaurant managers prepare daily
reports of cash, deposits, sales, sales mix, labor costs, and customer counts
for DF&R's management. The restaurant managers also submit weekly sales reports,
customer counts, and payroll. Physical inventories of all food, beverage, and
supply items are taken at least monthly. Operating results compared to prior
periods and budgets are closely monitored by both divisional and corporate
personnel. Management believes that its current systems are adequate to support
planned expansion.
HARRIGAN'S
The Company strives to achieve a relaxed and informal, yet traditional,
atmosphere in its Harrigan's restaurants. The Company has avoided a trendy
ambiance and instead created a warm, cozy dining environment. Harrigan's
restaurants range in size from 6,400 square feet to 9,000 square feet, and the
average restaurant is approximately 7,250 square feet. Harrigan's menu features
a variety of American food, including hickory-grilled steaks, chicken, and
half-pound hamburgers. Harrigan's also offers mesquite-smoked prime rib and baby
back ribs, pasta dishes, soups, salads, and seafood, as well as brunch and lunch
specials. Various signature items such as New Orleans potato casserole,
paper-thin french fried zucchini, distinctive cheese bread, and specialty
desserts are also offered. Since Harrigan's inception, its menu has remained
fairly consistent, but has steadily been refined in response to changing
customer tastes and preferences. During 1995, the cost of a typical meal at
Harrigan's, including beverages, was $7.25 to $9.15 for lunch and $10.25 to
$12.15 for dinner. Although Harrigan's offers full bar service, it emphasizes
its dining experience. Alcoholic beverage sales during 1995 accounted for
approximately 16% of Harrigan's total revenues.
Harrigan's restaurants generally have dining room seating for approximately 175
to 200 customers and a bar which seats approximately 75 additional customers.
Harrigan's is currently under evaluation as a possible vehicle for future
growth.
Operationally, the Company's Harrigan's division is structured similarly to the
Don Pablo's division with a division vice president of operations, area
managers, and one general manager, one kitchen manager, and three assistant
managers per restaurant. Financial procedures and controls, training methods,
purchasing processes, and various other aspects of operations previously
developed by the Company for its Don Pablo's restaurants are also applied to the
Harrigan's division.
S-21
<PAGE>
TOMATO RUMBA'S PASTARIA GRILL
In December 1992, the Company acquired the rights to an Italian-themed
restaurant concept and two existing restaurants in Florida operating under the
name "Gianni's." Since the acquisition of these restaurants, the Company has
continued to develop and revise the concept in terms of menu content and
pricing, exterior and interior design, demographic profiles, and unit economics.
In April 1995, the Company changed the name of the concept to "Tomato Rumba's
Pastaria Grill" and converted a number of restaurants that had been opened under
the Gianni's name to Tomato Rumba's. In March 1996, the Company closed 12 of its
18 Tomato Rumba's restaurants and all three of the remaining Gianni's
restaurants. Currently, the Company is operating six Tomato Rumba's restaurants
in Charlotte, North Carolina and Charleston and Columbia, South Carolina. These
restaurants will serve as the focal point of the Company's continuing effort to
refine and develop the Tomato Rumba's concept as a possible vehicle for future
growth.
HARDEE'S RESTAURANTS
The Company operates ten Hardee's fast-food restaurants in northern and central
Florida as a franchisee of Imasco, Ltd. Hardee's restaurants are traditional
fast-food restaurants offering hamburgers and fried chicken along with such
items as sandwiches, prepackaged salads, french fries, various desserts, and
nonalcoholic beverages. All of the Company's Hardee's restaurants are located in
stand-alone buildings containing between 3,280 and 3,930 square feet. The
Company owns eight of these restaurant facilities and the remainder are operated
pursuant to leases with purchase options. The Company does not consider its
Hardee's operations to be part of its strategic growth plan and expects to sell
its Hardee's restaurants before the end of the third quarter of 1996.
RECENT DEVELOPMENTS
In March 1995, the Company acquired certain assets of TUG, Inc., another
Applebee's franchisee, for approximately $17 million. These assets consisted of
eight operating Applebee's restaurants and the Applebee's development rights for
most of Iowa, northwest Illinois, and contiguous areas in Wisconsin and
Missouri. Six of these restaurants are located in Iowa, one in Illinois, and one
in Wisconsin. Management believes that the development territory acquired will
accommodate approximately 30 Applebee's restaurants, including the restaurants
acquired.
In June 1995, the Company acquired certain assets related to the Applebee's
restaurant operation of Marcus Restaurants, Inc., another Applebee's franchisee,
for approximately $48 million. These assets included 18 operating Applebee's
restaurants, two restaurants under construction, and the Applebee's development
rights for the Chicago metropolitan area, most of Wisconsin, and certain
contiguous counties in Minnesota and Michigan. Ten of the restaurants acquired
are located in Wisconsin and eight in the Chicago area. The Company's management
believes that the development territory acquired will accommodate approximately
75 Applebee's restaurants, including the restaurants acquired.
In connection with obtaining the consent of the Franchisor to the Marcus
Acquisition, the Company agreed to establish new annual development schedules
through the year 2000 with the Franchisor for the acquired Wisconsin and Chicago
area territories and for the Company's other existing Applebee's territories.
The agreement with the Franchisor also acknowledges that, in view of the
significant amount of additional development territory acquired by the Company
in 1995, it is highly unlikely that the Franchisor will approve any transfers of
development territory to the Company from another franchisee or directly grant
the Company any new development territory. Management of the Company believes
that its existing territories (including Wisconsin and Chicago) will accommodate
planned Applebee's restaurant development for approximately five to seven years.
In November 1995, the Company acquired all the outstanding stock of DF&R. The
acquisition was accomplished by the merger of a newly formed, wholly-owned
subsidiary of the Company into DF&R. As a result of the merger, DF&R became a
wholly-owned subsidiary of the Company, and the Company issued approximately 9.3
million shares of common stock to the shareholders of DF&R. Prior to the merger
the shares of DF&R were publicly held. The exchange ratio for the merger was 1.5
shares of common stock of the Company for each outstanding share of common stock
of DF&R. As a result of the merger, the Company acquired the Don Pablo's and
Harrigan's concepts along with 44 operating Don Pablo's restaurants and 12
Harrigan's restaurants.
S-22
<PAGE>
In March 1996, the Company closed 12 of its 18 Tomato Rumba's Pastaria Grill
restaurants and all three of its Gianni's Little Italy restaurants. All of the
closed restaurant facilities will either be sold or converted for use as other
restaurant concepts to be operated by the Company. The redeployment of these
Tomato Rumba's and Gianni's facilities is expected to be completed by the end of
1996.
GOVERNMENTAL REGULATION
Each of the Company's restaurants is subject to licensing and regulation by a
number of governmental authorities, which include health, safety, and fire
agencies in the state or municipality in which the restaurant is located, and
except in the case of the Hardee's restaurants, alcoholic beverage control.
Difficulties or failures in obtaining the required licenses or approvals could
delay or prevent the opening of a new restaurant in a particular area. If the
Company fails to maintain all required state and local licenses permitting the
sale of liquor by the drink at each Applebee's restaurant, then the Franchisor
may terminate both the franchise agreement pertaining to such restaurant and the
development agreement pertaining to the territory in which the restaurant is
located.
In 1995, approximately 14% of the Company's Applebee's restaurant sales, 20% of
Don Pablo's sales, 16% of Harrigan's sales, and 10% of Tomato Rumba's sales were
attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Some of the counties in which the
Company has restaurants prohibit the sale of alcoholic beverages on Sundays.
Typically, licenses or permits must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage, and dispensing
of alcoholic beverages.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated patron the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
The Company's restaurant operations are also subject to Federal and state laws
governing such matters as minimum wage, working conditions, overtime, and tip
credits.
COMPETITION
The restaurant industry is highly competitive with respect to price, service,
location, and food type and quality, and competition is expected to intensify.
There are several, well-established competitors with greater financial and other
resources than the Company. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and may be better
established in the markets where the Company's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional, or local economic conditions, demographic trends,
traffic patterns, the availability and cost of suitable locations, and the type,
number, and location of competing restaurants. The Company has experienced
increased competition in attracting and retaining qualified management level
operating personnel. In addition, factors such as inflation, increased food,
labor, and benefits costs, and difficulty in attracting hourly employees may
adversely affect the restaurant industry in general and the Company's
restaurants in particular.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 17,000 persons in 21
states. Of those employees, approximately 350 held management or administrative
positions, 1,500 were involved in restaurant management, and the remainder were
engaged in the operation of the Company's restaurants. Management believes that
the Company's continued success will depend to a large degree on its ability to
attract and retain good management employees. While the Company will continually
have to address the high level of employee attrition normal in the food-service
industry, the Company has taken steps to attract and keep qualified management
personnel through the implementation of a variety of employee benefit plans,
including an Employee Stock Ownership Plan, a 401(k) Plan, and incentive stock
option plans for its key employees. None of the Company's employees is covered
by a collective bargaining agreement. The Company considers its employee
relations to be good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ --- ------------------------------------------------------------
<S> <C> <C>
Tom E. DuPree, Jr. 43 Chairman of the Board and Chief Executive Officer
Michael W. Evans 44 President, Chief Operating Officer, and Director
John G. McLeod, 52 Senior Vice President - Human Resources, Secretary, and
Jr. Director
David P. Frazier 49 President - DF&R Division and Director
Marc D. Redus 42 Senior Vice President and Director
James W. Rowe 72 Director
Thomas R. Williams 67 Director
Erich J. Booth 47 Chief Financial Officer and Treasurer
</TABLE>
TOM E. DUPREE, JR. founded the Company and has been Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation. Mr.
DuPree has been actively involved in developing and managing restaurants since
1978.
MICHAEL W. EVANS has served as a director and as the President and Chief
Operating Officer of the Company since 1988. From 1986 to 1988, Mr. Evans was
director of operations and later President of a predecessor company that was
merged into the Company. Prior to 1986, Mr. Evans was Regional Director of
Operations for Daryl's Restaurants and Taverns, a regional restaurant chain.
JOHN G. MCLEOD, JR. has served as Senior Vice President - Human Resources since
1992. He served as Vice President - Human Resources from 1987 to 1992 and has
served as a director and the Secretary of the Company since its formation. From
1983 to 1987, Mr. McLeod was the personnel director of a predecessor of the
Company.
DAVID P. FRAZIER has served as President - DF&R division and as a director of
the Company since the merger with DF&R in November 1995. Mr. Frazier co-founded
DF&R in 1979 and has worked in the restaurant industry for more than 30 years.
MARC D. REDUS has served as Senior Vice President and as a director of the
Company since the merger with DF&R in November 1995. Mr. Redus co-founded DF&R
in 1979 and has worked in the restaurant industry for more than 20 years.
JAMES W. ROWE became a director of the Company in March 1992. He also serves as
Chairman of the Audit Committee and as a member of the Compensation Committee.
Mr. Rowe is a former Vice Chairman of the Executive Committee of The Great
Atlantic & Pacific Tea Company, Inc., from which he retired in 1993.
THOMAS R. WILLIAMS became a director of the Company in December 1991. He also
serves as Chairman of the Compensation Committee and as a member of the Audit
Committee. Mr. Williams is President of The Wales Group, Inc., a closely held
corporation engaged in investments. He is a former Chairman of the Board of
First Wachovia Corporation, from which he retired in 1987. Mr. Williams is a
director of American Software, Inc., BellSouth Corporation, ConAgra, Inc.,
Georgia Power Company, and National Life Insurance Company of Vermont and a
trustee of The Fidelity Group of Mutual Funds.
ERICH J. BOOTH has served as the Chief Financial Officer and Treasurer of the
Company since October 1991. Before joining the Company, Mr. Booth had been Vice
President of Finance of Dun & Bradstreet Software (formerly Management Science
America, Inc.) since 1989. From 1984 to 1989, he served as Vice President and
Chief Financial Officer of Ward White USA Holding, Inc., a diversified specialty
retailer. Mr. Booth, a Certified Public Accountant, worked from 1973 to 1984 for
Peat, Marwick, Mitchell & Co.
There are no family relationships among the Company's executive officers and
directors.
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<PAGE>
In the Agreement and Plan of Merger pursuant to which the company merged with
DF&R, the Company agreed to cause Mr. Frazier and Mr. Redus to be elected to the
Board of Directors of the Company and to be nominated for re-election as
directors at the 1996 and 1997 Annual Meetings of Shareholders and included in
the slate of directors contained in proxies solicited by management for these
meetings.
Officers of the Company serve at the pleasure of the Board of Directors. The
term of office for each director of the Company ends at the next annual meeting
of the Company's shareholders or when his successor is elected and qualified.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 31, 1996 by (i) each person
known by the Company to own beneficially more than 5% of the Company's common
stock, (ii) each director and executive officer of the Company, and (iii) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)(2)
-------------------
NAME NUMBER PERCENT
- ------------------------------------------------------------ ---------- -------
<S> <C> <C>
Tom E. DuPree, Jr. (3)...................................... 8,937,799 23.0%
David P. Frazier (4)........................................ 833,243 2.1
Marc D. Redus (5)........................................... 651,700 1.7
Michael W. Evans (6)........................................ 541,065 1.4
John G. McLeod, Jr. (7)..................................... 458,089 1.2
Thomas R. Williams (8)...................................... 52,143 *
James W. Rowe (9)........................................... 41,625 *
Erich J. Booth (10)......................................... 42,649 *
Putnam Investments, Inc. (11)............................... 4,077,812 10.5
All directors and executive officers as a group (8 persons)
(12)....................................................... 11,014,316 27.9
</TABLE>
- ------------------------
*Less than one percent.
Mr. DuPree and Putnam Investments, Inc. are the only shareholders known by the
Company to be the beneficial owners of more than 5% of the Company's common
stock. Mr. DuPree's address is Hancock at Washington, Madison, Georgia 30650.
The address of Putnam Investments, Inc. is One Post Office Square, Boston,
Massachusetts 02109.
(1) The named shareholders have sole voting and investing power with respect to
all shares shown as being beneficially owned by them except with respect to
the shares owned by the Company's Employee Stock Ownership Plan and Trust
("ESOP"). Each participant in the ESOP has the right to direct voting of all
shares allocated to his account on all matters. Power to direct the
investment of shares held by the ESOP presently rests with the Company's
Employee Benefit Committee, whose members are Messrs. DuPree, Evans, and
McLeod; however, each participant in the ESOP may elect to direct the
investment of 25% of the shares allocated to his account.
(2) Except as indicated below, does not include shares issuable upon exercise
of stock options.
(3) Includes 551,563 shares held by various foundations and trusts of which Mr.
DuPree's wife is the sole Trustee. Also includes 271,734 shares held by the
ESOP which are allocated to other employees and for which Mr. DuPree has
shared investment power. See Footnote (1) above. Mr. DuPree is Chairman of
the Board of Directors and Chief Executive Officer of the Company.
(4) Includes 9,600 shares which Mr. Frazier has the right to acquire within 60
days upon the exercise of stock options at an average exercise price of
$15.27 per share. Mr. Frazier is the President - DF&R division and a
director of the Company.
(5) Includes 9,600 shares which Mr. Redus has the right to acquire within 60
days upon the exercise of stock options at an average exercise price of
$15.27 per share. Mr. Redus is Senior Vice President and a director of the
Company.
(6) Includes 269,331 shares which Mr. Evans has the right to acquire within 60
days upon the exercise of stock options at an average exercise price of
$1.74 per share, 13,923 shares held by the ESOP which are vested and
allocated to Mr. Evans, and 257,811 shares held by the ESOP which are
unvested or allocated to other employees and for which Mr. Evans has shared
investment power. See Footnote (1) above. Mr. Evans is President, Chief
Operating Officer, and a director of the Company.
(7) Includes 150,000 shares which Mr. McLeod has the right to acquire within 60
days upon the exercise of stock options at an exercise price of $1.62 per
share, 11,139 shares held by the ESOP which are vested and allocated to Mr.
McLeod, and 260,595 shares held by the ESOP which are allocated to other
employees and for which Mr. McLeod has shared investment power. See Footnote
(1) above. Mr. McLeod is Senior Vice President - Human Resources, Secretary,
and a director of the Company.
(8) Includes 50,625 shares which Mr. Williams has the right to acquire within
60 days upon the exercise of stock options at an exercise price of $2.17 per
share. Mr. Williams is a director of the Company.
(9) Includes 40,500 shares which Mr. Rowe has the right to acquire within 60
days upon the exercise of stock options at an exercise price of $3.06 per
share. Mr. Rowe is a director of the Company.
(10) Includes 40,500 shares which Mr. Booth has the right to acquire within 60
days upon the exercise of stock options at an exercise price of $2.57 per
share and 529 shares held by the ESOP which are vested and allocated to Mr.
Booth, but does not include 444 shares held by the ESOP which are unvested.
Mr. Booth is Chief Financial Officer and Treasurer of the Company.
(11) Based on a Schedule 13G dated March 7, 1996, filed by Putnam Investments,
Inc.
(12) Includes 570,156 shares which the officers and directors have the right to
acquire within 60 days upon the exercise of stock options at an average
exercise price of $2.74 per share, 25,591 shares held by the ESOP which are
vested and allocated to directors and executive officers, and 246,143 shares
held by the ESOP which are unvested or are allocated to other employees. See
Footnote (1) above.
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DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, dated as of May 1, 1996 (the
"Indenture"), between the Company and SunTrust Bank, Atlanta, as Trustee (the
"Trustee"). The following summary of certain provisions of the Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). A copy of the
Indenture has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement constitutes a part. All defined terms used hereunder
and not previously defined are defined under "Certain Definitions."
GENERAL
The Notes will be general, senior unsecured obligations of the Company, limited
to $150 million aggregate principal amount, and will mature on June 1, 2006.
Each Note will bear interest at the rate per annum shown on the front cover of
this Prospectus Supplement from , 1996 or from the most recent interest
payment date to which interest has been paid or provided for, payable
semiannually (to holders of record at the close of business on May 15, or
November 15, immediately preceding the interest payment date) on June 1 and
December 1, of each year, commencing December 1, 1996.
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at SunTrust Bank, Atlanta, c/o
First Chicago Trust Company of New York, 14 Wall Street, New York, New York
10005); PROVIDED that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holder as such address appears in the
security register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
No service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
RANKING
The Indebtedness evidenced by the Notes will rank PARI PASSU in right of payment
with all other unsubordinated indebtedness of the Company. After giving PRO
FORMA effect to this offering, as of March 31, 1996, the Company would have had
approximately $202 million of Indebtedness outstanding, approximately $2 million
of which was secured Indebtedness, and an additional $165 million of
availability under the Credit Agreement. The Notes are not secured and will,
therefore, effectively rank behind any secured Indebtedness of the Company
permitted under the Indenture, to the extent of the value of the assets securing
such Indebtedness.
