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PROSPECTUS
$100,000,000
AVADO BRANDS, INC.
OFFER TO EXCHANGE
11 3/4% SENIOR SUBORDINATED NOTES DUE 2009
FOR
ALL OUTSTANDING 11 3/4% SENIOR SUBORDINATED NOTES DUE 2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. ATLANTA, GEORGIA TIME
ON AUGUST 18, 1999, UNLESS EXTENDED.
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THE COMPANY:
- - We are a leading full service, casual dining restaurant company which
acquires, develops and operates growth oriented niche-leading restaurant
brands.
- - Avado Brands, Inc.
Hancock at Washington
Madison, Georgia 30650
(706) 342-4552
http://www.avado.com
OUTSTANDING NOTES:
- - 11 3/4% Senior Subordinated Notes due 2009 sold by us in an unregistered
offering to initial purchasers who have placed the notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities Act.
EXCHANGE NOTES:
- - 11 3/4% Senior Subordinated Notes due 2009
EXCHANGE OFFER:
- - We are offering to exchange our Exchange Notes for your Outstanding Notes.
- - We will not receive any proceeds from the exchange offer.
- - If you fail to tender your Outstanding Notes, then you will continue to hold
unregistered securities, the transfer of which will continue to be restricted.
ATTRIBUTES OF THE EXCHANGE NOTES:
- - The Exchange Notes will be identical to the Outstanding Notes, except that the
Exchange Notes will be registered under the Securities Act and will not
contain transfer restrictions.
- - Maturity: June 15, 2009.
- - Interest Payments: Semi-annually in cash on June 15 and December 15,
commencing December 15, 1999.
- - Guarantees: The Exchange Notes will be guaranteed on a senior subordinated
basis by our wholly-owned principal subsidiaries on the issue date. Not all of
our subsidiaries will guarantee the Exchange Notes.
- - Redemption: We may redeem the Exchange Notes at any time on or after June 15,
2004. In addition, until June 15, 2002 we may redeem up to 35% of the Exchange
Notes with the proceeds of one or more public equity offerings. If we undergo
a change of control or sell certain of our assets, then we may be required to
offer to purchase Exchange Notes from holders.
- - Ranking: The Exchange Notes and the guarantees will be unsecured and
subordinated to all of our and the guarantors' existing and future senior
debt.
INVESTING IN THE EXCHANGE NOTES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 14.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Exchange Notes or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is July 19, 1999
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(COVER PAGE CONTINUED)
We are offering the Exchange Notes to satisfy certain of our obligations
contained in the Registration Rights Agreement dated June 22, 1999 (the
"Registration Rights Agreement") by and among us, the Guarantors and BancBoston
Robertson Stephens Inc., J.P. Morgan Securities Inc. and Wachovia Securities,
Inc., as the initial purchasers (the "Initial Purchasers"), with respect to the
initial sale of the Outstanding Notes. Based on interpretations by the staff of
the Securities and Exchange Commission (the "Commission"), the Exchange Notes
issued in the Exchange Offer described in this Prospectus may be offered for
resale, resold and otherwise transferred by the holders thereof (other than by
an "affiliate" of ours within the meaning of Rule 405 under the Securities Act
of 1933, as amended (the "Securities Act"), without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder acquires the Exchange Notes in the ordinary course of business,
has no arrangement with any person to participate in the distribution of the
Exchange Notes, and is not engaged in and does not intend to engage in a
distribution of the Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account in the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes, but
by so acknowledging and delivering a prospectus, a broker-dealer will not be
deemed to have admitted that it is an "underwriter" within the meaning of the
Securities Act. A broker-dealer may use this Prospectus, as it may be amended or
supplemented from time to time, in connection with resales of the Exchange Notes
received in exchange for Outstanding Notes if such Exchange Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. We agree that, for a period of 180 days after the Expiration Date,
we will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. We cannot assure you that any liquid market may develop for the
Exchange Notes, nor that you will be able to sell the Exchange Notes, at any
particular price. Future trading prices of the Exchange Notes will depend on
many factors, including, among other things, prevailing interest rates, our
operating results and the market for similar securities. Historically, the
market for securities similar to the Exchange Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. We can offer no assurance that any
market for the Exchange Notes that might develop would not be subject to similar
disruptions. Certain of the Initial Purchasers have advised us that they
currently intend to make a market in the Exchange Notes we are offering, but
they are not obligated to do so, and they may stop market making at any time
without notice.
We prepared this Prospectus based on information we have or we obtained from
sources we believe to be reliable. Summaries of documents we have provided in
this Prospectus may not be complete. We will make copies of the actual documents
available to you upon request. We do not represent that the information herein
is complete. The information in this Prospectus is current only as of the date
on the cover, and our business or financial condition and other information in
this Prospectus may change after that date. You should consult your own legal,
tax and business advisors regarding an investment in the Exchange Notes.
Information in this Prospectus is not legal, tax or business advice.
You should base your decision to invest in the Exchange Notes solely on
information contained in this Prospectus. We have not authorized anyone to
provide you with any different information.
Contact us with any questions you have concerning this offering or to obtain
documents or additional information to verify the information in this
Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Exchange Notes or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER, OR A SOLICITATION IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY DISTRIBUTION
OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS.
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TABLE OF CONTENTS
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Where You Can Find More Information........................................................................ i
Forward Looking Statements................................................................................. ii
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 14
Use of Proceeds............................................................................................ 21
Capitalization............................................................................................. 22
The Exchange Offer......................................................................................... 23
Pro Forma Financial Information............................................................................ 30
Selected Consolidated Historical Financial Data............................................................ 39
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 41
Business................................................................................................... 50
Management................................................................................................. 61
Security Ownership of Management and Principal Holders..................................................... 64
Certain Relationships and Related Transactions............................................................. 66
Description of Certain Indebtedness........................................................................ 67
Description of the Exchange Notes.......................................................................... 70
Certain United States Federal Income Tax Considerations.................................................... 111
Plan of Distribution....................................................................................... 116
Legal Matters.............................................................................................. 117
Independent Accountants.................................................................................... 117
Index to Consolidated Financial Statements................................................................. F-1
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a Registration Statement on Form S-4 (the
"Registration Statement," which term shall include all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the Exchange Notes being offered by
this Prospectus. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. We file annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). You may read and copy any document we
file at the Commission's public reference rooms at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at 7 World Trade Center, Suite 1300, New York, New York
10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Commission at 1-800-SEC-0330 (1-800-732-0330)
for further information on the public reference rooms. You can also obtain
copies of these materials from the public reference section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission (http://www.sec.gov). Our common stock and Preferred
Securities are quoted on the Nasdaq National Market. You also may read and copy
reports and other information we file at the office of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
We incorporate by reference into this Prospectus the information we file
with the Commission, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference contains important business and financial information about us and is
an important part of this Prospectus. Information that we file subsequently with
the
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Commission will automatically update this Prospectus. We have filed the
following documents with the Commission, and they are incorporated herein by
reference:
(1) our Annual Report on Form 10-K for the fiscal year ended January 3,
1999;
(2) our Quarterly Report on Form 10-Q for the period ended April 4, 1999;
(3) our Current Reports on Form 8-K dated May 17, June 4 and June 23, 1999;
and
(4) all documents subsequently filed by us with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, prior to termination of this Offering.
THIS INFORMATION IS AVAILABLE TO YOU WITHOUT CHARGE UPON YOUR WRITTEN OR
ORAL REQUEST. ANY SUCH REQUEST SHOULD BE MADE OR DELIVERED TO AVADO BRANDS,
INC., HANCOCK AT WASHINGTON, MADISON, GA 30650, ATTENTION: TONY SHAFFER,
DIRECTOR OF INVESTOR RELATIONS; TELEPHONE: (706) 342-4552, FACSIMILE: (706)
342-9283; E-MAIL: [email protected].
TO OBTAIN TIMELY DELIVERY OF THIS INFORMATION, YOU MUST REQUEST IT NO LATER
THAN FIVE (5) BUSINESS DAYS BEFORE AUGUST 18, 1999, THE EXPIRATION DATE OF THE
EXCHANGE OFFER.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. Words such as
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements principally appear in the following sections of the Prospectus:
"Prospectus Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including our degree of
leverage, future acquisitions, changes in key personnel, competition, changes in
economic conditions, changes in consumer tastes, our continued ability to find
suitable restaurant locations and finance new restaurant development, labor and
benefit costs, weather conditions, consumer perceptions of food safety and the
other factors discussed in this Prospectus, including those set forth under
"Risk Factors."
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PROSPECTUS SUMMARY
"WE," "US," "OUR" AND SIMILAR TERMS, AS WELL AS REFERENCES TO "AVADO",
"AVADO BRANDS" OR THE "COMPANY" REFER TO AVADO BRANDS, INC. AND ITS SUBSIDIARIES
EXCEPT WHERE IT IS CLEAR THAT SUCH TERMS MEAN ONLY AVADO BRANDS, INC. THE
FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT LIKELY DOES
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT
AND THE DOCUMENTS WE HAVE REFERRED TO IN THIS PROSPECTUS. THE COMPANY'S FISCAL
YEAR IS A 52- OR 53-WEEK YEAR ENDING ON THE SUNDAY CLOSEST TO DECEMBER 31.
THE COMPANY
Avado Brands, Inc. (formerly Apple South, Inc.) is a leading full service,
casual dining restaurant company, which acquires, develops and operates growth
oriented niche-leading restaurant brands. As of April 4, 1999, we owned four
niche-leading restaurant brands operating 220 restaurants, which consisted of
129 Don Pablo's Mexican Kitchen restaurants, 51 Hops Restaurant Bar & Brewery
restaurants, 22 McCormick & Schmick's seafood dinner houses and 18 Canyon Cafe
restaurants (collectively, the "Core Brands"). In addition, we operated 23
Applebee's Neighborhood Grill & Bar restaurants, which were divested subsequent
to April 4, 1999. We also own a 20% equity interest in Belgo Group PLC, a
thirteen-unit United Kingdom restaurant company, a 50% equity interest in Belgo
Americas, LLC, and a 50% equity interest in San Marzano, LLC. Since acquiring
the Core Brands, we have significantly increased pro forma restaurant sales and
EBITDA, with increases of approximately 44% and 55%, respectively, for fiscal
1998 as compared to fiscal 1997 (as if we owned these brands at the beginning of
the period). For the latest twelve-month period ("LTM period") ended April 4,
1999, we generated pro forma restaurant sales and EBITDA of $558.1 million and
$70.1 million, respectively, from our Core Brands.