The Company conducts a significant portion of its operations through
subsidiaries. Accordingly, the Company's ability to meet its cash obligations is
dependent, in part, upon the ability of such subsidiaries to make cash
distributions to the Company. Furthermore, any right of the Company to receive
the assets of any of its subsidiaries upon such subsidiary's liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) effectively will be subordinated by operation of
law to the claims of any such subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiaries in which case the claims of the Company would
still be subordinate to any indebtedness of such subsidiaries senior in right of
payment to that held by the Company. As of March 31, 1996, the indebtedness
(including trade payables) of the Company's combined subsidiaries was
approximately $18 million. As these subsidiaries do not guarantee the payment of
principal and interest on the Notes, the claims of holders of the Notes
effectively will be subordinated to the claims of creditors of these
subsidiaries.
COVENANTS
LIMITATION ON INDEBTEDNESS. Under the terms of the Indenture, the Company will
not, and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than Permitted Indebtedness (as defined below), Indebtedness
evidenced by the Notes, and Indebtedness existing on the Closing Date) unless
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Consolidated Fixed Charge Coverage
Ratio would be greater than 2.5:1. The Company's obligation to comply with this
covenant will terminate if and when the Notes become Investment Grade Rated.
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Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except
as specified below) may Incur each and all of the following (each, "Permitted
Indebtedness"):
(i) Indebtedness of the Company outstanding at any time in an aggregate
principal amount not to exceed an amount equal to $165 million under the
Credit Agreement, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below;
(ii) Indebtedness to the Company or any of its Wholly-Owned Restricted
Subsidiaries as long as such Indebtedness continues to be owed to the
Company or any of its Wholly-Owned Restricted Subsidiaries;
(iii) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, Indebtedness then outstanding, other than
Indebtedness Incurred under clause (i), (ii), (iv), or (v) of this
paragraph, and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees, and
expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is PARI PASSU with, or
subordinated in right of payment to, the Notes shall only be permitted under
this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is PARI PASSU with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
PARI PASSU with, or subordinate in right of payment to, the remaining Notes,
(B) in case the Indebtedness to be refinanced is subordinated in right of
payment to the Notes, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Notes
at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes, and (C) such new Indebtedness, determined as of
the date of Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be refinanced or refunded, and
the Average Life of such new Indebtedness is at least equal to the remaining
Average Life of the Indebtedness to be refinanced or refunded; and PROVIDED
further that in no event may Indebtedness of the Company be refinanced
pursuant to this clause (iii) by means of any Indebtedness of any Restricted
Subsidiary;
(iv) Indebtedness (A) in respect of performance, surety, or appeal bonds
provided in the ordinary course of business consistent with past practice,
(B) under Currency Agreements and Interest Rate Agreements; PROVIDED that,
in the case of Currency Agreements that relate to other Indebtedness, such
Currency Agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities, and compensation
payable thereunder, and (C) arising from agreements providing for
indemnification, adjustment of purchase price, or similar obligations, or
from Guarantees or letters of credit, bankers' acceptances, surety bonds, or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets, or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any person
acquiring all or any portion of such business, assets, or Restricted
Subsidiary for the purpose of financing such acquisition), in a principal
amount not to exceed the gross proceeds actually received by the Company or
any Restricted Subsidiary in connection with such disposition; and
(v) Indebtedness of the Company not to exceed $20 million at any time
outstanding.
For purposes of determining compliance with the "Limitation on Indebtedness"
covenant described in the preceding paragraphs, (A) in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the clauses of the preceding paragraph, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one such clause, (B) the
amount of Indebtedness issued at a price that is less than the principal amount
thereof shall be equal to the amount of the liability in respect thereof
determined in conformity with GAAP, and (C) any Liens granted pursuant to the
equal and ratable provisions referred to in the first paragraph of the
description of the "Limitation on Liens" covenant below shall not be treated as
Indebtedness.
LIMITATION ON RESTRICTED PAYMENTS. Under the terms of the Indenture, so long as
any of the Notes are outstanding, the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, (i) declare or pay any
dividend or make any distribution on its Capital Stock (other than pro rata
dividends or distributions payable solely in shares of its or such Restricted
Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held
by such holders or in
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options, warrants, or other rights to acquire such shares of Capital Stock) held
by persons other than the Company or any of its Wholly-Owned Restricted
Subsidiaries, (ii) purchase, redeem, retire, or otherwise acquire for value any
shares of Capital Stock of the Company or any Restricted Subsidiary (including
options, warrants, or other rights to acquire such shares of Capital Stock) held
by persons other than the Company or any of its Wholly-Owned Restricted
Subsidiaries, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes, or (iv) make any Investment that is a Restricted
Investment (such payments or any other actions described in clauses (i) through
(iv) being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness (other than Permitted Indebtedness) pursuant to
the Limitation on Indebtedness covenant, or (C) the aggregate amount expended
for all Restricted Payments (the amount so expended, if other than in cash, to
be determined in good faith by the board of directors, whose determination shall
be conclusive and evidenced by a board resolution) after the date of the
Indenture shall exceed the sum of (1) 50% of the aggregate amount of the
Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is
a loss, minus 100% of such amount) (determined by excluding income created by
transfers of assets received by the Company or a Restricted Subsidiary from an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the month immediately
following the Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date, PLUS (2) the aggregate net proceeds (including
the fair market value of non-cash proceeds as determined in good faith by the
board of directors) received by the Company from the issuance and sale permitted
by the Indenture of its Capital Stock (other than Redeemable Stock) to a person
who is not a Subsidiary of the Company, including an issuance or sale permitted
by the Indenture for cash or other property upon the conversion of any
Indebtedness of the Company subsequent to the Closing Date, or from the issuance
of any options, warrants, or other rights to acquire Capital Stock of the
Company (in each case, exclusive of any Redeemable Stock or any options,
warrants, or other rights that are redeemable at the option of the holder, or
are required to be redeemed, prior to the Stated Maturity of the Notes), PLUS
(3) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from repayments of loans or advances, or other transfers
of assets, in each case to the Company or any Restricted Subsidiary from
Unrestricted Subsidiaries, or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company and any Restricted
Subsidiary in such Unrestricted Subsidiary, PLUS (4) $20 million. The Company's
obligation to comply with this covenant will terminate if and when the Notes
become Investment Grade Rated.
The foregoing provision shall not take into account, and shall not be violated
by reason of: (i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would comply
with the foregoing paragraph; (ii) the redemption, repurchase, defeasance, or
other acquisition or retirement for value of Indebtedness that is subordinated
in right of payment to the Notes including premium, if any, and accrued and
unpaid interest, with the proceeds of, or in exchange for, permitted refinancing
indebtedness; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Redeemable Stock) of
the Company; (iv) the acquisition of Junior Indebtedness of the Company in
exchange for, or out of the proceeds of, a substantially concurrent offering of,
shares of the Capital Stock of the Company (other than Redeemable Stock); (v)
the purchase, redemption, acquisition, cancellation, or other retirement for
value of shares of Capital Stock of the Company, options on any such shares or
related stock appreciation rights or similar securities held by officers or
employees or former officers or employees (or their estates or beneficiaries
under their estates), upon death, disability, retirement, termination of
employment, or pursuant to any agreement under which such shares of stock or
related rights were issued; or (vi) payments or distributions pursuant to or in
connection with a consolidation, merger, or transfer of assets that complies
with the provisions of the Indenture applicable to mergers, consolidations, and
transfers of all or substantially all of the property and assets of the Company;
PROVIDED that, except in the case of clauses (i) and (iii), no Default or Event
of Default (as defined below) shall have occurred and be continuing or occur as
a consequence of the actions or payments set forth therein.
Notwithstanding the foregoing, in the event of an issuance of Capital Stock of
the Company and (1) the repurchase, redemption, or other acquisition of Capital
Stock out of the proceeds of such issuance or (2) the acquisition of Notes or
Indebtedness that is subordinated in right of payment to the Notes out of the
proceeds of such issuance, then, in
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<PAGE>
calculating whether the conditions of clause (C) of the second preceding
paragraph have been met with respect to any subsequent Restricted Payments, the
proceeds of any such issuance shall be included under such clause (C) only to
the extent such proceeds are not applied as described in clause (1) or (2) of
this paragraph.
LIMITATION ON PRIORITY INDEBTEDNESS. Under the terms of the Indenture, the
Company will not, and will not permit any of its Restricted Subsidiaries to (i)
Incur any Secured Indebtedness (as defined below) other than Indebtedness under
the Credit Agreement permitted to be Incurred under clause (i) of the second
paragraph of the description of the "Limitation on Indebtedness" covenant, (ii)
grant any Lien other than a Permitted Lien, or (iii) enter into any
Sale-Leaseback Transaction unless, after giving effect thereto, Priority
Indebtedness does not exceed either 40% of Total Indebtedness or 30% of Adjusted
Consolidated Net Tangible Assets. The Company's obligation to comply with this
covenant will terminate if and when the Notes become Investment Grade Rated.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. Under the terms of the Indenture, so long as any of the Notes are
outstanding, the Company will not, and will not permit any Restricted Subsidiary
to, create or otherwise cause or suffer to exist or become effective any kind of
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary, (iii) make
loans or advances to the Company or any other Restricted Subsidiary, or (iv)
transfer any of its property or assets to the Company or any other Restricted
Subsidiary. The Company's obligation to comply with this covenant will terminate
if and when the Notes become Investment Grade Rated.
The foregoing provisions shall not restrict any encumbrances or restrictions:
(i) existing on the Closing Date in the Credit Agreement, the Indenture, or any
other agreements in effect on the Closing Date, and any extensions,
refinancings, renewals, or replacements of any of the foregoing; PROVIDED that
the encumbrances and restrictions in any such extensions, refinancings,
renewals, or replacements are no less favorable in any material respect to the
holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed, or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any person or the
property or assets of such person acquired by the Company or any Restricted
Subsidiary and existing at the time of such acquisition, which encumbrances or
restrictions (A) are not applicable to any person or the property or assets of
any person other than such person or the property or assets of such person so
acquired and (B) were not put in place in anticipation of such acquisition, and
any extensions, refinancings, renewals, or replacements of any of the foregoing;
PROVIDED that the encumbrances and restrictions in any such extensions,
refinancings, renewals, or replacements are no less favorable in any material
respect to the holders than those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed, or replaced; (iv) in
the case of clause (iv) of the preceding paragraph, (A) that restrict in a
customary manner the subletting, assignment, or transfer of any property or
asset that is a lease, license, conveyance, or contract or similar property or
asset, (B) existing by virtue of any transfer of, agreement to transfer, option
or right with respect to, or Lien on, any property or assets of the Company or
any Restricted Subsidiary not otherwise prohibited by the Indenture, or (C) not
relating to any Indebtedness, and, in each of cases (A), (B), or (C), arising or
agreed to in the ordinary course of business and that do not, individually or in
the aggregate, detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary; or (v) with respect to a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary. Nothing contained in the preceding
paragraph shall prevent the Company or any Restricted Subsidiary from (1)
creating, incurring, assuming, or suffering to exist any Liens otherwise
permitted by the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. Under the terms of
the Indenture, the Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, enter into, renew, or extend any
transaction (including, without limitation, the purchase, sale, lease, or
exchange of property or assets, or the rendering of any service) with any holder
(or any Affiliate of such holder) of 5% or more of any class of Capital Stock of
the Company or with any Affiliate of the Company or any Restricted Subsidiary
(each, a "Related Party Transaction"), except upon fair and reasonable terms no
less favorable to the Company or such Restricted Subsidiary than could be
obtained, at the time of such transaction or
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at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a person that is not such a holder or
an Affiliate. The Company's obligation to comply with this covenant will
terminate if and when the Notes become Investment Grade Rated.
Without limiting the foregoing, (i) any Related Party Transaction or series of
Related Party Transactions with an aggregate value in excess of $1,000,000 must
first be approved pursuant to a board resolution by a majority of the board of
directors of the Company who are disinterested in the subject matter of the
transaction, and (ii) with respect to any Related Party Transaction or series of
Related Party Transactions with an aggregate value in excess of $10,000,000, the
Company must first obtain a favorable written opinion from an independent
financial advisor of national reputation as to the fairness, from a financial
point of view, of such transaction to the Company or such Subsidiary, as the
case may be.
The foregoing limitation does not limit, and shall not apply to, (i) any
transaction between the Company and any of its Wholly-Owned Restricted
Subsidiaries or between Wholly-Owned Restricted Subsidiaries of the Company;
(ii) the payment of reasonable and customary regular fees to directors of the
Company who are not employees of the Company; (iii) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant; or (iv) any
loans or advances by the Company to employees of the Company or a Restricted
Subsidiary in the ordinary course of business and in furtherance of the
Company's business, in an aggregate amount not to exceed $2 million at any one
time outstanding.
LIMITATION ON LIENS. Under the terms of the Indenture, the Company will not,
and will not permit any Restricted Subsidiary to, create, incur, assume, or
suffer to exist any Lien on any of its assets or properties, or any shares of
Capital Stock or Indebtedness of any Restricted Subsidiary, without making
effective provision for all of the Notes and all other amounts due under the
Indenture to be directly secured equally and ratably with (or prior to) the
obligation or liability secured by such Lien ("Secured Indebtedness") unless,
after giving effect thereto, the aggregate amount of Secured Indebtedness
together with Attributable Indebtedness in respect of Sale-Leaseback
Transactions (as defined below) do not exceed 30% of Adjusted Consolidated Net
Tangible Assets.
The foregoing limitation does not apply to (i) purchase money Liens upon or in
furniture, fixtures, or equipment acquired or held in the ordinary course of
business by the Company or any of its Restricted Subsidiaries taken or retained
by the seller of such furniture, fixtures, or equipment to secure all or a part
of the purchase price therefor; PROVIDED that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary other
than the inventory or equipment so acquired, (ii) Liens securing Indebtedness
under the Credit Agreement permitted to be Incurred under clause (i) of the
second paragraph of the description of the "Limitation on Indebtedness"
covenant, (iii) other Liens existing on the Closing Date, (iv) Liens granted
after the Closing Date on any assets or Capital Stock of the Company or its
Restricted Subsidiaries created in favor of the holders, (v) Liens with respect
to Acquired Indebtedness permitted under the "Limitation on Indebtedness"
covenant and permitted refinancings thereof; PROVIDED that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired, (vi) Liens with respect
to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary
to the Company or a Wholly-Owned Restricted Subsidiary to secure Indebtedness
owing to the Company or such other Restricted Subsidiary, (vii) Liens securing
Indebtedness which is Incurred to refinance secured Indebtedness and which is
permitted to be Incurred under clause (iii) of the second paragraph of the
description of the "Limitation on Indebtedness" covenant; PROVIDED that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced, or (viii) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS. Under the Indenture, the Company
will not, and will not permit any Restricted Subsidiary to, enter into any
sale-leaseback transaction involving any of its assets or properties (each, a
"Sale-Leaseback Transaction"), unless the aggregate amount of all Attributable
Indebtedness with respect to such transactions, plus all Indebtedness secured by
Liens (excluding Secured Indebtedness that is excluded as described in the
"Limitation on Liens" covenant) does not exceed 30% of Adjusted Consolidated Net
Tangible Assets.
The foregoing restriction does not apply to, and any computation of Attributable
Indebtedness under such limitation shall exclude, any Sale-Leaseback Transaction
if (i) the lease is for a period, including renewal rights, of three years or
less, (ii) the sale or transfer of the assets or properties is entered into
prior to, at the time of, or within six months after the later of the
acquisition of the assets or properties or the completion of construction
thereof, (iii) the lease secures or relates to industrial revenue or pollution
control bonds, (iv) the transaction is between the Company and any Restricted
Subsidiary or between Restricted Subsidiaries, or (v) the Company or such
Restricted Subsidiary, within 12 months after
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the sale of any assets or properties is completed, applies an amount not less
than the net proceeds received from such sale in accordance with clause (A) or
(B) of the first paragraph of the description of the "Limitation on Asset Sales"
covenant described below.
LIMITATION ON ASSET SALES. Under the terms of the Indenture, the Company shall
not effect or permit any Asset Sale unless (i) such Asset Sale is effected at
fair market value (as determined in good faith by the board of directors), (ii)
in the case of any Asset Sale or series of related Asset Sales for a total
consideration in excess of $10 million, at least 85% of the consideration is
received in cash, and (iii) in the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date exceed $10 million in
any one fiscal year, then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 180 days after the date Net Cash Proceeds so
received exceed $10 million in any one fiscal year (A) apply an amount equal to
such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness
of the Company or Indebtedness of any Restricted Subsidiary in each case owing
to a person other than the Company or any of its Restricted Subsidiaries and, in
the case of repayment of Indebtedness arising under the Credit Agreement or any
other revolving credit facility, effect a permanent reduction in the commitments
or availability under the Credit Agreement or such other facility or (B) invest
an equal amount, or the amount not so applied pursuant to clause (A) (or enter
into a definitive agreement committing so to invest within 180 days after the
date of such agreement), in property or assets of a nature or type or that are
used in a business similar or related to the nature or type of the property and
assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
board of directors, whose determination shall be conclusive and evidenced by a
board resolution) and (ii) apply (no later than the end of the 180-day period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following four paragraphs.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 180-day period as set forth in clause (i)
of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of Excess
Proceeds not theretofore subject to an Excess Proceeds Offer (as defined below)
totals at least $10 million, the Company must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase from the holders on a pro rata basis an aggregate principal amount of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to the
Trustee and each holder stating: (i) that the Excess Proceeds Offer is being
made pursuant to the "Limitation on Asset Sales" covenant and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be the date 20 Business
Days from the date such notice is mailed) (the "Excess Proceeds Payment Date");
(iii) that any Note not tendered will continue to accrue interest pursuant to
its terms; (iv) that, unless the Company defaults in the payment of the Excess
Proceeds Payment, any Note accepted for payment pursuant to the Excess Proceeds
Offer shall cease to accrue interest on and after the Excess Proceeds Payment
Date; (v) that holders electing to have a Note purchased pursuant to the Excess
Proceeds Offer will be required to surrender the Note, together with the form
entitled "Option of the holder to Elect Purchase" on the reverse side of the
Note completed, to the paying agent at the address specified in the notice prior
to the close of business on the Business Day immediately preceding the Excess
Proceeds Payment Date; (vi) that holders will be entitled to withdraw their
election if the paying agent receives, not later than the close of business on
the third Business Day immediately preceding the Excess Proceeds Payment Date, a
telegram, facsimile transmission, or letter setting forth the name of such
holder, the principal amount of Notes delivered for purchase and a statement
that such holder is withdrawing his election to have such Notes purchased; and
(vii) that holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered; PROVIDED that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for payment on
a pro rata basis Notes or portions thereof tendered pursuant to the Excess
Proceeds Offer; (ii) deposit with the paying agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii) deliver,
or cause to be delivered, to the Trustee all Notes or portions thereof so
accepted together with an officers' certificate specifying the Notes or portions
thereof accepted for payment by the Company. The paying agent shall promptly
mail to the holders of Notes so accepted payment in an
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amount equal to the purchase price, and the Trustee shall promptly authenticate
and mail to such holders a new Note equal in principal amount to any unpurchased
portion of the Note surrendered; PROVIDED that each Note purchased and each new
Note issued shall be in a principal amount of $1,000 or integral multiples
thereof. The Company will publicly announce the results of the Excess Proceeds
Offer as soon as practicable after the Excess Proceeds Payment Date. For
purposes of the "Limitation on Asset Sales" covenant of the Indenture, the
Trustee shall act as the paying agent. The Company's obligation to comply with
this covenant will terminate if and when the Notes become Investment Grade
Rated.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess Proceeds are received
by the Company under the "Limitation on Asset Sales" covenant of the Indenture
and the Company is required to repurchase Notes as described above.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Under the terms of the Indenture, upon the occurrence of a Change of Control,
each holder shall have the right to require the repurchase of its Notes by the
Company in cash pursuant to the offer described below (the "Change of Control
Offer") at a purchase price equal to 101% of the principal amount thereof, plus
accrued interest (if any) to the date of purchase (the "Change of Control
Payment"). Prior to the mailing of the notice to holders provided for in the
succeeding paragraph, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all indebtedness of the
Company that would prohibit the repurchase of the Notes as provided for in the
succeeding paragraph or (ii) obtain any requisite consents under instruments
governing any such indebtedness of the Company to permit the repurchase of the
Notes as provided for in the succeeding paragraph. The Company shall first
comply with the covenant in the preceding sentence before it shall be required
to repurchase Notes pursuant to the "Repurchase of Notes upon a Change of
Control" covenant of the Indenture.
Within 30 days of the Change of Control, the Company shall mail a notice to the
Trustee and each holder stating: (i) that a Change of Control has occurred (and
a brief description of the events resulting in such Change of Control), that the
Change of Control Offer is being made pursuant to the "Repurchase of Notes upon
a Change of Control" covenant of the Indenture and that all Notes validly
tendered will be accepted for payment; (ii) the purchase price and the date of
purchase (which shall be the date 20 business days from the date such notice is
mailed) (the "Change of Control Payment Date"); (iii) that any Note not tendered
will continue to accrue interest pursuant to its terms; (iv) that, unless the
Company defaults in the payment of the Change of Control Payment, any Note
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest on and after the Change of Control Payment Date; (v) that
holders electing to have any Note or portion thereof purchased pursuant to the
Change of Control Offer will be required to surrender such Note, together with
the form entitled "Option of the holder to Elect Purchase" on the reverse side
of such Note completed, to the paying agent at the address specified in the
notice prior to the close of business on the business day immediately preceding
the Change of Control Payment Date; (vi) that holders will be entitled to
withdraw their election if the paying agent receives, not later than the close
of business on the third business day immediately preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission, or letter
setting forth the name of such holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes purchased; and (vii) that holders whose Notes are being
purchased only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered; PROVIDED that each Note purchased
and each new Note issued shall be in a principal amount of $1,000 or integral
multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for payment
Notes or portions thereof tendered pursuant to the Change of Control Offer; (ii)
deposit with the paying agent money sufficient to pay the purchase price of all
Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee, all Notes or portions thereof so accepted together
with an officers' certificate specifying the Notes or portions thereof accepted
for payment by the Company. The paying agent shall promptly mail, to the holders
of Notes so accepted, payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such holders a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date. For purposes of the "Repurchase of Notes upon a
Change of Control" covenant of the Indenture, the Trustee shall act as paying
agent.
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The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs and the
Company is required to repurchase the Notes under the "Repurchase of Notes upon
a Change of Control" covenant of the Indenture.
If the Company is unable to repay all of its indebtedness that would prohibit
repurchase of the Notes or is unable to obtain the consents of the holders of
indebtedness, if any, of the Company outstanding at the time of a Change of
Control whose consent would be so required to permit the repurchase of Notes,
then the Company will have breached the "Repurchase of Notes upon a Change of
Control" covenant of the Indenture. This breach will constitute an Event of
Default under the Indenture if it continues for a period of 30 consecutive days
after written notice is given to the Company by the Trustee or the holders of at
least 25% in aggregate principal amount of the Notes outstanding. In addition,
the failure by the Company to repurchase Notes at the conclusion of the Change
of Control Offer will constitute an Event of Default (as defined below) without
any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available, or will be able to obtain third-party financing, at the time of any
Change of Control to make any debt payment (including repurchases of Notes)
required by the "Repurchase of Notes upon a Change of Control" covenant of the
Indenture (as well as may be contained in other securities of the Company which
might be outstanding at the time). The "Repurchase of Notes upon a Change of
Control" covenant of the Indenture will, unless the consents referred to above
are obtained, require the Company to repay all indebtedness then outstanding
which, by its terms, would prohibit such Note repurchase, either prior to or
concurrently with such Note repurchase. The terms of the Credit Agreement
prohibit such a Note repurchase.
EVENTS OF DEFAULT
An Event of Default, as defined in the Indenture and applicable to the Notes,
will occur with respect to the Notes if: (i) the Company defaults in the payment
of principal of (or premium if any, on) any Note when the same becomes due and
payable at maturity, upon acceleration, redemption, mandatory repurchase, or
otherwise; (ii) the Company defaults in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; (iii) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture with respect to the Note
or under the Notes and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or by the holders (as
defined in the Indenture) of 25% or more in aggregate principal amount of the
Notes; (iv) there occurs with respect to any issue or issues of indebtedness of
the Company or any of its subsidiaries having an outstanding principal amount of
$25 million or more in the aggregate for all such issues of all such persons,
whether such indebtedness now exists or shall hereafter be created, (A) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its stated maturity and/or (B) the failure to make a
principal payment at the final (but not any interim) fixed maturity; (v) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10 million in the aggregate for all such final judgments or orders
(treating any deductibles, self-insurance, or retention as not so covered) shall
be rendered against the Company or any of its subsidiaries and shall not be paid
or discharged, and there shall be any period of 60 consecutive days following
entry of the final judgment or order that causes the aggregate amount for all
such final judgments or orders outstanding and not paid or discharged against
all such persons to exceed $10 million during which a stay of enforcement of
such final judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; (vi) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any of its
subsidiaries in an involuntary case under any applicable bankruptcy, insolvency,
or other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar official of
the Company or any of its subsidiaries or for all or substantially all of the
property and assets of the Company or any of its subsidiaries or (C) the winding
up or liquidation of the affairs of the Company or any of its subsidiaries and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or (vii) the Company or any of its subsidiaries
(A) commences a voluntary case under any applicable bankruptcy, insolvency, or
other similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator, or similar official of the Company or any of
its subsidiaries or for all or substantially all of the property and assets of
the Company or any of its subsidiaries or (C) effects any general assignment for
the benefit of creditors.
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If an Event of Default (other than an Event of Default specified in clause (vi)
or (vii) above that occurs with respect to the Company) occurs and is continuing
under the Indenture, then, and in each and every such case, either the Trustee
or the holders of not less than 25% in aggregate principal amount of the Notes
then outstanding under the Indenture by written notice to the Company (and to
the Trustee if such notice is given by the holders (the "Acceleration Notice")),
may, and the Trustee at the request of such holders shall, declare the principal
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (iv)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default or payment default
triggering such Event of Default pursuant to clause (iv) shall be remedied or
cured by the Company and/or the relevant subsidiaries or waived by the holders
of the relevant indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(vi) or (vii) above occurs with respect to the Company, the principal of,
premium, if any, and accrued interest on the Notes then outstanding shall IPSO
FACTO become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. The holders of at least a majority
in principal amount of the outstanding Notes may, by written notice to the
Company and to the Trustee, waive all past defaults with respect to the Notes
and rescind and annul a declaration of acceleration with respect to the Notes
and its consequences if all existing Events of Default applicable to Notes,
other than the nonpayment of the principal of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "-- Modification and Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method, and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of holders of the Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of the Notes. A
holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the holder gives the Trustee written notice of a continuing Event of
Default; (ii) the holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such holder or holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability, or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the holders of a majority
in aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that they
have conducted or supervised a review of the activities of the Company and its
subsidiaries and the Company's and its subsidiaries' performance under the
Indenture and that to the best of such officers' knowledge, based upon such
review, the Company has fulfilled all obligations thereunder, or, if there has
been a default in the fulfillment of any such obligation, specifying each such
default and the nature and status thereof. The Company will also be obligated to
notify the Trustee of any default or defaults in the performance of any
covenants or agreements under the Indenture.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell, convey,
transfer, lease, or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to any person (other than a
consolidation with or merger with or into a Wholly-Owned Restricted Subsidiary
with a positive net worth; PROVIDED that, in connection with any such merger of
the Company with a Wholly-Owned Restricted Subsidiary, no consideration (other
than Common Stock in the surviving person or the Company) shall
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be issued or distributed to the stockholders of the Company) or permit any
person to merge with or into the Company unless: (i) the Company shall be the
continuing person, or the person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
all of the Notes and under the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a PRO
FORMA basis, the Company or any person becoming the successor obligor of the
Notes, as the case may be, shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately prior to such
transaction; (iv) immediately after giving effect to such transaction on a PRO
FORMA basis, the consolidated resulting surviving or transferee entity would
immediately thereafter be permitted to incur at least $1.00 of additional
indebtedness (other than Permitted Indebtedness) pursuant to the Limitation on
Indebtedness covenant; and (v) the Company delivers to the Trustee an officers'
certificate (attaching the arithmetic computations to demonstrate compliance
with clause (iii)) and opinion of counsel, in each case stating that such
consolidation, merger, or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; PROVIDED, however, that clause (iii)
above does not apply if, in the good faith determination of the board of
directors of the Company, whose determination shall be evidenced by a board
resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company; and PROVIDED further that any such transaction
shall not have as one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes and the Indenture on the 123rd day after the deposit
referred to below, and the provisions of the Indenture will no longer be in
effect with respect to the Notes (except for, among other matters, certain
obligations to register the transfer or exchange of the Notes, to replace
stolen, lost, or mutilated Notes, to maintain paying agencies, and to hold
monies for payment in trust) if, among other things, (i) the Company has
deposited with the Trustee, in trust, money and/or U.S. government obligations
that through the payment of interest and principal in respect thereof, in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Notes on the
stated maturity of such payments in accordance with the terms of the Indenture
and the Notes, (ii) the Company has delivered to the Trustee (A) either (x) an
opinion of counsel to the effect that holders of the Notes will not recognize
income, gain, or loss for federal income tax purposes as a result of the
Company's exercise of its option under this "Defeasance" provision and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance, and
discharge had not occurred, which opinion of counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the date of the Indenture such that a ruling is no longer required or (y) a
ruling directed to the Trustee received from the Internal Revenue Service to the
same effect as the aforementioned opinion of counsel and (B) an opinion of
counsel to the effect that the creation of the defeasance trust does not violate
the Investment Company Act of 1940 and after the passage of 123 days following
the deposit, the trust fund will not be subject to the effect of section 547 of
the United States Bankruptcy Code or section 15 of the New York Debtor and
Creditor Law, (iii) immediately after giving effect to such deposit on a pro
forma basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred and
be continuing on the date of such deposit or during the period ending on the
123rd day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company is a party or by which the Company is bound, and
(iv) if at such time the Notes are listed on a national securities exchange, the
Company has delivered to the Trustee an opinion of counsel to the effect that
the Notes will not be delisted as a result of such deposit, defeasance, and
discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The Indenture
further provides that the provisions of the Indenture will no longer be in
effect with respect to the covenants described in this Prospectus Supplement
under "-- Covenants" and clause (iii) under "-- Events of Default" with respect
to such covenants and clauses (iv) and (v) under "Events of Default" shall be
deemed not to be Events of Default with respect to the Notes, upon, among other
things, the deposit with the Trustee, in trust, of money and/or U.S. government
obligations that through the payment of
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interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes, on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (ii)(B), (iii), and (iv) of the preceding
paragraph and the delivery by the Company to the Trustee of an opinion of
counsel to the effect that, among other things, the holders of the Notes will
not recognize income, gain, or loss for federal income tax purposes as a result
of such deposit and defeasance of the covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. government obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
The Indenture provides that the Company and the Trustee may amend or supplement
the Indenture or the Notes without notice to or the consent of any holder: (i)
to cure any ambiguity, defect, or inconsistency in the Indenture; PROVIDED that
such amendments or supplements shall not adversely affect the interests of the
holders in any material respect; (ii) to comply with Article 5 of the Indenture;
(iii) to comply with any requirements of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act; (iv) to evidence
and provide for the acceptance of appointment hereunder by a successor Trustee;
(v) to establish the form or forms or terms of the Notes as permitted by the
Indenture; (vi) to provide for uncertificated Notes and to make all appropriate
changes for such purpose; and (vii) to make any change that does not materially
and adversely affect the rights of any holder.
The Indenture also provides that modifications and amendments of the Indenture
may be made by the Company and the Trustee with the consent of the holders of
not less than a majority in aggregate principal amount of the outstanding Notes;
PROVIDED, however, that no such modification or amendment may, without the
consent of each holder affected thereby, (i) change the stated maturity of the
principal of, or any installment of interest on, any Note; (ii) reduce the
principal amount of, or premium, if any, or interest on, any Note; (iii) change
the place or currency of payment of principal of, or premium, if any, or
interest on, any Note; (iv) impair the right to institute suit for the
enforcement of any payment on or after the stated maturity (or, in the case of a
redemption, on or after the redemption date) of any Note; (v) reduce the
above-stated percentage of outstanding Notes the consent of whose holders is
necessary to modify or amend the Indenture; (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes; or (vii) reduce the
percentage or aggregate principal amount of an outstanding Note the consent of
whose holders is necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults. It shall not be necessary for
the consent of the holders under this section of the Indenture to approve the
particular form of any proposed amendment, supplement, or waiver, but it shall
be sufficient if such consent approves the substance thereof. After an
amendment, supplement, or waiver under this section of the Indenture becomes
effective, the Company shall give to the holders affected thereby a notice
briefly describing the amendment, supplement, or waiver. The Company will mail
supplemental indentures to holders upon request. Any failure of the Company to
mail such notice, or any defect therein, shall not, however, in any way impair
or affect the validity of any such supplemental indenture or waiver.
Neither the Company nor any of its subsidiaries will, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee, or
otherwise, to any holder of any Note for or as an inducement to any consent,
waiver, or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or agreed to be paid to
all holders of the Notes that consent, waive, or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver,
or agreement.
GLOBAL NOTES
The Notes will be issued in the form of one or more fully registered global
notes (each a "Global Note") deposited with The Depository Trust Company (the
"Depositary") or a nominee thereof. Unless and until it is exchanged in whole or
in
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part for Notes in definitive registered form, a Global Note may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor of the
Depositary or a nominee of such successor.
Ownership of beneficial interests in a Global Note will be limited to persons
that have accounts with the Depositary ("Participants") or persons that may hold
interests through Participants. Upon the issuance of a Global Note, the
Depositary for such Global Note will credit, on its book-entry registration and
transfer system, the Participants' accounts with the respective principal
amounts of the Notes represented by such Global Note beneficially owned by such
Participants. The accounts to be credited will be designated by the
Underwriters. Ownership of beneficial interests in such Global Note will be
shown on, and the transfer of such ownership interests will only be effected
through, records maintained by the Depositary (with respect to interests of
Participants) and on the records of Participants (with respect to interests of
persons holding through Participants). The laws of some states may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to own,
transfer, or pledge beneficial interests in Global Notes.
So long as the Depositary or its nominee is the owner of record of a Global
Note, the Depositary or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture. Except as set forth below, owners of beneficial
interests in a Global Note will not be entitled to have the Notes represented by
such Global Note registered in their names, and will not receive or be entitled
to receive physical delivery of such Notes in definitive form and will not be
considered the owners or holders thereof under the Indenture. Accordingly, each
person owning a beneficial interest in a Global Note must rely on the procedures
of the Depositary and, if such person is not a Participant, on the procedures of
the Participant through which such person owns its interest, to exercise any
rights of a holder of record under the Indenture. The Company understands that
under existing industry practices, if the Company requests any action of holders
or if any owner of a beneficial interest in a Global Note desires to give or
take any action which a holder is entitled to give or take under the Indenture,
the Depositary would authorize the Participants holding the relevant beneficial
interests to give or take such action, and such Participants would authorize
beneficial owners owning through such Participants to give or take such action
or would otherwise act upon the instruction of beneficial owners holding through
them.
Payments of principal of, premium, if any, and interest on Notes represented by
a Global Note registered in the name of the Depositary or its nominee will be
made to such Depositary or such nominee, as the case may be, as the registered
owner of such Global Note. None of the Company, the Trustee, or any agent of the
Company or agent of the Trustee will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in such Global Note or for maintaining, supervising, or
reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payment of
principal, premium, if any, or interest in respect of such Global Note, will
immediately credit Participants' accounts with payments in amounts proportionate
to their respective beneficial interests in such Global Note as shown on the
records of the Depositary. The Company also expects that payments by
Participants to owners of beneficial interests in such Global Note held through
such Participants will be governed by standing customer instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participants.
If the Depositary notifies the Company that it is at any time unwilling or
unable to continue as Depositary or ceases to be eligible under applicable law,
and a successor Depositary eligible under applicable law is not appointed by the
Company within 90 days, the Company will issue such Notes in definitive form in
exchange for such Global Note. In addition, the Company may at any time and in
its sole discretion determine not to have any of the Notes represented by one or
more Global Notes and, in such event, will issue Notes in definitive form in
exchange for all of the Global Notes representing such Notes. Any Notes issued
in definitive form in exchange for a Global Note will be registered in such name
or names as the Depositary shall instruct the Trustee. It is expected that such
instructions will be based upon directions received by the Depositary from
Participants with respect to ownership of beneficial interests in such Global
Note.
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SAME-DAY SETTLEMENT IN RESPECT OF GLOBAL NOTES
So long as any Notes are represented by Global Notes registered in the name of
the Depositary or its nominee, such Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in such
Notes will therefore be required by the Depositary to settle in immediately
available funds. No assurances can be given as to the effect, if any, of
settlement in immediately available funds on trading activity in the Notes.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse shall be had for the payment of the
principal of, premium, if any, or interest on any of the Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant, or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any indebtedness represented thereby,
against any incorporator, shareholder, officer, director, employee, or
controlling person of the Company or of any successor person thereof. Each
holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; PROVIDED, however, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" is defined to mean Indebtedness of a person existing at
the time such person merged with or into or became a Restricted Subsidiary.
"ADJUSTED CONSOLIDATED NET INCOME" is defined to mean, for any period, the
aggregate net income (or loss) of the Company and its consolidated Restricted
Subsidiaries for such period determined in conformity with GAAP; PROVIDED that
the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income (or loss) of any person that is
not a Restricted Subsidiary, except to the extent of the amount of dividends or
other distributions that both (x) are actually paid in cash to the Company or
any of its Restricted Subsidiaries by such person during such period and (y)
when taken together with all other dividends and distributions paid during such
period in cash to the Company or any of its Restricted Subsidiaries by such
person, are not in excess of the Company's or any of its Restricted
Subsidiaries' pro rata share of such other person's aggregate net income earned
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described above
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income of any person accrued prior to the date it becomes a
Restricted Subsidiary or is merged into or consolidated with the Company or any
of its Restricted Subsidiaries or all or substantially all of the property and
assets of such person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income (or loss) of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary of such net income is not permitted by its charter or
any agreement, instrument, judgment, decree, order, statute, rule, or
governmental regulation applicable to such Restricted Subsidiary; (iv) any net
gains or losses (on an after-tax basis) attributable to Asset Sales; and (v) all
net after-tax extraordinary gains and extraordinary losses.