We operate multi-concept, niche-leading restaurant brands using a
decentralized organizational structure in order to enhance growth and
profitability. Since 1986, we have developed a strong track record of acquiring
and growing leading casual dining concepts, beginning with Applebee's, where we
became the leading Applebee's operator and franchisee with 264 restaurants and
approximately $454.0 million in annual sales, prior to the divestiture of our
Applebee's restaurants in fiscal years 1998 and 1999. More recently, we have
continued this strong growth trend, more than doubling the number of our
niche-leading Core Brand restaurants from 94 at the time of acquisition during
1995 through 1997 to 220 as of April 4, 1999. For the thirteen weeks ended April
4, 1999, we have improved restaurant operating margins from 14.9% to 15.6% for
our Core Brands, calculated on a pro forma basis, as compared to the thirteen
weeks ended March 30, 1997. For the LTM period ended April 4, 1999, we have
improved EBITDA margins to 12.6% from 11.4% for our Core Brands, calculated on a
pro forma basis, as compared to fiscal 1997. We intend to continue to execute
this successful operating strategy which emphasizes decentralized operating
management and the benefits of centralized economies of scale in the areas of
finance, accounting, human resource services and selective purchasing
opportunities.
CORE BRAND CONCEPTS
- DON PABLO'S--Known as "The Real Enchilada," Don Pablo's is the leading
casual dining Mexican restaurant brand in the United States and generates
among the highest operating margins in the casual dining industry. The
restaurants feature traditional Mexican dishes served in a distinctive,
festive dining atmosphere reminiscent of a Mexican village plaza. Each
restaurant is staffed with an experienced management team that is visible
in the dining area and interacts with customers and staff to ensure
attentive customer service and consistent food quality. Don Pablo's
relatively low priced menu items are prepared fresh on-site using
high-quality ingredients. The diverse menu, generous portions and
attractive price/value relationship appeal to a broad customer base.
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The Don Pablo's concept was initiated in 1985, with the opening of the
first Don Pablo's restaurant in Lubbock, Texas. We acquired this brand in
November 1995, including 44 then-existing restaurants, and have since
opened 86 additional restaurants and closed one restaurant as of April 4,
1999. We believe the build-out potential for this concept is approximately
400 restaurants. For the LTM period ended April 4, 1999, this brand
generated sales of approximately $285.5 million, representing 51% of the
sales of our Core Brands. Average sales volume per unit was $2.4 million
for the LTM period ended April 4, 1999. Don Pablo's is based in Bedford,
Texas.
- HOPS--Hops is the nation's largest restaurant brand with an on-premise
brewery. Unlike many traditional brewpub concepts, Hops emphasizes a high
quality restaurant menu, which is complemented by fresh microbrewed beer.
Each restaurant offers an American-style menu that includes top choice
steaks and prime rib, baby-back ribs, fresh fish, chicken and pasta
dishes, deluxe burgers and sandwiches, hand-tossed salads with homemade
dressings, appetizers, soups and desserts-all of which are freshly
prepared in a display kitchen. The Hops concept was initiated in 1989,
with the opening of the first Hops restaurant in Clearwater, Florida. We
acquired this brand in March 1997, including 21 then-existing restaurants,
and have since opened 30 additional restaurants. We believe the build-out
potential for this concept is approximately 400 restaurants. For the LTM
period ended April 4, 1999, this brand generated sales of $115.5 million,
representing 21% of the sales of our Core Brands. Average sales volume per
unit was $2.6 million for the LTM period ended April 4, 1999. Hops is
based in Tampa, Florida.
- MCCORMICK & SCHMICK'S--McCormick & Schmick's is the leading upper-end
casual dining seafood group in the United States with 22 traditional,
classic restaurants specializing in fresh seafood. The success of the
McCormick & Schmick's brand is evidenced by its average sales volumes per
unit, which were $5.0 million for the LTM period ended April 4, 1999,
which management believes are among the highest in the industry. It is
recognized for its traditional-style full service bar, regional taste and
superior service. The restaurants are designed to capture the distinctive
attributes of each local market, and vary in design from a traditional,
New England-style fish house to a more contemporary dinner house with
spectacular waterfront views. Many of the restaurants are located in
historical buildings. The same philosophy of distinctiveness and quality
applies equally to the bar operation and the dining rooms. The McCormick &
Schmick's concept was initiated in 1972, with the acquisition of its first
restaurant in Portland, Oregon. We acquired this brand in March 1997,
including 16 then-existing restaurants, and have since opened seven
additional restaurants and closed one restaurant as of April 4, 1999. We
believe the build-out potential for this concept is approximately 125
restaurants. For the LTM period ended April 4, 1999, this brand generated
sales of approximately $109.0 million, representing 19% of the sales of
our Core Brands. McCormick & Schmick's is based in Portland, Oregon.