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"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" is defined to mean the total amount
of assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization, and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense, and other like
intangibles, all as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP.
"AFFILIATE" is defined to mean, as applied to any person, any other person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by,"
and "under common control with"), as applied to any person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities, by contract, or otherwise.
"ASSET ACQUISITION" is defined to mean (i) an investment by the Company or any
of its Restricted Subsidiaries in any other person pursuant to which such person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries or (ii) an acquisition by
the Company or any of its Restricted Subsidiaries of the property and assets of
any person other than the Company or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business, or one or more
restaurant properties, of such person.
"ASSET DISPOSITION" is defined to mean the sale or other disposition by the
Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary) of (i) all or substantially all of the Capital
Stock of any Restricted Subsidiary or (ii) all or substantially all of the
assets that constitute a division or line of business, or one or more restaurant
properties, of the Company or any of its Restricted Subsidiaries.
"ASSET SALE" is defined to mean any sale, transfer, or other disposition
(including by way of merger, consolidation, or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries of all or any of its property, business, or assets
(including, without limitation, the Capital Stock of any Restricted Subsidiary);
PROVIDED that the following shall not be included in the definition of "Asset
Sale":
(i) any conveyance, sale, lease, transfer, or other disposition by a
Restricted Subsidiary of the Company of any or all of its assets (upon
voluntary liquidation or otherwise) to the Company or a Restricted
Subsidiary of the Company;
(ii) any conveyance, sale, lease, transfer, or other disposition by the
Company or any Restricted Subsidiary of the Company in the ordinary course
of business of assets acquired and held for resale in the ordinary course of
business (in no event shall the conveyance, sale, lease, transfer, or other
disposition of a restaurant property by the Company or any Restricted
Subsidiary of the Company be considered in the ordinary course of business
for purposes of the Indenture);
(iii) any conveyance, sale, lease, transfer, or other disposition by the
Company and its Restricted Subsidiaries of assets pursuant to and in
accordance with the provisions described under "-- Consolidation, Merger,
and Sale of Assets";
(iv) any sale by the Company or any Restricted Subsidiary of the Company
of damaged, worn out, or other obsolete property in the ordinary course of
business;
(v) any abandonment by the Company or any Restricted Subsidiary of the
Company of assets and properties that are no longer useful in its business
and cannot be sold; or
(vi) any transfer by the Company or any Restricted Subsidiary of the
Company of any Capital Stock of any Restricted Subsidiary of the Company to
the Company or any Restricted Subsidiary of the Company.
"ATTRIBUTABLE INDEBTEDNESS" is defined to mean, as to any particular lease under
which any person is at the time liable, and at any date as of which the amount
thereof is to be determined, the total net amount of rent required to be paid by
such person under such lease during the initial term thereof as determined in
accordance with generally accepted accounting principles, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with like term in accordance with
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GAAP. The net amount of rent required to be paid under any such lease for any
such period shall be the aggregate amount of rent payable to the lessee with
respect to such period after excluding amounts required to be paid on account of
insurance, taxes, assessments, utilities, operating and labor costs, and similar
charges. In the case of any lease which is terminable by the lessee upon the
payment of a penalty, such net amount shall also include the amount of such
penalty, but no rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated.
"AVERAGE LIFE" is defined to mean, at any date of determination with respect to
any Note, the quotient obtained by dividing (i) the sum of the products of (A)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such Note and (B) the amount of such
principal payment by (ii) the sum of all such principal payments.
"CAPITAL STOCK" is defined to mean, with respect to any person, any and all
shares, interests, participations, or other equivalents (however designated,
whether voting or non-voting) of such person's capital stock or other ownership
interests, whether now outstanding or issued after the date of the Indenture,
including, without limitation, all common stock and preferred stock.
"CAPITALIZED LEASE" is defined to mean, as applied to any person, any lease of
any property (whether real, personal, or mixed) of which the discounted present
value of the rental obligations of such person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such person; and
"Capitalized Lease Obligation" is defined to mean the rental obligations, as
aforesaid, under such lease.
"CHANGE OF CONTROL" is defined to mean such time as (i) a "person" or "group"
(within the meaning of sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 50% of the total Voting Stock of the Company on a fully diluted basis; or
(ii) individuals who at the beginning of any period of two consecutive calendar
years constituted the board of directors (together with any new directors whose
election by the board of directors or whose nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the board of directors then still in office who either were members
of the board of directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the board of directors then in office.
"CLOSING DATE" is defined to mean the date on which the Notes are originally
issued under the Indenture.
"CONSOLIDATED EBITDA" is defined to mean, for any period, the sum of the amounts
for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (other than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets), (iv) depreciation expense, to the extent such amount
was deducted in calculating Adjusted Consolidated Net Income, (v) amortization
expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, and (vi) all other non-cash items reducing Adjusted
Consolidated Net Income, less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that,
if any Subsidiary is not a Wholly-Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the quotient
of (1) the number of shares of outstanding common stock of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries divided by (2) the total number of shares of outstanding
common stock of such Restricted Subsidiary on the last day of such period.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" is defined to mean, on any
Transaction Date, the ratio of (i) the sum of (x) the aggregate amount of
Consolidated EBITDA for the four fiscal quarters for which financial information
in respect thereof is available immediately prior to such Transaction Date (the
"Reference Period") and (y) one-third of the rental expense during such period
attributable to operating leases to (ii) the aggregate Consolidated Fixed
Charges during such Reference Period. In making the foregoing calculation, (A)
PRO FORMA effect shall be given to (1) any Indebtedness Incurred subsequent to
the end of the Reference Period and prior to the Transaction Date, (2) any
Indebtedness Incurred during such Reference Period to the extent such
Indebtedness is outstanding at the Transaction Date, and (3) any Indebtedness to
be Incurred on the Transaction Date, in each case as if such Indebtedness had
been Incurred on the first
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day of such Reference Period and after giving PRO FORMA effect to the
application of the proceeds thereof as if such application had occurred on such
first day, (B) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a PRO FORMA basis
and bearing a floating interest rate shall be computed as if the rate in effect
on the Transaction Date (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months) had been the applicable rate for the entire period,
(C) there shall be excluded from Consolidated Fixed Charges any Consolidated
Fixed Charges related to any amount of Indebtedness, Redeemable Stock, or
obligations under leases that was outstanding during such Reference Period or
thereafter but that is not outstanding or is to be repaid on the Transaction
Date, except for Consolidated Interest Expense accrued (as adjusted pursuant to
clause (B) above) during such Reference Period under a revolving credit or
similar arrangement to the extent of the commitment thereunder (or under any
successor revolving credit or similar arrangement) in effect on the Transaction
Date, (D) PRO FORMA effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving PRO FORMA effect to the application of proceeds
of any Asset Disposition) that occur during such Reference Period or thereafter
and on or prior to the Transaction Date as if they had occurred and such
proceeds had been applied on the first day of such Reference Period, (E) with
respect to any such Reference Period commencing prior to the Closing Date, the
issuance of the Notes shall be deemed to have taken place on the first day of
such Reference Period, and (F) PRO FORMA effect shall be given to asset
dispositions and asset acquisitions (including giving PRO FORMA effect to the
application of proceeds of any asset disposition) that have been made by any
person that has become a Restricted Subsidiary or has been merged with or into
the Company or any Restricted Subsidiary during such Reference Period or
subsequent to such period and prior to the Transaction Date and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; PROVIDED that to the
extent that clause (D) or (F) of this sentence requires that pro forma effect be
given to an asset acquisition or asset disposition, such PRO FORMA calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date the person, or division or line of business of the person, or
restaurant property, that is acquired or disposed of, for which financial
information is available.
"CONSOLIDATED FIXED CHARGES" is defined to mean, for any period, the sum
(without duplication) of (i) Consolidated Interest Expense for such period, (ii)
all but the principal component of rentals in respect of Capitalized Lease
Obligations paid, accrued, or scheduled to be paid or to be accrued by the
Company and its Restricted Subsidiaries during such period, (iii) one-third of
the rental expense during such period, attributable to operating leases, (iv)
any amount paid as dividends on preferred stock of the Company during such
period, and (v) the product of (x) cash and non-cash dividends (except dividends
payable solely in shares of Capital Stock that are not Redeemable Stock) paid,
declared, accrued, or accumulated on any Redeemable Stock and (y) a fraction,
the numerator of which is one and the denominator of which is one minus the sum
of the currently effective combined Federal, state, local, and foreign tax rate
of the Company and its Restricted Securities.
"CONSOLIDATED INTEREST EXPENSE" is defined to mean, for any period, the
aggregate amount of (a) interest in respect of Indebtedness (including
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts, and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed by the Company or any of its Restricted
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued, or scheduled to be paid or to be
accrued by the Company and its Restricted Subsidiaries during such period;
EXCLUDING, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (b) the amount of
dividends accrued or payable by such person or any of its consolidated
Subsidiaries in respect of preferred stock (other than by Restricted
Subsidiaries of such person to such person or such person's Wholly-Owned
Subsidiaries).
"CONSOLIDATED NET WORTH" is defined to mean, at any date of determination,
stockholders' equity of the Company and its Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation),
less (i) amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, (ii) cost of treasury stock,
and (iii) the principal amount of any promissory notes receivable from the sale
of the Capital
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Stock of the Company or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"CREDIT AGREEMENT" is defined to mean the Company's existing line of credit with
Wachovia Bank of Georgia, N.A., as agent, as such may be amended, supplemented,
extended, renewed, replaced, or modified from time to time, including, without
limitation, by adding additional parties thereto or increasing the commitment
thereunder. There can only be one such credit facility or loan agreement
designated to be the "Credit Agreement" at any one time.
"CURRENCY AGREEMENT" is defined to mean any foreign exchange contract, currency
swap agreement, or other similar agreement or arrangement designed to protect
against fluctuation in currency values.
"DEFAULT" is defined to mean any event that is, or after notice or passage of
time or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" is defined to mean, with respect to any person,
Capital Stock of such person that, by its terms or by the terms of any security
into which it is convertible, exercisable, or exchangeable, is, or upon the
happening of any event or the passage of time would be, required to be redeemed
or repurchased (including at the option of the holder thereof) by such person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Notes; PROVIDED that Capital Stock will not be deemed to be Disqualified
Capital Stock if it may only be so redeemed or repurchased solely in
consideration of Qualified Capital Stock of the Company.
"GAAP" is defined to mean generally accepted accounting principles in the United
States of America as in effect as of the date of the Indenture, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
contained in the Indenture shall be computed in conformity with GAAP applied on
a consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the offering of the Notes, (ii) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17, and (iii) any non-recurring
charges associated with the adoption, after the Closing Date, of Financial
Accounting Standard Nos. 106 and 109.
"GUARANTEE" is defined to mean any obligation, contingent or otherwise, of any
person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities, or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"INCUR" is defined to mean, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee, or otherwise become liable for, or become responsible
for, the payment of, contingently or otherwise, such Indebtedness; PROVIDED (i)
that the Indebtedness of a person existing at the time such person became a
Subsidiary or a Restricted Subsidiary, as the case may be, shall be deemed to
have been Incurred by such Subsidiary or Restricted Subsidiary, as the case may
be, at such time and (ii) that neither the accrual of interest nor the accretion
of original issue discount shall be considered an Incurrence of Indebtedness.
"INDEBTEDNESS" is defined to mean, with respect to any person at any date of
determination (without duplication), (i) all indebtedness of such person for
borrowed money, (ii) all obligations of such person evidenced by bonds,
debentures, notes, or other similar instruments, (iii) all obligations of such
person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
person to pay the deferred and unpaid purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) all obligations of such person as lessee under
Capitalized Leases, (vi) all Indebtedness of other persons secured by a Lien on
any asset of such person, whether or not such Indebtedness is assumed by
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such person; PROVIDED that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness, (vii) all Indebtedness of other persons
Guaranteed by such person to the extent such Indebtedness is Guaranteed by such
person, (viii) all Disqualified Capital Stock of such person, and (ix) to the
extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, PROVIDED (i) that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local, or other taxes.
"INTEREST RATE AGREEMENTS" is defined to mean any obligations of any person
pursuant to any interest rate swaps, caps, collars, and similar arrangements
providing protection against fluctuations in interest rates. For purposes of the
Indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such person, then in each such case, the amount of
such obligations shall be the net amount so determined, plus any premium due
upon default by such person.
"INVESTMENT" is defined to mean any direct or indirect advance, loan, or other
extension of credit (other than advances to customers in the ordinary course of
business that are, in conformity with GAAP, recorded as accounts receivable on
the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others,
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, bonds, notes, debentures, or other
similar instruments issued by any other person. For purposes of the definition
of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments"
covenant described above, (i) "Investment" shall include the fair market value
of the assets (net of liabilities) of any Restricted Subsidiary at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall
exclude the fair market value of the assets (net of liabilities) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (ii) any property transferred to or from
any person shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the board of directors.
"INVESTMENT GRADE RATED" is defined to mean, with respect to the Notes, both a
rating of the Notes by Standard & Poor's Rating Group of BBB- or better and a
rating of the Notes by Moody's Investors Service of Baa3 or better.
"JUNIOR INDEBTEDNESS" is defined to mean Indebtedness of any person that (i)
requires no payment of principal prior to or on the date on which all principal
of, premium, if any, and interest on the Notes is paid in full and (ii) is
subordinate and junior in right of payment to the Notes in all respects.
"LIEN" is defined to mean any mortgage, pledge, security interest, encumbrance,
lien, or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, any option or other
agreement to sell, or any filing of or any agreement to give any security
interest).
"NET CASH PROCEEDS" is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale, and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any
S-44
<PAGE>
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters, and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP.
"PERMITTED LIENS" is defined to mean (i) Liens for taxes, assessments,
governmental charges, or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made, (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen, or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made, (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance, and other types of social security, (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds, and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money), (v) easements,
rights-of-way, municipal and zoning ordinances, and similar charges,
encumbrances, title defects, or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries, (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; PROVIDED that
(A) such Lien is created solely for the purpose of securing Indebtedness
Incurred (1) to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto (or to refinance
unsecured Indebtedness Incurred to finance such cost) and such Lien is created
prior to, at the time of or within twelve months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (B) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost, and (C) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item, (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole, (viii) Liens encumbering property
or assets under construction arising from obligations of the Company or any
Restricted Subsidiary to make progress or partial payments relating to such
construction, (ix) any interest or title of a lessor in the property subject to
any Capitalized Lease or operating lease, (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases, (xi) Liens on property
of, or on shares of stock or Indebtedness of, any corporation existing at the
time such corporation becomes, or becomes a part of, any Restricted Subsidiary,
(xii) Liens in favor of the Company or any Restricted Subsidiary, (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary of the Company that does not give rise to an Event of
Default, (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof, (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods, (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, futures
contracts, futures options, or similar agreements or arrangements designed to
protect the Company or any of its Restricted Subsidiaries from fluctuations in
the price of commodities, (xvii) Liens arising out of conditional sale, title
retention, consignment, or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date, and (xviii) Liens on or sales
of receivables.
"PRIORITY INDEBTEDNESS" is defined to mean, at any date of determination
(without duplication), the aggregate outstanding amount of (i) Secured
Indebtedness, (ii) Attributable Indebtedness with respect to Sale-Leaseback
Transactions, and (iii) Subsidiary Indebtedness.
"QUALIFIED CAPITAL STOCK" is defined to mean any Capital Stock of a person that
is not Disqualified Capital Stock.
"REDEEMABLE STOCK" is defined to mean any class or series of Capital Stock of
any person that by its terms or otherwise is (i) required to be redeemed prior
to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes, or (iii) convertible into or
S-45
<PAGE>
exchangeable for Capital Stock referred to in clause (i) or (ii) above or
Indebtedness having a scheduled maturity prior to the Stated Maturity of the
Notes; PROVIDED that any Capital Stock that would not constitute Redeemable
Stock but for provisions thereof giving holders thereof the right to require
such person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the Notes shall not constitute Redeemable Stock if the "asset sale" or "change
of control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes Upon a Change of Control" covenants
described above and such Capital Stock specifically provides that such person
will not repurchase or redeem any such stock pursuant to such provision prior to
the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described above. Notwithstanding the foregoing,
Capital Stock shall not be deemed to be Redeemable Stock if it may only be so
redeemed solely in consideration of Capital Stock that is not Redeemable Stock.
"RESTRICTED INVESTMENT" is defined to mean any Investment in an Unrestricted
Subsidiary.
"RESTRICTED SUBSIDIARY" is defined to mean any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"STATED MATURITY" is defined to mean, (i) with respect to any Indebtedness, the
date specified in such Indebtedness as the fixed date on which the final
installment of principal of such Indebtedness is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any
Indebtedness, the date specified in such Indebtedness as the fixed date on which
such installment is due and payable.
"SUBSIDIARY" is defined to mean, with respect to any person, any corporation,
association, or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such person and one or more
other Subsidiaries of such person.
"SUBSIDIARY INDEBTEDNESS" is defined to mean any Indebtedness as to which any
Restricted Subsidiary (i) provides credit support (including any undertaking,
agreement, or instrument which would constitute Indebtedness); (ii) is directly
or indirectly liable; or (iii) constitutes the lender.
"TOTAL INDEBTEDNESS" is defined to mean, at any date of determination, the
aggregate outstanding amount of (i) Indebtedness of the Company and its
Restricted Subsidiaries and (ii) Attributable Indebtedness with respect to Sale-
Leaseback Transactions.
"TRANSACTION DATE" is defined to mean, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"UNRESTRICTED SUBSIDIARY" is defined to mean (i) any Subsidiary of the Company
that at the time of determination shall be designated an Unrestricted Subsidiary
by the board of directors in the manner provided below and (ii) any Subsidiary
of an Unrestricted Subsidiary. The board of directors may designate any
Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; PROVIDED that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
above. The board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary of the Company; PROVIDED that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) and (y) no Default or Event of
Default shall have occurred and be continuing. Any such designation by the board
of directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"VOTING STOCK" is defined to mean, with respect to any person, Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors, managers, or other voting members of the governing body of such
person.
S-46
<PAGE>
"WHOLLY-OWNED" is defined to mean, with respect to any Subsidiary of any person,
such Subsidiary if all of the outstanding common stock or other similar equity
ownership interests (but not including preferred stock) in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned directly or indirectly by such person.
S-47
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated as of , the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has severally agreed to
purchase, the principal amount of Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
- ------------------------------------------------------------ ------------
<S> <C>
J.P. Morgan Securities Inc.................................. $
Raymond James & Associates, Inc.............................
------------
Total..................................................... $150,000,000
------------
------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the Underwriters
are committed to take and pay for all of the Notes, if any are taken.
The Company has been advised by the Underwriters that they propose to offer the
Notes, in part, directly to the public at the initial public offering price set
forth on the cover page of this Prospectus Supplement and, in part, to certain
securities dealers at such prices less a concession of % of the principal
amount of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not to exceed % of the principal amount of the Notes to certain
brokers and dealers. After the Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Notes are a new issue of securities with no established trading market. The
Company has been advised by the Underwriters that the Underwriters presently
intend to make a market in the Notes, although the Underwriters are under no
obligation to do so and the Underwriters may discontinue such market making at
any time in their sole discretion without notice. Accordingly, no assurance can
be given as to the liquidity of, or the trading markets for, the Notes.
Settlement for the Notes will be made from immediately available funds and all
secondary trading in the Notes will settle in immediately available funds.
In the ordinary course of their respective businesses, the Underwriters and/or
certain of their respective affiliates have engaged in, and may in the future
engage in, investment banking or commercial banking transactions, or both, with
the Company.
The Company has agreed to indemnify each Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The legality of the Notes will be passed upon for the Company by Kilpatrick &
Cody, Atlanta, Georgia, as counsel for the Company, and will be passed upon for
the Underwriters by Davis Polk & Wardwell. Attorneys at Kilpatrick & Cody who
participated in the preparation of this Prospectus Supplement own a total of
2,830 shares of common stock of the Company.
S-48
<PAGE>
APPLE SOUTH, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Statements of Earnings for the Three Years Ended December
31, 1993, 1994, and 1995 and for the (unaudited) Quarters Ended April
2, 1995 and March 31, 1996........................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
(unaudited) March 31, 1996........................................... F-4
Consolidated Statements of Shareholders' Equity for the Three Years
Ended December 31, 1993, 1994, and 1995 and the (unaudited) Quarter
Ended March 31, 1996................................................. F-5
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1993, 1994, and 1995 and the (unaudited) Quarters Ended
April 2, 1995 and March 31, 1996..................................... F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple South, Inc.
We have audited the accompanying consolidated balance sheets of Apple South,
Inc. as of December 31, 1994 and 1995, and the related consolidated statements
of earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apple
South, Inc. at December 31, 1994 and 1995, and the consolidated results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 26, 1996
F-2
<PAGE>
APPLE SOUTH, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31 APRIL 2 MARCH 31
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
UNAUDITED
<S> <C> <C> <C> <C> <C>
Restaurant sales:
Applebee's................................................ $150,921 $201,359 $300,928 $62,231 $ 89,577
Don Pablo's............................................... 31,132 57,192 88,820 17,350 27,095
Harrigan's................................................ 23,044 23,021 22,781 5,681 5,773
Tomato Rumba's/Gianni's................................... 2,718 9,973 19,399 3,660 1,858
Hardee's.................................................. 9,940 9,014 8,262 2,142 2,030
-------- -------- -------- ------- --------
Total restaurant sales.................................. 217,755 300,559 440,190 91,064 126,333
-------- -------- -------- ------- --------
Restaurant operating expenses:
Food and beverage......................................... 63,329 84,910 120,630 25,032 34,732
Payroll and benefits...................................... 62,425 87,236 129,424 27,305 38,158
Depreciation and amortization............................. 7,483 11,119 17,662 3,543 5,295
Other operating expenses.................................. 51,636 69,483 98,850 20,858 28,129
-------- -------- -------- ------- --------
Total restaurant operating expenses..................... 184,873 252,748 366,566 76,738 106,314
-------- -------- -------- ------- --------
Income from restaurant operations........................... 32,882 47,811 73,624 14,326 20,019
General and administrative expenses......................... 11,584 15,359 22,298 4,667 6,442
Merger and asset revaluation charges........................ -- -- 9,997 -- 19,800
-------- -------- -------- ------- --------
Operating income (loss)..................................... 21,298 32,452 41,329 9,659 (6,223)
-------- -------- -------- ------- --------
Other income (expense):
Interest expense.......................................... (2,205) (3,131) (6,189) (1,276) (1,943)
Interest income........................................... 590 789 638 212 57
Other, net................................................ (490) (150) (1,349) (99) (478)
-------- -------- -------- ------- --------
Total other income (expense)............................ (2,105) (2,492) (6,900) (1,163) (2,364)
-------- -------- -------- ------- --------
Earnings (loss) before income taxes......................... 19,193 29,960 34,429 8,496 (8,587)
Income taxes................................................ 7,250 10,900 14,150 3,100 (3,100)
-------- -------- -------- ------- --------
Net earnings (loss)......................................... $ 11,943 $ 19,060 $ 20,279 $ 5,396 $ (5,487)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Earnings (loss) per common and common equivalent share...... $ 0.36 $ 0.54 $ 0.52 $ 0.15 $ (0.14)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Weighted average common and common equivalent shares
outstanding................................................ 33,395 35,444 38,880 35,874 39,905
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
APPLE SOUTH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1994 1995 1996
-------- -------- ----------
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA UNAUDITED
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,587 $ 4,806 $ 5,518
Short-term investments.................................... 2,857 377 185
Accounts receivable....................................... 1,905 3,506 3,322
Inventories............................................... 3,552 5,416 5,812
Prepaid expenses and other................................ 3,879 5,282 7,053
-------- -------- ----------
Total current assets.................................... 32,780 19,387 21,890
Premises and equipment, net................................. 188,009 303,077 309,470
Franchise costs, net........................................ 3,284 4,920 5,142
Goodwill, net............................................... 430 38,375 37,866
Other assets................................................ 1,584 3,379 5,869
-------- -------- ----------
$226,087 $369,138 $ 380,237
-------- -------- ----------
-------- -------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,095 $ 13,489 $ 12,777
Accrued liabilities....................................... 12,755 20,282 25,808
Current installments of long-term debt.................... 5,371 3,207 2,456
Income taxes.............................................. 1,359 187 --
-------- -------- ----------
Total current liablilites............................... 30,580 37,165 41,041
Long-term debt.............................................. 70,190 118,726 140,260
Deferred income taxes....................................... 4,976 10,026 7,334
-------- -------- ----------
Total liabilities....................................... 105,746 165,917 188,635
-------- -------- ----------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued...................................... -- -- --
Common stock, $.01 par value. Authorized 75,000,000
shares; 34,300,391 issued in 1994, 39,079,261 issued in
1995 and 39,084,032 issued in 1996....................... 343 391 391
Additional paid-in capital................................ 79,172 142,355 139,704
Retained earnings......................................... 40,826 60,475 54,753
Treasury stock at cost; 149,942 shares in 1996............ -- -- (3,246)
-------- -------- ----------
Total shareholders' equity.............................. 120,341 203,221 191,602
-------- -------- ----------
$226,087 $369,138 $ 380,237
-------- -------- ----------
-------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
APPLE SOUTH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992................................ 27,051 $270 $ 14,364 $13,717 $ -- $ 28,351
Net earnings................................................ -- -- -- 11,943 -- 11,943
Sale of common stock........................................ 5,137 51 38,615 -- -- 38,666
Common stock isssued to ESOP................................ 29 -- 205 -- -- 205
Exercise of options and warrants............................ 551 6 1,485 -- -- 1,491
Cash dividends ($0.010 per share)........................... -- -- -- (220) -- (220)
Distributions made by acquired companies prior to merger.... -- -- -- (755) -- (755)
Pro forma income tax adjustment............................. -- -- -- 218 -- 218
Reclassification of S Corporation earnings.................. -- -- 2,618 (2,618) -- --
------ ------ ---------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1993................................ 32,768 327 57,287 22,285 -- 79,899
Net earnings................................................ -- -- -- 19,060 -- 19,060
Sale of common stock........................................ 1,133 11 19,084 -- -- 19,095
Common stock issued to ESOP................................. 23 1 394 -- -- 395
Exercise of options......................................... 377 4 770 -- -- 774
Tax effect of exercise of options by employees.............. -- -- 1,637 -- -- 1,637
Cash dividends ($0.015 per share)........................... -- -- -- (364) -- (364)
Distributions made by acquired companies prior to merger.... -- -- -- (223) -- (223)
Pro forma income tax adjustment............................. -- -- -- 68 -- 68
------ ------ ---------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1994................................ 34,301 343 79,172 40,826 -- 120,341
Net earnings................................................ -- -- -- 20,279 -- 20,279
Sale of common stock........................................ 4,076 41 57,307 -- -- 57,348
Common stock issued to ESOP................................. 56 -- 665 -- -- 665
Exercise of options......................................... 646 7 1,798 -- -- 1,805
Tax effect of exercise of options by employees.............. -- -- 3,413 -- -- 3,413
Cash dividends ($0.022 per share)........................... -- -- -- (630) -- (630)
------ ------ ---------- -------- -------- -------------
BALANCE AT DECEMBER 31, 1995................................ 39,079 391 142,355 60,475 -- 203,221
Net earnings (loss)......................................... -- -- -- (5,487) -- (5,487)
Purchase of common stock for treasury....................... -- -- -- -- (8,215) (8,215)
Common stock issued to ESPP................................. 5 -- 100 -- -- 100
Common stock issued to ESOP................................. -- -- (21) -- 271 250
Exercise of options......................................... -- -- (4,228) -- 4,698 470
Tax effect of exercise of options by employees.............. -- -- 1,498 -- -- 1,498
Cash dividends ($0.006 per share)........................... -- -- -- (235) -- (235)
------ ------ ---------- -------- -------- -------------
BALANCE AT MARCH 31, 1996 (UNAUDITED)....................... 39,084 $391 $ 139,704 $54,753 ($ 3,246) $191,602
------ ------ ---------- -------- -------- -------------
------ ------ ---------- -------- -------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLE SOUTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31 APRIL 2 MARCH 31
DOLLARS IN THOUSANDS 1993 1994 1995 1995 1996
-------- -------- --------- -------- --------
UNAUDITED
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $ 11,943 $ 19,060 $ 20,279 $ 5,396 $ (5,487)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 7,483 11,119 19,946 3,774 6,201
Pro forma income tax adjustment......................... 218 68 -- -- --
Deferred income taxes................................... 1,194 2,907 4,366 931 (2,692)
Asset revaluation charges............................... -- -- -- -- 17,842
Loss on disposal of premises and equipment.............. 128 185 97 -- --
(Increase) decrease in assets:
Accounts receivable................................... 432 (1,119) (1,601) (32) 184
Inventories........................................... (773) (1,030) (1,435) (172) (630)
Prepaid expenses and other............................ (408) (2,225) (1,403) (2,698) (951)
Other assets.......................................... (67) 190 (1,795) (1,073) (2,490)
Increase (decrease) in liabilities:
Accounts payable...................................... 181 3,694 2,394 (1,990) (712)
Accrued liabilities................................... 2,610 2,933 7,527 1,901 3,661
Income taxes.......................................... 653 1,709 2,925 1,364 (815)
-------- -------- --------- -------- --------
Net cash provided by operations..................... 23,594 37,491 51,300 7,401 14,111
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (50,657) (99,391) (124,066) (27,389) (26,871)
Assets acquired for cash................................ -- -- (52,059) (17,194) --
Proceeds from sale of premises and equipment............ 740 3,930 2,209 -- 429
Short-term investments.................................. (7,779) 5,299 2,480 (17) 192
Additions to franchise costs............................ (586) (909) (1,205) (192) (302)
Repayment of notes receivable........................... 49 -- -- -- --
-------- -------- --------- -------- --------
Net cash used in investing activities............... (58,233) (91,071) (172,641) (44,792) (26,552)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) revolving credit
agreements............................................. -- 44,500 56,000 (13,000) 22,000
Repayment of notes payable.............................. (7,528) -- -- -- --
Proceeds from issuance of common stock.................. 40,362 20,264 59,818 41,920 820
Principal payments on long-term debt.................... (6,550) (5,668) (9,628) (586) (1,217)
Dividends declared and paid............................. (220) (364) (630) (101) (235)
Distributions of acquired companies prior to merger..... (754) (223) -- -- --
Proceeds from issuance of long-term debt................ 21,500 -- -- -- --
Purchase of treasury stock.............................. -- -- -- -- (8,215)
-------- -------- --------- -------- --------
Net cash provided by financing activities........... 46,810 58,509 105,560 28,233 13,153
-------- -------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING
THE PERIOD................................................. 12,171 4,929 (15,781) (9,158) 712
Cash and cash equivalents at the beginning of the period.... 3,487 15,658 20,587 20,587 4,806
-------- -------- --------- -------- --------
Cash and cash equivalents at the end of the period.......... $ 15,658 $ 20,587 $ 4,806 $ 11,429 $ 5,518
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Supplemental disclosures:
Interest paid........................................... $ 1,943 $ 3,139 $ 6,878 $ 1,126 $ 2,079
Income taxes paid....................................... 5,164 6,180 6,859 2,639 407
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE QUARTERS ENDED APRIL 2, 1995, AND MARCH 31, 1996,
IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Apple South, Inc., including its wholly owned subsidiaries (the "Company"), is a
multi-concept restaurant company and is the nation's largest operator of
Applebee's Neighborhood Grill & Bar restaurants. At March 31, 1996, the Company
operated 198 Applebee's, 48 Don Pablo's, 12 Harrigan's, six Tomato Rumba's, and
ten Hardee's restaurants. The Company operates its Applebee's and Hardee's
restaurants under franchise agreements, whereas the Don Pablo's, Harrigan's, and
Tomato Rumba's are proprietary concepts of the Company.
BASIS OF PRESENTATION -- The consolidated financial statements which contain
certain amounts based upon management's best estimates, include the accounts of
Apple South, Inc. and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
CASH EQUIVALENTS -- Cash equivalents include all highly liquid investments,
which have original maturities of three months or less.
SHORT-TERM INVESTMENTS -- Short-term investments, which have original maturities
of greater than three months, are stated at cost plus accrued interest, which
approximates market value.
INVENTORIES -- Inventories consist primarily of food, beverages and supplies and
are stated at the lower of cost (using the first-in, first-out method) or
market.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost.
Depreciation of premises and equipment is calculated using the straight-line
method over the estimated useful lives of the related assets, which approximates
25 years for buildings and seven years for equipment. Leasehold improvements are
depreciated using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
FRANCHISE COSTS -- The costs related to the acquisition of franchises are
amortized over their estimated useful lives, principally 20 years, using the
straight-line method. Accumulated amortization of franchise costs amounted to
$0.8 million, $1.0 million, and $1.2 million at December 31, 1993, 1994, and
1995, and $1.0 million and $1.3 million at April 2, 1995 and March 31, 1996,
respectively. The franchise agreements for the Applebee's restaurants also
require royalty fees equal to 4% of sales and advertising fees equal to 1.5% of
sales. The franchise agreements for the Hardee's restaurants require royalty
fees of 3.5% of sales and an advertising fee which approximates 0.5% of sales.
Such fees are expensed as incurred. Total royalty and advertising fees paid
under franchise agreements were $8.6 million, $11.4 million, and $16.9 million
in 1993, 1994, and 1995 and $3.5 million and $5.0 million for the quarters ended
April 2, 1995 and March 31, 1996, respectively.
DEVELOPMENT COSTS -- Certain direct and indirect costs are capitalized in
conjunction with acquiring and developing new restaurant sites and amortized
over the life of the related building. Development costs were capitalized as
follows: $0.7 million, $1.8 million, and $3.0 million in 1993, 1994, and 1995,
and $0.7 million and $1.0 million for the quarters ended April 2, 1995 and March
31, 1996.
PREOPENING COSTS -- Preopening costs are incurred before a restaurant is opened
and consist primarily of wages and salaries, hourly employee recruiting, license
fees, meals, lodging and travel, plus the cost of hiring and training the
management teams. Preopening costs are expensed in the first full month of a
restaurant's operations.
GOODWILL -- Goodwill represents the excess of cost over fair value of assets
acquired and is being amortized over 20 years using the straight-line method.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operations. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. Accumulated amortization of
goodwill amounted to $299,000, $338,000, and $1.5 million at December 31, 1993,
1994, and 1995, and $347,000 and $2.0 million at April 2, 1995 and March 31,
1996, respectively.
F-7
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE -- Earnings per share are computed based on the weighted
average number of common and common equivalent shares outstanding. The weighted
average number of shares and per share data have been retroactively adjusted to
give effect to various stock splits, effected as stock dividends (Note 11). The
difference between primary and fully diluted earnings per share was not
significant in any period presented.
INCOME TAXES -- Apple Tenn-Flo, L.P. ("ATF") was acquired by the Company in
April 1994 (Note 2) in a transaction accounted for as a pooling of interests.
Prior to the merger, ATF was a limited partnership and as such, the individual
partners of ATF and not the partnership were responsible for Federal and state
income taxes.
The accompanying consolidated statements of earnings reflect provisions for
income taxes on a pro forma basis for the period prior to the ATF acquisition as
if the Company were liable for Federal and state income taxes on ATF's earnings
at a 38% statutory rate. The consolidated statements of shareholders' equity
reflect adjustments to eliminate the pro forma income taxes attributed to ATF's
earnings since such taxes were the direct responsibility of ATF's partners.
NOTE 2 -- BUSINESS COMBINATIONS, CONVERSIONS AND ASSET VALUATIONS
On November 17, 1995, the Company exchanged 9.3 million newly issued shares of
its common stock for all of the outstanding shares of DF&R Restaurants, Inc.
("DF&R"). DF&R operated 56 full-service, casual dining restaurants including 44
Don Pablo's and 12 Harrigan's restaurants.
The exchange of shares was accounted for as a pooling of interests, and
accordingly the accompanying consolidated financial statements have been
restated to include the accounts and operations of the acquired entity for all
periods presented. Separate results for the combining entities for the years
ended December 31, 1993 and 1994 and for the most recent interim period prior to
acquisition (nine months ended October 1, 1995) are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 OCTOBER 1
1993 1994 1995
-------- -------- -----------
UNAUDITED
<S> <C> <C> <C>
Restaurant sales:
Previously reported....................................... $163,579 $220,346 $238,590
DF&R...................................................... 54,176 80,213 79,597
-------- -------- -----------
$217,755 $300,559 $318,187
-------- -------- -----------
-------- -------- -----------
Net earnings:
Previously reported....................................... $ 8,260 $ 13,319 $ 13,543
DF&R...................................................... 3,683 5,741 5,744
-------- -------- -----------
$ 11,943 $ 19,060 $ 19,287
-------- -------- -----------
-------- -------- -----------
</TABLE>
Adjustments have been made to conform DF&R's reporting periods and accounting
policies. The only conforming accounting policy adjustment made to DF&R's
financial statements was to expense rather than capitalize and amortize
preopening expenses. As a result of this accounting policy adjustment, DF&R's
net earnings for the years ending December 31 were reduced as follows: $148,000
in 1993, $236,000 in 1994, and $29,000 in 1995.
For the year ended December 31, 1995, merger and asset revaluation charges are
non-recurring costs related to the merger with DF&R and the conversion of
Gianni's Little Italy restaurants to Tomato Rumba's Pastaria Grill. These
expenses primarily include investment banking fees, accounting and legal fees,
printing costs, and other costs related to the DF&R merger, as well as
conversion costs which include decor and menu changes and the write-off of
specific assets and certain operating losses related to the Gianni's Little
Italy restaurants prior to conversion.