- CANYON CAFE--Canyon Cafe is the leader in the emerging concept of
Southwestern cuisine, with 18 locations that bring the flavors of the
Southwest to life with a convergence of great creative food, a visually
entertaining environment and a soothing yet invigorating ambiance. This
brand combines three distinct cultures, Native American, Spanish and
Mexican, to create a unique upscale casual dining experience. Canyon Cafe
restaurants offer a wide variety of unique items such as "Desert Fire
Pasta," "Chile-Rubbed Grilled Tuna" and "Chipotle Chicken," along with
some more traditional items including chicken tacos and grilled chicken
salad. In addition to the set items that appear on each restaurant's menu,
the executive chefs at each location offer their original recipes. The
Canyon Cafe concept was initiated in 1989, with the opening of the first
restaurant in Dallas, Texas. We acquired this brand in July 1997,
including 13 then-existing restaurants, and have since opened eight
additional restaurants and closed three restaurants as of April 4, 1999.
Canyon Cafe is the only brand in this niche that has a broad geographic
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presence, and we believe the build-out potential for this concept is
approximately 125 restaurants. For the LTM period ended April 4, 1999,
this brand generated sales of $48.1 million, representing 9% of the sales
of our Core Brands. Average sales volume per unit was $2.6 million for the
LTM period ended April 4, 1999. Canyon Cafe is based in Dallas, Texas.
STRATEGY
Our strategy is to continue to acquire, develop and operate growth oriented
niche-leading restaurant brands using a decentralized organizational structure
to enhance growth and profitability. Our key strategies are to:
- CONTINUE TO DEVELOP AND GROW CORE BRANDS--Since the mid 1980's, we have
grown to become a leading multi-concept operator of niche-leading
restaurant brands. Our first success was with Applebee's, where we grew
from one restaurant in 1986 to become the largest operator in the
Applebee's system, with 264 restaurants and approximately $454.0 million
in annual sales in fiscal 1997. Since the acquisition of our four Core
Brands, we have grown the total number of Core Brand restaurants from 94
to 220 and total Core Brand restaurant sales to approximately $558.1
million, creating niche-leading market positions for each of our Core
Brands. For fiscal 1999, we plan to open approximately 40 new restaurants,
consisting of 15 Don Pablo's, 20 Hops, four McCormick & Schmick's and, if
an appropriate site is located, one Canyon Cafe.
- BENEFIT FROM DECENTRALIZED BRAND MANAGEMENT--Each brand functions on a
decentralized basis with its own executive management, real estate
development, purchasing, recruiting, training, marketing and restaurant
operations. This strategy provides our Core Brands a competitive advantage
by tailoring the management of each brand to its respective market, while
allowing each brand to share best practices and leverage centralized
corporate functions such as finance, accounting, human resource services
and selective purchasing opportunities. In addition, this decentralized
management structure encourages entrepreneurial decision making on the
part of brand level management by placing decisions closer to the
customer. Each brand's performance is also monitored by strict financial
targets including returns on investment and restaurant level growth and
profitability.
- CONTINUE TO IMPROVE MARGINS AND PROFITABILITY--In connection with our
Applebee's divestitures, we undertook a strategic review of our corporate
operations, resulting in the identification of significant opportunities
for cost savings. We expect these initiatives to reduce corporate level
expenses by approximately $2.2 million annually. In addition, each of the
Core Brands focuses on improving restaurant level operating margins by
benefiting from the Company's economies of scale in areas such as finance,
accounting, human resource services and selective purchasing
opportunities, as well as leveraging the best practices of each of the
four Core Brands. For the thirteen weeks ended April 4, 1999, we have
improved restaurant operating margins from 14.9% to 15.6% for our Core
Brands, calculated on a pro forma basis, as compared to the thirteen weeks
ended March 30, 1997. For the LTM period ended April 4, 1999, we have
improved EBITDA margins to 12.6% from 11.4% for our Core Brands,
calculated on a pro forma basis, as compared to fiscal 1997.
- CONSISTENTLY PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER
SERVICE--We believe that food quality, attentive service and dining
atmosphere all contribute to customer satisfaction. As such, each of our
Core Brands continually evaluates new initiatives that will improve food
presentation and taste and customer service. Additionally, as we expand
the market presence of our brands, we strive to create a consistent brand
image for each concept that our customers will find appealing. To achieve
and maintain a consistently rewarding dining experience for our customers,
each of our brands has implemented stringent operational controls and
extensive employee training.
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- PURSUE SELECTIVE OPPORTUNITIES TO GROW INTERNATIONALLY--We are selectively
seeking opportunities to export one or more of our brands to other
countries through joint ventures or strategic alliances. Additionally, we
may selectively make equity investments in strategic international
partners. For example, in fiscal 1998, we made an equity investment in
Belgo Group PLC, which resulted in two joint ventures, Belgo Americas, LLC
and Belgo Ventures Limited. A leading restaurant guide has rated two of
the restaurants in the Belgo portfolio to be among the top three in
London. We also established San Marzano, LLC, a joint venture with
PizzaExpress PLC, to develop upscale pizza restaurants in the United
States. PizzaExpress PLC owns and operates more than 200 upper-end pizza
restaurants in the United Kingdom and other countries in Europe and Asia.