In the first quarter of 1996, the Company closed 12 of its 18 Tomato Rumba's
restaurants and all three of its Gianni's Little Italy restaurants and
accelerated efforts to sell its Hardee's restaurants. These actions, in
conjunction with the Company's adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-
F-8
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BUSINESS COMBINATIONS, CONVERSIONS AND ASSET VALUATIONS (CONTINUED)
Lived Assets and Long-Lived Assets to be Disposed of," resulted in an asset
revaluation charge of approximately $19.8 million ($12.7 million after tax)
which consisted primarily of the asset impairment loss and included certain
operating losses related to the Tomato Rumba's division.
In June 1995, the Company acquired certain assets of Marcus Restaurants, Inc.,
another operator of Applebee's restaurants, in a transaction accounted for under
the purchase method for approximately $48 million. Approximately $16 million of
the purchase price was funded by the proceeds from the sale of 900,000 shares of
common stock, approximately $13 million of the purchase price was financed as an
operating lease through the Company's leveraged lease agreement and the
remaining $19 million was financed from borrowings under the Company's revolving
credit agreements. The assets acquired included 18 operating Applebee's
restaurants, two Applebee's restaurants under construction and the exclusive
development rights to Applebee's territories in the Chicago metropolitan area,
most of Wisconsin, and certain contiguous counties in Minnesota and Michigan.
The excess of cost over fair value of assets acquired was $27 million in this
acquisition.
In March 1995, the Company acquired certain assets of another operator of
Applebee's restaurants, TUG, Inc., in a transaction accounted for under the
purchase method for approximately $17 million in cash. These assets included
eight operating Applebee's restaurants, the buildings in which two of the
restaurants are located, subject to ground leases, and the exclusive development
rights to Applebee's territory for most of Iowa, northwest Illinois, and
contiguous counties in Wisconsin and Missouri. The excess of cost over fair
value of assets acquired was $12 million in this acquisition.
The following summary, prepared on an unaudited pro forma basis, presents the
results of operations of Apple South, Inc. and DF&R on a pooled basis, combined
with those of TUG, Inc. and Marcus Restaurants, Inc. ("the purchase business
combinations") as if the purchase business combinations had been completed as of
the beginning of the periods presented, after the impact of certain adjustments,
such as amortization of intangibles, increased interest expense on the
acquisition debt, elimination of interest on acquisition debt repaid with
proceeds from the registered public offering of approximately 3.2 million shares
of Company common stock in March 1995 and 0.9 million shares of Company common
stock in June 1995, and the related income tax effects (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31 APRIL 2
1994 1995 1995
-------- -------- -------------
<S> <C> <C> <C>
Restaurant sales............................................ $346,310 $458,805 $80,197
Income from restaurant operations........................... 52,838 75,220 11,724
Net earnings................................................ 19,359 19,950 3,602
Earnings per common and common equivalent share............. 0.49 0.51 0.12
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had occurred as of the beginning of the periods
presented.
In April 1994, the Company exchanged approximately one million newly issued
shares of its common stock for all the partnership interests in ATF. ATF
operated nine Applebee's restaurants, had one additional Applebee's restaurant
under construction and held exclusive development rights for additional
Applebee's restaurants in eastern Tennessee and a number of contiguous counties
in adjoining states.
The exchange of shares was accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of the acquired entities for all
periods presented. Results of operations for the ATF restaurants prior to
acquisition were not significant to the Company's consolidated results of
operations for the year ended December 31, 1993 or 1994.
F-9
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PREMISES AND EQUIPMENT
A summary of premises and equipment follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1994 1995 1996
-------- -------- ---------
UNAUDITED
<S> <C> <C> <C>
Land........................................................ $ 34,747 $ 53,314 $ 60,908
Buildings................................................... 93,966 160,196 175,275
Equipment................................................... 67,278 101,819 101,778
Leasehold improvements...................................... 10,528 19,622 19,956
Construction in progress.................................... 16,774 21,376 10,733
-------- -------- ---------
Total premises and equipment................................ 223,293 356,327 368,650
Less accumulated depreciation and amortization.............. 35,284 53,250 59,180
-------- -------- ---------
Premises and equipment, net................................. $188,009 $303,077 $ 309,470
-------- -------- ---------
-------- -------- ---------
</TABLE>
NOTE 4 -- LONG TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1994 1995 1996
------- -------- ---------
UNAUDITED
<S> <C> <C> <C>
Revolving credit agreements, with variable rate interest
(6.4% at March 31, 1996)................................... $44,500 $100,500 $ 122,500
Term loan, with interest at 7.3% payments due through
2000....................................................... 20,000 18,000 18,000
Term loan, with variable rate interest (10.1% at December
31, 1994; paid
in 1995)................................................... 4,576 -- --
First mortgage notes, with interest rates from 7.4% to
13.7%; payments due through 2002........................... 2,724 1,506 539
Promissory notes, with interest rates from 8.8% to 10.3%;
paid in 1995............................................... 774 -- --
Other....................................................... 2,987 1,927 1,677
------- -------- ---------
Total long-term debt........................................ 75,561 121,933 142,716
Less current installments................................... 5,371 3,207 2,456
------- -------- ---------
Long-term debt, excluding current installments.............. $70,190 $118,726 $ 140,260
------- -------- ---------
------- -------- ---------
</TABLE>
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of long-term debt
approximates the book value recorded.
The aggregate annual maturities of long-term debt for the remaining nine months
of the fiscal year ending December 29, 1996 are $2.3 million and for the years
subsequent to December 29, 1996 are as follows: 1997 -- $3.9 million; 1998 --
$126.3 million; 1999 -- $4.3 million; 2000 -- $5.3 million; 2001 -- $0.2
million; and thereafter -- $0.4 million.
The Company has unsecured revolving bank credit agreements aggregating $185
million of which $20 million is due in 1997 and $165 million is due in 1998 with
interest payable at a margin above LIBOR or at prime. Through December 1997, the
Company has fixed the interest rate on $100 million at 6.4% under an interest
rate swap agreement which is accounted for as a hedge.
Terms of the Company's revolving credit agreements and/or the term loan include
various provisions which, among other things, require the Company to (i)
maintain defined net worth and coverage ratios, (ii) limit the incurrence of
certain liens
F-10
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- LONG TERM DEBT (CONTINUED)
or encumbrances in excess of defined amounts and (iii) maintain defined leverage
ratios. As of December 31, 1995 and March 31, 1996, the Company was in
compliance with these provisions of these agreements, and management does not
believe that compliance with the credit terms will adversely impact the
Company's future operations.
NOTE 5 -- LEASES
The Company has various leases for land, buildings, equipment and office
facilities. Land and building lease terms range from ten to 20 years, with
renewal options ranging from five to 20 years. Equipment lease terms generally
range from four to eight years. In the normal course of business, some leases
are expected to be renewed or replaced by leases on other properties. In other
instances, the Company expects to exercise purchase options as and when
available in accordance with lease terms. Future minimum lease payments do not
include amounts payable by the Company for maintenance costs, real estate taxes,
insurance, etc., or contingent rentals payable based on a percentage of sales in
excess of stipulated amounts for restaurant facilities.
In the first quarter of 1995, the Company entered into a $30 million leveraged
lease agreement. This lease financing is structured as a series of individual
operating leases for financial reporting purposes, with lease rates
approximately the same as the borrowing rates available under the Company's
revolving credit agreements. During 1995, the entire $30 million commitment was
utilized for the development and acquisition of restaurants. These properties
can later be purchased at their original cost, renewed in three year increments,
or sold to an unrelated party with a Company residual value guarantee of up to
$25.5 million.
Future minimum lease payments under noncancelable operating leases for the
remaining nine months of the fiscal year ending December 29, 1996 and for the
subsequent five fiscal years are as follows (amounts in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 10,469
1997............................................................. 13,726
1998............................................................. 41,944
1999............................................................. 11,151
2000............................................................. 10,429
2001............................................................. 6,060
Later years...................................................... 50,828
--------
Total minimum lease payments..................................... $144,607
--------
--------
</TABLE>
Total rental expense related to cancelable and noncancelable operating leases
was $9.0 million, $10.3 million, $13.6 million in 1993, 1994, and 1995 and $2.9
million and $3.9 million for the quarters ended April 2, 1995, and March 31,
1996 respectively. Contingent rentals were $0.9 million, $1.0 million, $0.9
million in 1993, 1994, and 1995 and $0.2 million and $0.3 million for the
quarters ended April 2, 1995 and March 31, 1996.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities include salaries, payroll taxes and other employee costs of
$6.5 million and $9.8 million at December 31, 1994 and 1995 and $13.6 million at
March 31, 1996 respectively.
F-11
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES
The components of the provision for income taxes are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31: CURRENT DEFERRED TOTAL
- ------------------------------------------------------------ ------- -------- -------
<S> <C> <C> <C>
1995:
Federal................................................... $ 7,300 $ 4,450 $11,750
State..................................................... 1,800 600 2,400
------- -------- -------
Total................................................. $ 9,100 $ 5,050 $14,150
------- -------- -------
------- -------- -------
1994:
Federal................................................... $ 6,835 $ 2,165 $ 9,000
State..................................................... 1,500 400 1,900
------- -------- -------
Total................................................. $ 8,335 $ 2,565 $10,900
------- -------- -------
------- -------- -------
1993:
Federal................................................... $ 5,050 $ 1,000 $ 6,050
State..................................................... 1,000 200 1,200
------- -------- -------
Total................................................. $ 6,050 $ 1,200 $ 7,250
------- -------- -------
------- -------- -------
<CAPTION>
FOR THE QUARTERS ENDED APRIL 2, 1995 AND MARCH 31, 1996: CURRENT DEFERRED TOTAL
- ------------------------------------------------------------ ------- -------- -------
<S> <C> <C> <C>
April 2, 1995 (unaudited):
Federal................................................... $ 1,700 $ 800 $ 2,500
State..................................................... 469 131 600
------- -------- -------
Total................................................. $ 2,169 $ 931 $ 3,100
------- -------- -------
------- -------- -------
March 31, 1996 (unaudited):
Federal................................................... $ (300) $(2,400) $(2,700)
State..................................................... (108) (292) (400)
------- -------- -------
Total................................................. $ (408) $(2,692) $(3,100)
------- -------- -------
------- -------- -------
</TABLE>
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate (both historical and pro forma) applied to earnings (loss)
before income taxes in the accompanying consolidated statements of earnings
follows:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31 APRIL 2 MARCH 31
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tax at Federal statutory rate............................... 35.0% 35.0% 35.0% 35.0% (35.0)%
Increase (decrease) in taxes due to:
Graduated tax rates....................................... (0.8) (0.3) -- -- --
State income taxes, net of Federal benefit (impact)....... 4.0 4.0 4.0 4.0 (4.0)
FICA tip and targeted jobs tax credits.................... -- (3.0) (3.3) (3.3) 3.1
Nondeductible merger expenses............................... -- -- 5.1 -- --
Other, net.................................................. (0.4) 0.7 0.3 0.8 (0.2)
-------- -------- -------- -------- --------
Effective tax rate.......................................... 37.8% 36.4% 41.1% 36.5% (36.1)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities give rise to deferred income tax liabilities. At
December 31, 1995 and 1994 and March 31, 1996 substantially all of the deferred
income tax liability relates to building and equipment depreciation.
F-12
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES (CONTINUED)
The provision for income taxes reflects pro forma amounts for the additional tax
expense attributable to ATF's earnings as if the Company were liable for Federal
and state income taxes rather than individual partners. All pro forma taxes on
ATF's earnings have been calculated as currently payable using a 38% statutory
rate as follows: $218,000 in 1993 and $68,000 for the period prior to the ATF
acquisition date.
NOTE 8 -- INTEREST EXPENSE
The following is a summary of interest cost incurred and interest cost
capitalized as a component of the cost of construction in progress (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31 APRIL 2 MARCH 31
1993 1994 1995 1995 1996
------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Interest cost capitalized................................... $ 218 $ 673 $1,074 $ 203 $ 97
Interest cost expensed...................................... 2,205 3,131 6,189 1,276 1,943
------ ------ ------ ------- ---------
Total....................................................... $2,423 $3,804 $7,263 $ 1,479 $2,040
------ ------ ------ ------- ---------
------ ------ ------ ------- ---------
</TABLE>
NOTE 9 -- STOCK OPTION PLANS
The Company's 1988 Stock Option Plan (the "Stock Option Plan") and the 1993 and
1995 Stock Incentive Plans (the "Stock Incentive Plans") provide for the
granting of nonqualified and incentive options for up to 1,974,375 shares,
450,000 shares and 2,000,000 shares, respectively, of common stock of the
Company to officers, directors, and key employees. Options awarded under the
Company's Stock Option Plan and Stock Incentive Plans are granted at prices not
less than the fair market value on the date of the grant, are exercisable
proportionally over three to ten years, and expire ten years subsequent to
award.
The DF&R 1992 Stock Option Plan (the "DF&R Option Plan") provides for the
granting of options to purchase 551,220 shares of the Company's common stock to
officers, directors, and key employees. All available options under the DF&R
Option Plan have been granted. Options awarded under the DF&R Option Plan prior
to the merger were adjusted based on the exchange ratio of 1.5 shares of DF&R
common stock for each share of the Company's common stock. Options awarded under
the DF&R Option Plan were granted at prices equal to fair market value on the
date of grant. With limited exceptions, all options are generally exercisable
beginning one year from the date of grant with annual vesting periods and
terminate not later than five years from the date of grant.
F-13
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION PLANS (CONTINUED)
Options to purchase 1,095,984 shares were exercisable as of December 31, 1995
and 928,963 are exercisable as of March 31, 1996. Further information relating
to total options is as follows:
<TABLE>
<CAPTION>
AVERAGE
SHARES PRICE
--------- -------
<S> <C> <C>
Outstanding at December 31, 1992............................ 2,064,900 $ 2.27
Granted in 1993............................................. 95,625 12.28
Exercised in 1993........................................... (144,788) 2.35
Canceled in 1993............................................ (3,600) 6.67
--------- -------
Outstanding at December 31, 1993............................ 2,012,137 2.73
Granted in 1994............................................. 348,787 15.73
Exercised in 1994........................................... (376,088) 2.06
Canceled in 1994............................................ (1,500) 15.17
--------- -------
Outstanding at December 31, 1994............................ 1,983,336 5.13
Granted in 1995............................................. 1,479,382 19.90
Exercised in 1995........................................... (646,184) 2.80
Canceled in 1995............................................ (25,861) 15.51
--------- -------
Outstanding at December 31, 1995............................ 2,790,673 13.44
Granted in the first quarter 1996........................... 165,000 21.84
Exercised in the first quarter 1996......................... (246,878) 2.52
Canceled in the first quarter 1996.......................... (10,000) 23.29
--------- -------
Outstanding at March 31, 1996 (unaudited)................... 2,698,795 14.88
--------- -------
--------- -------
</TABLE>
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Company has a noncontributory Employee Stock Ownership Plan (the "Plan")
covering substantially all full-time employees. In accordance with the terms of
the Plan, the Company may make contributions to the Plan in amounts as
determined by the Board of Directors. Participants become 20% vested in their
accounts after three years of service, escalating 20% each year thereafter until
they are fully vested. Accrued contributions were approximately $375,000,
$650,000, and $250,000 in the years ended December 31, 1993, 1994, and 1995 and
$302,000 for the quarter ended March 31, 1996.
The Company has established the Apple South, Inc. Profit Sharing Plan and Trust
in accordance with Section 401(k) of the Internal Revenue Code, which allows
eligible participating employees to defer receipt of a portion of their
compensation and contribute such amount to one or more investment funds.
Employee contributions are matched by the Company dollar for dollar for the
first 2% of the employee's income deferred. Company matching funds vest at the
rate of 20% each year, beginning after three years of service. Company
contributions were $100,000, $200,000, and $300,000 for the years ended December
31, 1993, 1994, and 1995 and $25,000 and $95,000 for the quarters ended April 2,
1995 and March 31, 1996.
F-14
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SHAREHOLDERS' EQUITY
Shareholders' equity, the weighted average common and common equivalent shares
outstanding, and earnings and dividends per share have been retroactively
adjusted to reflect common stock splits, effected in the form of stock
dividends, which have been declared by the Company's Board of Directors and are
summarized as follows:
<TABLE>
<CAPTION>
DECLARATION DATE DATE OF RECORD DIVIDEND RATE
- ---------------- ---------------- -------------
<S> <C> <C>
May 19, 1994 June 1, 1994 3-for-2
August 17, 1993 August 30, 1993 3-for-2
January 18, 1993 January 29, 1993 3-for-2
</TABLE>
Pursuant to a direct placement of common stock on June 30, 1995, the Company
sold 900,000 shares at $18.50 per share. Pursuant to a registered public
offering on March 3, 1995, the Company sold 3,162,500 shares of common stock at
$13.75 per share. After deducting expenses of these offerings, proceeds to the
Company amounted to approximately $16 million in the June offering and $41
million in the March offering.
At the annual meeting of shareholders held on April 28, 1995, the Company's
shareholders approved a proposal to increase the number of shares of common
stock authorized for issuance by the Company from the previous 50 million to 75
million shares.
In February 1996, the Company announced that it may from time to time, depending
on market conditions, purchase up to one million shares of its common stock
through open market transactions to satisfy obligations under stock option and
employee stock ownership plans. As of March 31, 1996, the Company had purchased
411,000 shares of its own stock under this program at an average price of $19.93
per share.
NOTE 12 -- COMMITMENTS
In connection with obtaining the consent of Applebee's International, Inc., the
franchisor of Applebee's restaurants (the "Franchisor"), to the transfer of the
Marcus Applebee's restaurants and the exclusive development rights to Applebee's
territories in Wisconsin and the Chicago area, the Company agreed to establish
new annual development schedules through the year 2000 with the Franchisor for
the acquired Wisconsin and Chicago area territories and for the Company's other
existing Applebee's territories.
At March 31, 1996, the Company was obligated to open 163 additional Applebee's
restaurants by the end of 2000, including 18 required to be opened by the end of
1996. If the Company opens fewer restaurants than required by the development
schedule in any development territory and does not open the designated number of
restaurants within the applicable cure period, the Franchisor has the right to
terminate the Company's development rights in the territory where the deficiency
occurs and in the recently acquired Chicago and Wisconsin development
territories. In addition, the Franchisor would be entitled to collect a 4%
royalty based on the Company's average restaurant sales with respect to each
restaurant not opened in accordance with the development schedule.
Under the Company's insurance programs, coverage is obtained for significant
exposures as well as those risks required to be insured by law or contract. It
is the Company's preference to retain a significant portion of certain expected
losses related primarily to workers' compensation, physical loss to property,
and comprehensive general liability. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred.
The Company is contingently liable for letters of credit and a guarantee of the
indebtedness of others aggregating approximately $6.3 million. The Company does
not expect circumstances to arise that would result in the disbursement of funds
under these guarantees.
F-15
<PAGE>
APPLE SOUTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- RELATED PARTY TRANSACTIONS
In the normal course of business, ATF incurred certain costs with related
parties for management fees and real estate rental. The following is a summary
of amounts paid to related parties for the period prior to the ATF acquisition
dated in 1994 and the year ended December 31, 1993 (amounts in thousands):
<TABLE>
<CAPTION>
1993 1994
------ ----
<S> <C> <C>
Rent expense................................................ $1,024 $313
Management fees............................................. 1,025 279
</TABLE>
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1996:
Restaurant sales.......................................... $126,333 -- -- -- --
Income from restaurant operations......................... 20,019 -- -- -- --
Net earnings (loss)....................................... (5,487) -- -- -- --
Earnings (loss) per share................................. (0.14) -- -- -- --
1995:
Restaurant sales.......................................... $ 91,064 $108,131 $118,992 $122,003 $440,190
Income from restaurant operations......................... 14,326 18,621 19,962 20,715 73,624
Net earnings.............................................. 5,396 7,417 6,474 992 20,279
Earnings per share........................................ 0.15 0.19 0.16 0.02 0.52
1994:
Restaurant sales.......................................... $ 66,077 $ 72,419 $ 78,509 $ 83,554 $300,559
Income from restaurant operations......................... 10,031 11,843 12,479 13,458 47,811
Net earnings.............................................. 3,820 4,881 5,049 5,310 19,060
Earnings per share........................................ 0.11 0.14 0.14 0.15 0.54
</TABLE>
F-16
<PAGE>
PROSPECTUS
[LOGO]
APPLE SOUTH, INC.
$200,000,000
DEBT SECURITIES
------
Apple South, Inc. (the "Company") may from time to time offer up to $200,000,000
aggregate initial offering price of its debt securities (the "Debt Securities"),
on terms to be determined at the time of sale, and as more fully described under
"Description of Debt Securities." The accompanying Prospectus Supplement (the
"Prospectus Supplement") sets forth the specific designation, the aggregate
principal amount offered, authorized denominations, maturity, purchase price,
rate (which may be fixed or variable) and time of payment of interest, any terms
of redemption (including any sinking fund), and any other specific terms of the
Debt Securities in respect of which this Prospectus and the Prospectus
Supplement are being delivered (the "Offered Securities"), together with the
terms of the offering and sale of the Offered Securities.
The Company may sell Debt Securities to or through underwriters or dealers,
directly to one or more purchasers, through agents, or through a combination of
the foregoing. See "Plan of Distribution." Unless otherwise set forth in the
Prospectus Supplement, such underwriters will include either or both of J.P.
Morgan Securities Inc. and Raymond James & Associates, Inc. acting alone or as
representatives of a group of underwriters. Either or both of J.P. Morgan
Securities Inc. and Raymond James & Associates, Inc. may also act as agents. The
accompanying Prospectus Supplement sets forth the names of such underwriters or
agents, the principal amounts, if any, to be purchased by such underwriters, and
the compensation, if any, of such underwriters or agents.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
J.P. MORGAN & CO. RAYMOND JAMES & ASSOCIATES, INC.
The date of this Prospectus is May 6, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at: Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of these materials may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company's common stock, $.01 par
value, is quoted on the Nasdaq National Market. Reports, proxy statements, and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information reference is hereby made
to the Registration Statement. A copy of the Registration Statement may be
inspected without charge and may be obtained at prescribed rates at the Public
Reference Section of the Commission, maintained by the Commission at its
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office located at Seven World Trade Center, 13th Floor, New
York, New York 10048, and the Chicago Regional Office at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the following
documents:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
(b) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996;
(c) The Company's Current Report on Form 8-K filed with the Commission on
April 3, 1995 and Amendment No. 1 thereto on Form 8-K/A filed with the
Commission on October 10, 1995; the Company's Current Report on Form 8-K filed
with the Commission on June 28, 1995; and the Company's Current Report on Form
8-K filed with the Commission on April 3, 1996.
(d) All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the Debt
Securities hereby.
Any statement incorporated herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this Prospectus
is delivered, upon written or oral request of such person, a copy of any or all
of the documents incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the document that this Prospectus incorporates by reference). Requests should be
directed to Erich J. Booth, Chief Financial Officer and Treasurer, Apple South,
Inc., Hancock at Washington, Madison, Georgia 30650, telephone number (706)
342-4552.
2
<PAGE>
THE COMPANY
Apple South, Inc. is a rapidly growing, multi-concept restaurant operating
company. Since its inception, the Company has grown and increased its
profitability through the efficient management of restaurant operations and
through a series of strategic restaurant openings and acquisitions. Over the
last five fiscal years, restaurant sales have increased at a compound annual
growth rate of 36%, and restaurant margins have risen from 11.1% in 1990 to
16.7% in 1995.
At March 31, 1996, the Company operated 274 restaurants, consisting of 198
casual dining restaurants operated under the name "Applebee's Neighborhood Grill
& Bar"; 48 "Don Pablo's" restaurants featuring traditional Mexican and Tex-Mex
dishes; 12 "Harrigan's" restaurants offering traditional classics such as
mesquite-smoked prime rib and hickory-grilled steaks and chicken; six
restaurants operated under the name "Tomato Rumba's Pastaria Grill" offering
pasta creations and grilled items; and ten franchised Hardee's fast-food
hamburger restaurants. For the year ended December 31, 1995, total restaurant
sales were $440.2 million.
As a franchisee of Applebee's International, Inc. (the "Franchisor"), the
Company holds the exclusive development rights for Applebee's restaurants in all
or parts of 22 states in the Southeast, Mid-Atlantic, and Midwest regions. The
Company opened its first Applebee's restaurant in South Carolina in 1986 and is
currently the nation's largest Applebee's operator. In November 1995, the
Company merged with DF&R Restaurants, Inc., the owner and operator of Don
Pablo's and Harrigan's restaurants. The Don Pablo's restaurants are concentrated
in Texas and the Midwest region, while the Harrigan's restaurants are located in
Texas, Oklahoma, and New Mexico. Tomato Rumba's is a proprietary casual dining
concept which the Company is continuing to refine.
APPLEBEE'S. Applebee's restaurants are intended to fill a market niche between
traditional full service and fast-food segments of the restaurant industry. The
restaurants are designed to appeal to a customer base consisting primarily of
the 21 to 54 year old group that grew up on traditional fast-food, but now
prefers a more sophisticated menu, the availability of alcoholic beverages, and
a comfortable ambiance in addition to the traditional qualities of fast-food
restaurants -- speed, value, and convenience. Each Applebee's restaurant is
designed and marketed as a friendly "neighborhood establishment" featuring a
varied selection of moderately priced, high-quality food and beverage items with
table service dining. Patronage by both family and adult groups is encouraged.
The Applebee's concept was initiated in 1980 with the opening of the first
Applebee's restaurant in Atlanta, Georgia, by a predecessor of the Franchisor.
The Franchisor is a publicly held company headquartered in Overland Park,
Kansas. As of March 31, 1996, the Applebee's restaurant system consisted of 699
restaurants in 45 states, Canada, the Caribbean, and Europe. Approximately 19%
of these restaurants are operated by the Franchisor, 28% by the Company, and the
remainder by other franchisees. During 1995, system-wide revenues from
Applebee's restaurants totaled approximately $1.25 billion.
DON PABLO'S. Don Pablo's restaurants feature traditional Mexican and Tex-Mex
dishes served in a distinctive, festive dining atmosphere reminiscent of a
Mexican village plaza. Each restaurant is staffed with a highly experienced
management team that is visible in the dining area and interacts with both
customers and the staff to ensure attentive customer service and consistent food
quality. The Company strives to differentiate Don Pablo's by offering a wide
variety of items prepared fresh on-site using high-quality ingredients at
relatively low prices. The diverse menu, generous portions, and attractive
price/value relationship appeal to a broad customer base, including families.
The first Don Pablo's was opened in Arlington, Texas in 1987. The Company
believes that the growing popularity of Mexican and Tex-Mex food and the
relatively few Mexican food restaurants in certain regions of the United States,
combined with the success of its Midwest and Mid-Atlantic restaurants, support
the Company's commitment to continue expanding the Don Pablo's chain in targeted
markets.
DEVELOPMENT PLANS. Including the 15 restaurants opened in the first quarter,
the Company expects to open a total of 68 restaurants in 1996, including at
least 46 Applebee's and 18 Don Pablo's restaurants. Expansion efforts during the
next few years will be focused on the development of additional Applebee's
restaurants in the Company's existing development territories and Don Pablo's
restaurants principally in the Midwest and Mid-Atlantic regions and Florida.
Under development agreements with the Franchisor, the Company is required to
open a specified number of Applebee's restaurants in each of its development
territories over specified intervals. Management believes that the Company's
existing development territories will support over 400 Applebee's restaurants
and will accommodate planned Applebee's restaurant development for approximately
five to seven years. In March 1996, the Company closed 15 restaurants in its
3
<PAGE>
Tomato Rumba's division and intends to focus its near term efforts on further
development of the Tomato Rumba's concept rather than building new Tomato
Rumba's restaurants. Management is currently exploring whether to undertake an
effort to refine the Harrigan's concept as a future growth vehicle. The Company
expects to sell its Hardee's restaurants before the end of the third quarter of
1996.
The Company attempts to balance its new restaurant development by (i)
selectively locating restaurants in areas where an appropriate level of market
penetration has been achieved, (ii) increasing the level of market penetration
in areas that are not yet "efficient," and (iii) expanding into new markets. As
a market area becomes more fully developed, each restaurant normally benefits
from increased customer recognition, greater advertising capabilities, and
economies of scale with respect to food costs, advertising and promotion, and
certain other expenses. Markets which have reached this minimum level of
penetration are characterized as "efficient" and typically are more profitable
than emerging markets.
The Company was incorporated under the laws of the State of Georgia in 1986. The
address of the Company's principal executive office is Hancock at Washington,
Madison, Georgia 30650. The Company's telephone number is (706) 342-4552. As
used in this Prospectus, the "Company" means Apple South, Inc. and its
subsidiaries and predecessors unless the context indicates otherwise.
RISK FACTORS
Prospective investors should consider carefully the following information in
conjunction with the other information contained in this Prospectus and the
Supplement hereto before purchasing Debt Securities.
This Prospectus and the Supplement hereto contain statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Those statements appear in a number of places in
this Prospectus and in the accompanying Prospectus Supplement and may include
statements regarding the intent, belief, or current expectations of the Company
or its officers with respect to (i) the use of proceeds of any offering of the
Debt Securities, (ii) the Company's financing plans, (iii) the policies of the
Company regarding investment, disposition, financing, or other matters, and (iv)
trends affecting the Company's financial condition or results of operations.
Prospective investors are cautioned that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those in the forward looking
statements as a result of various factors including but not limited to changes
in monetary and fiscal policies, laws and regulations, and social and economic
conditions, such as inflation or a recession, increased competition in the
restaurant industry, the current trend toward "dining out," and the amount,
type, and cost of financing available to the Company. The accompanying
information contained in this Prospectus, including without limitation the
information set forth below, and information set forth in the Prospectus
Supplement identify important factors that could cause such differences.
GROWTH STRATEGY. Based on its current development schedule, the Company expects
to complete the development of its existing Applebee's territories within five
to seven years. In connection with the approval by the Franchisor of a recent
acquisition by the Company of Applebee's restaurants and development territory
from another franchisee, the Company and the Franchisor agreed that it is
unlikely that the Franchisor will grant additional development territory to the
Company or approve an acquisition of territory from another Applebee's
franchisee. After the Company's Applebee's territories are fully developed, the
Company's growth will be dependent upon the success of the Don Pablo's and such
other growth concepts as the Company may acquire or develop. Management of the
Company believes that the Don Pablo's concept has demonstrated the capacity to
provide significant future growth; however, neither the Tomato Rumba's nor the
Harrigan's concepts as currently constituted have demonstrated the capability to
serve as future growth vehicles, and there can be no assurance that either of
these concepts can be developed so as to contribute significantly to the growth
of the Company. The Company is interested in acquiring additional restaurant
concepts; however, the Company is not engaged in any negotiations regarding any
such acquisition and there is no assurance that an appropriate concept will be
available for acquisition on acceptable terms.
FRANCHISE MATTERS. The Company operates its Applebee's restaurants as a
franchisee of Applebee's International, Inc. The Company has entered into
development agreements with the Franchisor which provide the Company with the
exclusive right to open Applebee's restaurants within designated territories. In
addition, each restaurant is operated pursuant to a franchise agreement with the
Franchisor. These agreements contain a number of restrictions and obligations on
the part of the Company, including the obligation to develop a significant
number of new restaurants over the next five years, and the
4
<PAGE>
failure of the Company to meet these requirements could result in the
termination of one or more franchise or development agreements. The long-term
success of the Company's Applebee's restaurants is, in large part, dependent
upon the overall success of the Applebee's restaurant system. Accordingly, the
success of the Company will be dependent in part upon the successful operation
of the Applebee's restaurants owned by the Franchisor and other franchisees, as
well as upon the financial condition, management, marketing, and innovative
abilities of the Franchisor. Any event that creates adverse publicity involving
Applebee's restaurants may have an adverse effect upon the Company regardless of
whether such event involves its restaurants.
NECESSITY OF ADDITIONAL FINANCING. If all the Debt Securities are sold, the net
proceeds from the sale, along with operating cash flow and existing credit
facilities, are expected to provide the capital required for the Company's
planned development of additional restaurants and the exercise of purchase
options under existing leases through 1997. However, the Company will require
financing in addition to its existing credit facilities to carry out its
expansion plans beyond 1997. Although management believes that such financing
will be available, the Company does not have any commitment for additional
financing.
FACTORS AFFECTING THE RESTAURANT INDUSTRY. The casual dining segment of the
restaurant industry is expected to remain intensely competitive with respect to
price, service, location, and the type and quality of food. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as regional and national chains, and several of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. It is also anticipated that
growth in the industry will result in continuing competition for available
restaurant sites as well as continued competition in attracting and retaining
qualified management level operating personnel. The restaurant business is often
affected by changes in consumer tastes, national, regional, or local economic
conditions, demographic trends, traffic patterns, and the type, number, and
location of competing restaurants. In addition, factors such as inflation,
increased food, labor, and benefits costs, and difficulty in attracting hourly
employees may adversely affect the restaurant industry in general and the
Company's restaurants in particular.
REGULATION. Each of the Company's restaurants is subject to extensive federal,
state, and local laws and regulations governing health, sanitation, minimum wage
and minimum hour requirements, safety, and the sale of alcoholic beverages. The
selection of new restaurant sites is affected by federal, state, and local laws
and regulations regarding environmental matters, zoning and land use, and the
sale of alcoholic beverages. The failure to receive or retain, or a delay in
obtaining, a liquor license in a particular location could adversely affect or
cause the Company to terminate its operations at that location. In the past,
none of these laws and regulations have had a significant negative effect on
operations, nor has the Company experienced any significant difficulties in
obtaining necessary licenses and approvals. More stringent and varied
requirements (particularly at the local level), however, may result in increases
in the cost and time required for opening new restaurants, and difficulties in
obtaining necessary licenses or permits could cause delays in or cancellations
of new restaurant openings.
ABSENCE OF ESTABLISHED PUBLIC MARKET. The Debt Securities will constitute a new
issue of securities for which there is no established public market. Unless
otherwise indicated in the applicable Prospectus Supplement, the Company does
not intend to list any Debt Securities on a national exchange or to seek
approval for quotation through any automated quotation system. Certain
broker-dealers may make a market in the Debt Securities but are under no
obligation to do so, and if commenced, such market making may be discontinued at
any time. Accordingly, there can be no assurance that an active trading market
will develop for the Debt Securities. If the Debt Securities are traded after
their initial issuance, future trading prices will depend on many factors,
including prevailing interest rates, the Company's operating results, and the
market for similar securities.
USE OF PROCEEDS
Except as otherwise described in the applicable Prospectus Supplement, the net
proceeds from the sale of Debt Securities will be used for the development of
new restaurants, the acquisition of additional restaurants and concepts if
appropriate opportunities arise, and for other general corporate purposes.
Pending such use, such funds will be used to pay down existing revolving bank
lines of credit or invested in short-term marketable securities.
5
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31 ------------------
---------------------------- APRIL 2 MARCH 31
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......................... 2.12 2.99 4.53 5.04 3.83 4.37 --
</TABLE>
- ------------------------
The ratio of earnings to fixed charges is based on earnings from continuing
operations and has been computed on a total enterprise basis. Earnings represent
income from continuing operations before income taxes and fixed charges, net of
capitalized interest. Fixed charges consist of interest expense before reduction
for capitalized interest, debt amortization costs, and one-third (the percent
deemed representative of the interest factor) of total restaurant lease
payments. As a result of the asset revaluation charge of $19.8 million in the
first quarter of 1996, earnings were insufficient to cover fixed charges by $8.6
million. The ratio of earnings to fixed charges excluding the asset revaluation
charge would have been 4.31 for the first quarter of 1996.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an Indenture, to be dated as of May
1, 1996 (the "Indenture"), between the Company and SunTrust Bank, Atlanta, as
Trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. Whenever particular sections or defined
terms of the Indenture not otherwise defined herein are referred to, such
sections or defined terms are incorporated herein by reference. A copy of the
Indenture has been filed as an Exhibit to the Registration Statement of which
this Prospectus constitutes a part.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt Securities
which may be issued thereunder and provides that the Debt Securities may be
issued from time to time in one or more series. The Debt Securities will be
direct, unsecured, and unsubordinated obligations of the Company. Except as may
be described in the Prospectus Supplement relating to any particular series of
Debt Securities offered thereby, the Indenture does not limit other indebtedness
or securities which may be incurred or issued by the Company or any of its
subsidiaries or contain financial or similar restrictions on the Company or any
of its subsidiaries. The Company's rights and the rights of its creditors,
including holders of Debt Securities, to participate in any distribution of
assets of any subsidiary of the Company upon the latter's liquidation or
reorganization or otherwise are effectively subordinated to the claims of the
subsidiary's creditors, except to the extent that the Company or any of its
creditors may itself be a creditor of that subsidiary. Although the Company's
obligations under its existing $165 million line of credit are unsecured, they
are guaranteed by certain of the Company's subsidiaries. Accordingly, the Debt
Securities will be effectively subordinated to the Company's obligations under
this line of credit with respect to any right to participate in any distribution
of assets of any such subsidiary.
The Prospectus Supplement which accompanies this Prospectus sets forth where
applicable the following terms of and information relating to the Offered
Securities offered thereby: (i) the designation of the Offered Securities; (ii)
the aggregate principal amount of the Offered Securities; (iii) the date or
dates on which principal of, and premium, if any, on the Offered Securities is
payable; (iv) the rate or rates at which the Offered Securities shall bear
interest, if any, or the method by which such rate shall be determined, and the
basis on which interest shall be calculated if other than a 360-day year
consisting of twelve 30-day months, the date or dates from which such interest
will accrue and on which such interest will be payable and the related record
dates; (v) if other than the offices of the Trustee, the place where the
principal of and any premium or interest on the Offered Securities will be
payable; (vi) any redemption, repayment or sinking fund provisions; (vii) if
other than denominations of $1,000 or multiples thereof, the denominations in
which the Offered Securities will be issuable; (viii) whether the Offered
Securities shall be issued in the form of Global Securities (as defined below)
or certificates; and (ix) any other specific terms of the Offered Securities,
including any additional Events of Default or covenants provided for with
respect to the Offered Securities.