These equity ownership positions and joint ventures provide us with
several potential growth vehicles, which are designed to allow for
development outside our current geographic and industry niches.
- OPPORTUNISTICALLY PURSUE STRATEGIC ACQUISITIONS--While we are not
currently contemplating any significant additional acquisitions or
investments, we will continue to evaluate opportunities to expand our
operations by making strategic acquisitions of innovative concepts which
can be developed into niche-leading brands and established concepts with
potential for growth. Currently, however, our primary focus is to continue
developing our four niche-leading Core Brand concepts and our Belgo and
San Marzano joint ventures.
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We are a Georgia corporation. Our common stock is publicly traded on the
Nasdaq National Market under the symbol "AVDO". Our principal executive offices
are located at Hancock at Washington, Madison, Georgia 30650, and our telephone
number is (706) 342-4552. Our web site address is www.avado.com.
RECENT DEVELOPMENTS
In December 1997, we announced our decision to divest our franchised
Applebee's restaurants in order to focus on the continued development of our
higher margin Core Brands, which offered significantly greater growth potential
and returns on investment. At the time of the decision to divest, we were the
largest Applebee's operator in the world. We operated 264 restaurants generating
approximately $454.0 million in annual sales during fiscal 1997. As of April 4,
1999, we had completed the divestiture of 254 of 279 of our Applebee's
restaurants. Subsequent to April 4, 1999, we divested our remaining Applebee's
restaurants. Gross proceeds from the divestiture of all of our Applebee's
restaurants totaled approximately $514.0 million, including approximately $11.3
million in notes. With the divestiture of our Applebee's restaurants complete,
we are now well positioned to continue to execute our successful multi-concept,
niche-leading brand strategy.
To reflect the divestiture of our Applebee's franchised restaurants and our
strategy of becoming the leading operator of multi-concept, niche-leading casual
dining brands, we changed our corporate name from "Apple South, Inc." to "Avado
Brands, Inc." on October 13, 1998.
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THE EXCHANGE OFFER
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The Exchange Notes........................... The forms and terms of the Exchange Notes are
identical in all material respects to the
terms of the Outstanding Notes for which they
may be exchanged pursuant to the Exchange
Offer, except for certain transfer
restrictions and registration rights relating
to the Outstanding Notes and except for
certain interest provisions relating to the
Outstanding Notes described below under "--
Interest on the Exchange Notes."
The Exchange Offer........................... We are offering to exchange up to
$100,000,000 aggregate principal amount of
11 3/4% Senior Subordinated Notes due 2009
(the "Exchange Notes") for up to $100,000,000
aggregate principal amount of our outstanding
11 3/4% Senior Subordinated Notes due 2009
(the "Outstanding Notes" and collectively
with the Exchange Notes, the "Notes"). You
may exchange Outstanding Notes only in
integral multiples of $1,000.
Expiration Date; Withdrawal of Tender........ The Exchange Offer will expire at 5:00 p.m.,
Atlanta, Georgia time, on, August 18, 1999,
or such later date and time as we might
extend it. You may withdraw your tender of
Outstanding Notes in the Exchange Offer at
any time prior to the Expiration Date. If we
do not accept any of your Outstanding Notes
for exchange for any reason, then we will
return them to you without expense as
promptly as practicable after the expiration
or termination of the Exchange Offer.
Certain Conditions to the Exchange Offer..... The Exchange Offer is subject to certain
customary conditions, which we may waive. See
"The Exchange Offer--Certain Conditions to
the Exchange Offer."
Procedures for Tendering Outstanding Notes... If you hold Outstanding Notes and wish to
accept the Exchange Offer, then you must
complete, sign and date the Letter of
Transmittal provided to you, or a facsimile
thereof, in accordance with the instructions
contained in the Letter of Transmittal and in
this Prospectus, and mail or otherwise
deliver the Letter of Transmittal, or such
facsimile, together with your Outstanding
Notes and any other required documentation to
the Exchange Agent (as defined) at the
address set forth herein. By executing the
Letter of Transmittal, you will represent to
us that, among other things, any Exchange
Notes you receive will be acquired in the
ordinary course of business,
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and that you have no arrangement with any
person to participate in the distribution of
the Exchange Notes.
Interest on the Exchange Notes............... The Exchange Notes will bear interest at the
rate of 11 3/4% per annum, payable
semiannually on June 15 and December 15,
commencing December 15, 1999 to holders of
record on the immediately preceding June 1
and December 1, respectively. If you are the
record owner of Exchange Notes on December 1,
1999, then you will receive interest on
December 15, 1999 calculated from the date of
initial issuance of the Exchange Notes, plus
an amount equal to the accrued interest on
the Outstanding Notes that were exchanged
calculated from the date of their initial
issuance to the date of the exchange.
Interest on the Outstanding Notes accepted
for exchange will cease to accrue upon
issuance of the Exchange Notes.
Special Procedures for Beneficial Owners..... If you are a beneficial owner whose
Outstanding Notes are registered in the name
of a broker, dealer, commercial bank, trust
company or other nominee and you wish to
tender your Outstanding Notes in the Exchange
Offer, then you should contact your
registered holder promptly and instruct such
registered holder to tender on your behalf.
If you wish to tender on your own behalf,
then you must, before completing and
executing the Letter of Transmittal and
delivering your Outstanding Notes, either
make appropriate arrangements to register
ownership of the Outstanding Notes in your
name or obtain a properly completed bond
power from the registered holder. The
transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date.
Registration Requirements.................... We have agreed to use our best efforts to
consummate a registered Exchange Offer to
offer holders of the Outstanding Notes an
opportunity to exchange their Outstanding
Notes for the Exchange Notes which will be
issued without legends restricting their
transfer. Your receipt of this Prospectus
indicates that we have accomplished that
registration with respect to your Outstanding
Notes. We also have agreed to file a shelf
registration statement (the "Shelf
Registration Statement") under certain
circumstances to cover resales of Outstanding
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Notes that are not covered by this registered
Exchange Offer and to use our best efforts to
cause the Shelf Registration Statement to be
declared effective under the Securities Act.
We also have agreed in that case and, subject
to certain exceptions, to keep the Shelf
Registration Statement effective until the
time when all of the Outstanding Notes
registered under the Shelf Registration
Statement are sold or two years after its
effective date.
Certain Federal Income Tax Considerations.... For a discussion of certain federal income
tax considerations relating to the Exchange
Notes, see "Certain United States Federal
Income Tax Consequences."
Use of Proceeds.............................. There will be no proceeds to the Company from
the exchange of notes pursuant to the
Exchange Offer.
Exchange Agent............................... SunTrust Bank, Atlanta is the Exchange Agent.
The address and telephone number of the
Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
</TABLE>
7
<PAGE>
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The following summary is provided solely for your convenience. This summary
is not intended to be complete. You should read the full text and more specific
details contained elsewhere in this Prospectus. For a more detailed description
of the Exchange Notes, see "Description of the Exchange Notes."
<TABLE>
<S> <C>
Issuer.................. Avado Brands, Inc.
Securities Offered...... $100,000,000 aggregate principal amount of 11 3/4% Senior
Subordinated Notes due 2009 (the "Exchange Notes").
Maturity Date........... June 15, 2009.
Interest Rate........... 11 3/4% per year.
Interest Payment........ June 15 and December 15, commencing December 15, 1999. Interest
Dates will accrue from the issue date of the Exchange Notes.
Subsidiary Guarantees... Each of our wholly-owned principal subsidiaries on the issue date
will guarantee the Exchange Notes on a senior subordinated basis,
other than certain of our subsidiaries where it is expected that
a portion of the ownership interests of such subsidiaries will be
acquired by management of such subsidiaries. Not all of our
subsidiaries will guarantee the Exchange Notes.
Ranking................. The Exchange Notes and the guarantees will be senior subordinated
obligations of the Company and the guarantors, respectively, and
will be subordinated in right of payment to any existing and
future senior indebtedness of the Company and the guarantors,
respectively. As of April 4, 1999, on a pro forma basis, the
Company and the guarantors would have had approximately $163.4
million of indebtedness that would have been senior in right of
payment to the Exchange Notes and the guarantees, excluding
unused commitments of approximately $78.6 million under our New
Credit Facility (as defined herein).
Optional Redemption..... We may redeem the Exchange Notes, in whole or in part, at any
time on or after June 15, 2004 at specified redemption prices. In
addition, at any time prior to June 15, 2002, we may redeem up to
35% of the original aggregate principal amount of the Exchange
Notes with net proceeds of one or more public equity offerings at
a redemption price in cash equal to 111.75% of the principal
amount thereof.
Change of Control....... If we experience specific kinds of changes of control, we must
offer to repurchase the Exchange Notes.
Certain Covenants....... The indenture governing the Exchange Notes contains certain
covenants, including limitations and restrictions on our ability
to:
- incur additional indebtedness;
- make dividend payments or other restricted payments;
- create liens;
- sell assets;
- enter into transactions with shareholders or affiliates; and
- enter into mergers, consolidations, or sales of all or
substantially all of our assets.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
These covenants are subject to important exceptions and
qualifications, which are described below in "Description of the
Exchange Notes" under the heading "Certain Covenants."
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that you should
carefully consider before investing in the Exchange Notes.
9
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
We derive the summary unaudited pro forma financial information presented
below in part from the unaudited Pro Forma Financial Information included
elsewhere in this Prospectus. The summary unaudited pro forma statements of
earnings for the fiscal year ended January 3, 1999 and the LTM period ended
April 4, 1999 reflect the operations of our Core Brands only and give effect to
(i) the divestiture of our Applebee's restaurants, (ii) the sale of the
Outstanding Notes and the application of the estimated net proceeds therefrom,
(iii) expected initial borrowings under the New Credit Facility and (iv) the
full year effect of the termination of employees in the fourth quarter of fiscal
1998 on general and administrative expenses, as if each had occurred at the
beginning of the respective periods (collectively, the "Transactions"). The pro
forma statement of earnings for the fiscal year ended December 28, 1997 gives
effect to the Transactions as if the Company owned all of the Core Brands at the
beginning of that fiscal year. The summary unaudited pro forma balance sheet as
of April 4, 1999, gives effect to the Transactions and the settlement of our two
remaining equity forward contracts.