6
<PAGE>
The Debt Securities will be issued either in certificated, fully registered
form, without coupons, or as Global Securities under a book-entry system, as
specified in the accompanying Prospectus Supplement and as defined below. See
"--Book-Entry System."
Unless otherwise specified in the accompanying Prospectus Supplement, principal
and premium, if any, will be payable, and the Debt Securities will be
transferable and exchangeable without any service charge, at the office of the
Trustee. However, the Company may require payment of the sum sufficient to cover
any tax or other governmental charge payable in connection with any such
transfer or exchange.
Unless otherwise specified in the accompanying Prospectus Supplement, interest
on any series of Debt Securities will be payable on the interest payment dates
set forth in the accompanying Prospectus Supplement to the persons in whose
names the Debt Securities are registered at the close of business on the related
record date and will be paid at the option of the Company, by wire transfer or
by checks mailed to such persons.
Unless otherwise described in the accompanying Prospectus Supplement, there are
no covenants or provisions contained in the Indenture which afford the holders
of the Debt Securities protection in the event of a highly leveraged transaction
involving the Company.
BOOK-ENTRY SYSTEM
If so specified in the accompanying Prospectus Supplement, Debt Securities of
any series may be issued under a book-entry system in the form of one or more
global securities (each a "Global Security"). Each Global Security will be
deposited with, or on behalf of, a depositary, which, unless otherwise specified
in the accompanying Prospectus Supplement, will be The Depository Trust Company,
New York, New York (the "Depositary"). The Global Securities will be registered
in the name of the Depositary or its nominee.
The Depositary has advised the Company that the Depositary is a limited purpose
trust company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York banking law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of section 17A of the Exchange Act. The Depositary was created to
hold securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations, some of which (and/or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others, such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Upon the issuance of a Global Security in registered form, the Depositary will
credit, on its book-entry registration and transfer system, the respective
principal amounts of the Debt Securities represented by such Global Security to
the accounts of participants. The accounts to be credited will be designated by
the underwriters, dealers, or agents, if any, or by the Company, if such Debt
Securities are offered and sold directly by the Company. Ownership of beneficial
interests in the Global Security will be limited to participants or persons that
may hold interests through participants. Ownership of beneficial interests by
participants in the Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by such
participants. The laws of some jurisdictions may require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in a Global
Security.
So long as the Depositary or its nominee is the owner of record of a Global
Security, the Depositary or such nominee, as the case may be, will be considered
the sole owner or holder of the Debt Securities represented by such Global
Security for all purposes under the Indenture. Except as set forth below, owners
of beneficial interests in a Global Security will not be entitled to have the
Debt Security represented by such Global Security registered in their names, and
will not receive or be entitled to receive physical delivery of such Debt
Securities in definitive form and will not be considered the owners or holders
thereof under the Indenture. Accordingly, each person owning a beneficial
interest in a Global Security must rely on the procedures of the Depositary and,
if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
of record under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of holders or if any
owner of a beneficial interest in a Global Security desires to give or take any
action which a holder is entitled to give or take
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under the Indenture, the Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instruction of beneficial
owners holding through them.
Payments of principal of, premium, if any, and interest on Debt Securities
represented by a Global Security registered in the name of the Depositary or its
nominee will be made to such Depositary or such nominee, as the case may be, as
the registered owner of such Global Security. None of the Company, the Trustee
or any other agent of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in such Global
Security or for maintaining, supervising, or reviewing any records relating to
such beneficial ownership interests.
The Company has been advised by the Depositary that the Depositary will credit
participants' accounts with payments of principal, premium, if any, or interest
on the payment date thereof in amounts proportionate to their respective
beneficial interests in the principal amount of the Global Security as shown on
the records of the Depositary. The Company expects that payments by participants
to owners of beneficial interests in the Global Security held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in "street name," and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depositary to
a nominee or successor of the Depositary or by a nominee of the Depositary to
another nominee of the Depositary. A Global Security representing all but not
part of the Debt Securities being offered hereby is exchangeable for Debt
Securities in definitive form of like tenor and terms if (i) the Depositary
notifies the Company that it is unwilling or unable to continue as depositary
for such Global Security or if at any time the Depositary is no longer eligible
to be or in good standing as a clearing agency registered under the Exchange
Act, and in either case, a successor depositary is not appointed by the Company
within 90 days of receipt by the Company of such notice or of the Company
becoming aware of such ineligibility, or (ii) the Company in its sole discretion
at any time determines not to have all of the Debt Securities represented by a
Global Security and notifies the Trustee thereof. A Global Security exchangeable
pursuant to the preceding sentence shall be exchangeable for Debt Securities
registered in such names and in such authorized denominations as the Depositary
for such Global Security shall direct.
EVENTS OF DEFAULT
An Event of Default, as defined in the Indenture and applicable to Debt
Securities, will occur with respect to the Debt Securities of any series if: (i)
the Company defaults in the payment of principal of (or premium if any, on) any
Debt Security of such series when the same becomes due and payable at maturity,
upon acceleration, redemption, mandatory repurchase, or otherwise; (ii) the
Company defaults in the payment of interest on any Debt Security of such series
when the same becomes due and payable, and such default continues for a period
of 30 days; (iii) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company in the Indenture with respect to the
Debt Security of such series or under the Debt Securities of such series and
such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or by the holders (as defined in the Indenture) of
25% or more in aggregate principal amount of the Debt Securities of such series;
(iv) there occurs with respect to any issue or issues of indebtedness of the
Company or any of its subsidiaries having an outstanding principal amount of $25
million or more in the aggregate for all such issues of all such persons,
whether such indebtedness now exists or shall hereafter be created, (A) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its stated maturity and/or (B) the failure to make a
principal payment at the final (but not any interim) fixed maturity; (v) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10 million in the aggregate for all such final judgments or orders
(treating any deductibles, self-insurance, or retention as not so covered) shall
be rendered against the Company or any of its subsidiaries and shall not be paid
or discharged, and there shall be any period of 60 consecutive days following
entry of the final judgment or order that causes the aggregate amount for all
such final judgments or orders outstanding and not paid or discharged against
all such persons to exceed $10 million during which a stay of enforcement of
such final judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; (vi) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any of its
subsidiaries in an involuntary case under any applicable bankruptcy, insolvency,
or other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or similar official of
the Company or any of its subsidiaries or for all or substantially all of the
property and assets of the Company or any of
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its subsidiaries or (C) the winding up or liquidation of the affairs of the
Company or any of its subsidiaries and, in each case, such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; (vii) the
Company or any of its subsidiaries (A) commences a voluntary case under any
applicable bankruptcy, insolvency, or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar
official of the Company or any of its subsidiaries or for all or substantially
all of the property and assets of the Company or any of its subsidiaries or (C)
effects any general assignment for the benefit of creditors; and (viii) any
other Events of Default set forth in the applicable Prospectus Supplement occur.
If an Event of Default (other than an Event of Default specified in clause (vi)
or (vii) above that occurs with respect to the Company) occurs with respect to
the Debt Securities of any series then outstanding and is continuing under the
Indenture, then, and in each and every such case, except for any series of Debt
Securities the principal of which shall have already become due and payable,
either the Trustee or the holders of not less than 25% in aggregate principal
amount of the Debt Securities of any such series then outstanding under the
Indenture (each such series voting as a separate class) by written notice to the
Company (and to the Trustee if such notice is given by the holders (the
"Acceleration Notice")), may, and the Trustee at the request of such holders
shall, declare the principal of, premium, if any, and accrued interest on the
Debt Securities of such series to be immediately due and payable. Upon a
declaration of acceleration, such principal of, premium, if any, and accrued
interest shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default or payment default
triggering such Event of Default pursuant to clause (iv) shall be remedied or
cured by the Company and/or the relevant subsidiaries or waived by the holders
of the relevant indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(vi) or (vii) above occurs with respect to the Company, the principal of,
premium, if any, and accrued interest on the Notes then outstanding shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. The holders of at least a majority
in principal amount of the outstanding Debt Securities of any series may, by
written notice to the Company and to the Trustee, waive all past defaults with
respect to Debt Securities of such series and rescind and annul a declaration of
acceleration with respect to Debt Securities of such series and its consequences
if (i) all existing Events of Default applicable to Debt Securities of such
series, other than the nonpayment of the principal of, premium, if any, and
interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "-- Modification and Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding Debt Securities of any series may direct the time, method, and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law or the Indenture, that
may involve the Trustee in personal liability, or that the Trustee determines in
good faith may be unduly prejudicial to the rights of holders of such series of
Debt Securities not joining in the giving of such direction and may take any
other action it deems proper that is not inconsistent with any such direction
received from holders of Debt Securities of such series. A holder may not pursue
any remedy with respect to the Indenture or the Debt Securities of any series
unless: (i) the holder gives the Trustee written notice of a continuing Event of
Default; (ii) the holders of at least 25% in aggregate principal amount of
outstanding Debt Securities of such series make a written request to the Trustee
to pursue the remedy; (iii) such holder or holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense; (iv) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and (v) during such 60-day period, the
holders of a majority in aggregate principal amount of the outstanding Debt
Securities of such series do not give the Trustee a direction that is
inconsistent with the request. However, such limitations do not apply to the
right of any holder of a Debt Security to receive payment of the principal of,
premium, if any, or interest on, such Debt Security or to bring suit for the
enforcement of any such payment, on or after the due date expressed in the Debt
Securities, which right shall not be impaired or affected without the consent of
the holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that they
have conducted or supervised a review of the activities of the Company and its
subsidiaries and the Company's and its subsidiaries' performance under the
Indenture and that to the best of such
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officers' knowledge, based upon such review, the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
The Indenture provides that the Company shall not consolidate with, merge with
or into, or sell, convey, transfer, lease, or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially as
an entirety in one transaction or a series of related transactions) to any
person or permit any person to merge with or into the Company (subject to such
exceptions as may be established in connection with the issuance of the Debt
Securities of all series then outstanding) unless: (i) the Company shall be the
continuing person, or the person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
all of the Debt Securities and under the Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; (iii) the Company delivers to the Trustee an
officers' certificate and opinion of counsel, in each case stating that such
consolidation, merger, or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; and (iv) such other conditions as may
be established in connection with the issuance of the Debt Securities of any
series then outstanding.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture will provide that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Debt Securities of any series and the Indenture with respect to
Debt Securities of such series on the 123rd day after the deposit referred to
below, and the provisions of the Indenture will no longer be in effect with
respect to the Debt Securities of such series (except for, among other matters,
certain obligations to register the transfer or exchange of the Debt Securities
of such series, to replace stolen, lost, or mutilated Debt Securities of such
series, to maintain paying agencies, and to hold monies for payment in trust)
if, among other things, (A) the Company has deposited with the Trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof, in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Debt Securities of such series on the stated
maturity of such payments in accordance with the terms of the Indenture and the
Debt Securities of such series, (B) the Company has delivered to the Trustee (i)
either (x) an Opinion of Counsel to the effect that holders of Debt Securities
of such series will not recognize income, gain, or loss for federal income tax
purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance, and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the date of the Indenture such that a
ruling is no longer required or (y) a ruling directed to the Trustee received
from the Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which the Company is bound, and (D) if at such time the
Debt Securities of such series are listed on a national securities exchange, the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Debt Securities of such series will not be delisted as a result of such
deposit, defeasance, and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The Indenture
will further provide that the provisions of the Indenture applicable to Debt
Securities of any series will no longer be in effect with respect to any
covenants described in the applicable Prospectus Supplement as being subject to
such defeasance and clause (iii) under "-- Events
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of Default" with respect to such covenants and clauses (iv), (v), and, if
specified in the applicable Prospectus Supplement, (viii) under "Events of
Default" shall be deemed not to be Events of Default with respect to Debt
Securities of such series, upon, among other things, the deposit with the
Trustee, in trust, of money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Debt Securities of such series on
the Stated Maturity of such payments in accordance with the terms of the
Indenture and the Debt Securities of such series, the satisfaction of the
provisions described in clauses (B)(ii), (C), and (D) of the preceding paragraph
and the delivery by the Company to the Trustee of an Opinion of Counsel to the
effect that, among other things, the holders of Debt Securities of such series
will not recognize income, gain, or loss for federal income tax purposes as a
result of such deposit and defeasance of certain covenants and Events of Default
and will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Debt Securities of any series as described in
the immediately preceding paragraph and the Debt Securities of such series are
declared due and payable because of the occurrence of an Event of Default that
remains applicable, the amount of money and/or U.S. Government Obligations on
deposit with the Trustee will be sufficient to pay amounts due on the Debt
Securities of such series at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Debt Securities of such series at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
MODIFICATION AND WAIVER
The Indenture provides that the Company and the Trustee may amend or supplement
the Indenture or the Debt Securities of any series without notice to or the
consent of any holder: (i) to cure any ambiguity, defect, or inconsistency in
the Indenture; provided that such amendments or supplements shall not adversely
affect the interests of the holders in any material respect; (ii) to comply with
Article 5 of the Indenture; (iii) to comply with any requirements of the
Commission in connection with the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended; (iv) to evidence and provide for the
acceptance of appointment hereunder by a successor Trustee; (v) to establish the
form or forms or terms of Debt Securities of any series or of the coupons
appertaining to such Debt Securities as permitted by the Indenture; (vi) to
provide for uncertificated Debt Securities and to make all appropriate changes
for such purpose; and (vii) to make any change that does not materially and
adversely affect the rights of any holder.
The Indenture also provides that modifications and amendments of the Indenture
may be made by the Company and the Trustee with the consent of the holders of
not less than a majority in aggregate principal amount of the outstanding Debt
Securities of each series affected thereby (each series voting as a separate
class); provided, however, that no such modification or amendment may, without
the consent of each holder affected thereby, (i) change the stated maturity of
the principal of, or any installment of interest on, any Debt Security, (ii)
reduce the principal amount of, or premium, if any, or interest on, any Debt
Security, (iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Debt Security, (iv) impair the right to
institute suit for the enforcement of any payment on or after the stated
maturity (or, in the case of a redemption, on or after the redemption date) of
any Debt Security, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes, or (vii) reduce the percentage or aggregate principal amount of
outstanding Debt Security of any series the consent of whose holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults. A supplemental indenture which changes or
eliminates any covenant or other provision of the Indenture which has expressly
been included solely for the benefit of one or more particular series of Debt
Securities, or which modifies the rights of holders of Debt Securities of such
series with respect to such covenant or provision, shall be deemed not to affect
the rights under the Indenture of the holders of Debt Securities of any other
series or of the coupons appertaining to such Debt Securities. It shall not be
necessary for the consent of the holders under this section of the Indenture to
approve the particular form of any proposed amendment, supplement, or waiver,
but it shall be sufficient if such consent approves the substance thereof. After
an amendment, supplement, or waiver under this section of the Indenture becomes
effective, the Company shall give to the holders affected thereby a notice
briefly describing the amendment, supplement, or waiver. The
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Company will mail supplemental indentures to holders upon request. Any failure
of the Company to mail such notice, or any defect therein, shall not, however,
in any way impair or affect the validity of any such supplemental indenture or
waiver.
Neither the Company nor any of its subsidiaries will, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee, or
otherwise, to any holder of any Debt Security for or as an inducement to any
consent, waiver, or amendment of any of the terms or provisions of the Indenture
or the Debt Securities unless such consideration is offered to be paid or agreed
to be paid to all holders of the Debt Securities that consent, waive, or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver, or agreement.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Debt Securities or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant, or agreement of the Company in the Indenture, or in any of
the Debt Securities or because of the creation of any indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee, or controlling person of the Company or of any successor Person
thereof. Each holder, by accepting the Debt Securities, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
PLAN OF DISTRIBUTION
The Company may sell Debt Securities to or through underwriters or dealers,
directly to one or more purchasers, through agents or through a combination of
the foregoing. Unless otherwise set forth in the Prospectus Supplement, such
underwriters will include either or both of J.P. Morgan Securities Inc. and
Raymond James & Associates, Inc., acting alone or as representatives of a group
of underwriters. Either or both of J.P. Morgan Securities Inc. and Raymond James
& Associates, Inc. may also act as agents.
The distribution of the Debt Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices.
In connection with the sale of Debt Securities, underwriters may receive
compensation from the Company or from purchasers of Debt Securities for whom
they may act as agents in the form of discounts, concessions, or commissions.
Underwriters may sell Debt Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions, or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agents. Underwriters, dealers, and agents that participate in the
distribution of Debt Securities may be deemed to be underwriters, and any
discounts or commissions received by them from the Company and any profit on the
resale of Debt Securities by them may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described in the Prospectus Supplement.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Debt Securities may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
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If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase Offered Securities from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and others, but in all cases such institutions must be
approved by the Company. The obligations of any purchaser under any such
contract will be subject to only those conditions set forth in the Prospectus
Supplement. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
Unless otherwise indicated in the Prospectus Supplement, the Company does not
intend to list any of the Debt Securities on a national securities exchange or
seek approval for quotation through any automated quotation system. If the Debt
Securities are not listed on a national securities exchange or approved for
quotation through an automated quotation system, certain broker-dealers may make
a market in the Debt Securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given that any broker-dealer will make a market in the Debt Securities or as to
the liquidity of the trading market for the Debt Securities, whether or not the
Debt Securities are listed on a national securities exchange or approved for
quotation through an automated quotation system. The Prospectus Supplement with
respect to any Offered Securities will state, if known, whether or not any
broker-dealer intends to make a market in such Offered Securities. If no such
determination has been made, the Prospectus Supplement will so state.
LEGAL MATTERS
The legality of the Debt Securities will be passed upon for the Company by
Kilpatrick & Cody, Atlanta, Georgia, as counsel for the Company, and unless
otherwise indicated in the applicable Prospectus Supplement, will be passed upon
for any underwriters or agents by Davis Polk & Wardwell. Attorneys at Kilpatrick
& Cody who participated in the preparation of this Prospectus own a total of
2,830 shares of common stock of the Company.
EXPERTS
The consolidated financial statements of Apple South, Inc., as of December 31,
1994 and 1995, and for each of the years in the three-year period ended December
31, 1995, and the financial statements of TUG, Inc., as of October 31, 1994, and
for the ten months ended October 31, 1994, incorporated in this Prospectus and
in the Registration Statement by reference have been incorporated herein and in
the Registration Statement in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein
and in the Registration Statement, and upon the authority of that firm as
experts in accounting and auditing.
The financial statements of The Marcus Corporation's Applebee's Operations, as
of May 29, 1994 and May 28, 1995, and for each of the years then ended,
incorporated by reference herein and in the Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon incorporated by reference herein and in the Registration Statement, and
are incorporated by reference elsewhere herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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[PHOTOS]
APPLEBEE'S NEIGHBORHOOD GRILL & BAR
offers a wide variety of American favorites
priced for value and served in a friendly,
neighborhood environment.
DON PABLO'S
specializes in a wide selection of authentic Mexican and Tex-Mex
food served in a festive, Mexican village atmosphere.
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[LOGO]