The summary unaudited pro forma financial information does not purport to
present the actual financial position or results of operations of the Company
had the transactions and events assumed therein in fact occurred on the dates
specified, nor are they necessarily indicative of the results of operations that
may be achieved in the future. The summary unaudited pro forma financial
information is based on certain assumptions and adjustments described in the
notes to the unaudited Pro Forma Financial Information and should be read in
conjunction therewith. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
and the notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA FOR TWELVE-MONTH PERIODS
ENDED
---------------------------------------
<S> <C> <C> <C>
DEC. 28, JAN. 3, APRIL 4,
1997 1999 1999
------------ ----------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA-CORE BRANDS ONLY:
Restaurant sales:
Don Pablos's........................................................ $ 196,457 $ 270,399 $ 285,508
Hops................................................................ 57,351 106,329 115,534
McCormick & Schmick's............................................... 78,518 102,489 108,952
Canyon Cafe......................................................... 34,057 48,187 48,105
------------ ----------- ------------
Total restaurant sales................................................ 366,383 527,404 558,099
Total restaurant operating expenses................................... 311,106 448,522 473,796
------------ ----------- ------------
Income from restaurant operations..................................... 55,277 78,882 84,303
General and administrative expenses................................... 28,140 32,002 33,015
Operating income...................................................... 27,137 44,718 49,126
OTHER DATA-CORE BRANDS ONLY:
EBITDA (l)............................................................ $ 41,825 $ 64,710 $ 70,072
EBITDA margin (2)..................................................... 11.4% 12.3% 12.6%
Depreciation and amortization (3)..................................... $ 15,337 $ 19,289 $ 19,920
Capital expenditures:
Restaurant construction and other................................... 109,788 110,771 103,799
Restaurant remodeling and refurbishments............................ 6,187 10,036 11,141
Same-store sales...................................................... 5.1% 2.6% 1.7%
Number of restaurants (at end of period).............................. 155 212 220
Cash interest expense (4)............................................. $ 24,941
Dividends on Preferred Securities (5)................................. 8,205
Ratio of EBITDA to cash interest expense.............................. 2.8x
Ratio of EBITDA to cash interest expense including dividends on
Preferred Securities................................................ 2.1x
Ratio of total debt to EBITDA......................................... 3.7x
Pro forma ratio of earnings to fixed charges.......................... 0.9x 1.0x
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGE)
10
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 4, 1999
------------------------
<S> <C> <C>
ACTUAL PRO FORMA
----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital (excluding assets held for sale) (6)................................... $ (212,205) $ (79,196)
Premises and equipment, net............................................................ 382,539 382,539
Total assets........................................................................... 642,149 612,978
Total debt............................................................................. 254,448 261,948
Preferred Securities (7)............................................................... 115,000 115,000
Shareholders' equity................................................................... 116,833 116,319
</TABLE>
- ------------------------
(1) "EBITDA" is defined as operating income before depreciation and amortization
expenses and asset revaluation and other special charges, which are included
in operating income, less miscellaneous expenses (income) included in
non-operating expenses. While EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability
or liquidity, management understands that it is widely used by certain
investors as one measure to evaluate the financial performance of companies
in the restaurant industry.
(2) "EBITDA margin" is EBITDA stated as a percentage of restaurant sales.
(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) Cash interest expense is interest expense less amortization of deferred
financing costs.
(5) We currently pay cash dividends of 7% on the Preferred Securities (as
defined below); however, we have the right to defer payments of these
dividends for periods not exceeding 20 consecutive quarters. Upon deferral,
these dividends would continue to accrue on a quarterly basis. The period
ended April 4, 1999 is a 53-week fiscal period.
(6) We operate with negative working capital due to the fact that substantially
all sales in our restaurants are for cash and accounts payable are due in 15
to 45 days.
(7) Represents the Company-obligated mandatorily redeemable preferred securities
of Avado Financing I (the "Preferred Securities"), a subsidiary holding
solely Avado Brands, Inc. 7% convertible subordinated debentures due March
1, 2027.
11
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
We derive the summary consolidated historical financial data presented below
from our audited Consolidated Financial Statements and the notes thereto for the
fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 and
the unaudited interim Consolidated Financial Statements and the notes thereto
for the thirteen-week periods ended March 29, 1998 and April 4, 1999. You should
read the financial data presented below together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Selected
Consolidated Historical Financial Data" and our Consolidated Financial
Statements and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THIRTEEN-WEEK
FISCAL YEARS ENDED PERIODS ENDED
------------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 29, DECEMBER 28, JANUARY 3, MARCH 29, APRIL 4,
1996 1997 1999 1998 1999
------------ ------------ ------------ -------------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA(1):
Restaurant sales:
Don Pablo's......................... $133,261 $196,457 $ 270,399 $ 59,263 $ 74,372
Hops................................ -- 49,511 106,329 23,327 32,532
McCormick & Schmick's............... -- 67,373 102,489 21,342 27,805
Canyon Cafe......................... -- 18,577 48,187 11,981 11,899
Applebee's.......................... 379,042 454,127 335,288 125,763 17,467
Other (2)........................... 33,719 22,275 -- -- --
------------ ------------ ------------ -------------- ------------
Total restaurant sales................ 546,022 808,320 862,692 241,676 164,075
Total restaurant operating expenses... 460,397 693,880 740,971 206,627 138,425
------------ ------------ ------------ -------------- ------------
Income from restaurant operations..... 85,625 114,440 121,721 35,049 25,650
General and administrative expenses... 26,329 39,617 46,150 12,915 9,840
Asset revaluation and other special
charges............................. 27,700 -- 2,940 -- --
------------ ------------ ------------ -------------- ------------
Operating income...................... 31,596 74,823 72,631 22,134 15,810
Net earnings.......................... 11,674 28,448 66,283 37,078 5,952
OTHER DATA:
EBITDA (3)............................ $ 83,522 $108,961 $ 93,151 $ 26,477 $ 21,170
EBITDA margin (4)..................... 15.3% 13.5% 10.8% 11.0% 12.9%
Depreciation and amortization (5)..... $ 26,250 $ 39,972 $ 23,221 $ 5,665 $ 6,332
Capital expenditures.................. 124,623 172,963 142,841 40,088 22,173
Number of restaurants (at end of
period)............................. 316 430 256 419 243
Ratio of earnings to fixed
charges(6).......................... 1.92x(7) 2.05x 3.37x(7) 6.06x 1.86x
SELECTED BALANCE SHEET DATA:
Working capital (excluding assets held
for sale)(8)........................ $(21,439) $(33,989) $ (210,947) $ (58,623)(9) $(212,205)
Premises and equipment, net........... 380,523 283,839 367,587 307,199 382,539
Total assets.......................... 457,827 804,289 670,597 903,186 642,149
Total debt............................ 216,177 382,049 257,478 414,962 254,448
Preferred Securities.................. -- 115,000 115,000 115,000 115,000
Shareholders' equity.................. 191,429 220,782 112,029 257,742 116,833
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGE)
12
<PAGE>
NOTES TO SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
(1) Includes franchised Applebee's restaurants. In December 1997, we announced
our decision to sell our franchised Applebee's restaurants and focus on the
development of our four Core Brands and our Belgo and San Marzano joint
ventures. As of April 4, 1999, we had completed the divestiture of 254 of
our 279 Applebee's restaurants. Subsequent to April 4, 1999, we divested our
remaining Applebee's restaurants. Gross proceeds from the divestiture of our
Applebee's restaurants totaled approximately $514.0 million, including
approximately $11.3 million in notes.
(2) Represents sales from previously divested and/or closed non Core Brand
restaurants.
(3) "EBITDA" is defined as operating income before depreciation and amortization
expenses and asset revaluation and other special charges, which are included
in operating income, less miscellaneous expenses (income) included in
non-operating expenses. While EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability
or liquidity, management understands that it is widely used by certain
investors as one measure to evaluate the financial performance of companies
in the restaurant industry.
(4) "EBITDA margin" is EBITDA stated as a percentage of restaurant sales.
(5) Includes depreciation and amortization related to restaurant operations and
corporate facilities and includes amortization of goodwill, which is
included in non-operating expenses.
(6) 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 portion deemed representative of the
interest factor) of total restaurant lease payments.
(7) The ratio of earnings to fixed charges excluding the fiscal year 1996 and
fiscal 1998 revaluations and other special charges would have been 3.44x and
3.44x, respectively.
(8) We operate with negative working capital due to the fact that substantially
all sales in our restaurants are for cash and accounts payable are due in 15
to 45 days.
(9) Excludes proceeds due from the sale of assets of $94.7 million related to
the divestiture of certain of our Applebee's restaurants, which we completed
on March 29, 1998.
13
<PAGE>
RISK FACTORS
YOU SHOULD READ CAREFULLY THIS ENTIRE PROSPECTUS BEFORE INVESTING IN THE
EXCHANGE NOTES. AMONG THE FACTORS THAT MAY AFFECT AN INVESTMENT IN THE EXCHANGE
NOTES ARE THE FOLLOWING:
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
EXCHANGE NOTES.
We have now and, after the offering will continue to have, a significant
amount of indebtedness. The following chart shows certain important credit
statistics and is presented assuming we had completed the offering of the
Outstanding Notes and the New Credit Facility (as defined herein) as of the
dates or at the beginning of the periods specified below and applied the
proceeds as intended:
<TABLE>
<CAPTION>
AT APRIL 4, 1999
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Long-term debt, including current portion............................... $ 261,948
Preferred Securities.................................................... 115,000
Shareholders' equity.................................................... 116,319
</TABLE>
<TABLE>
<CAPTION>
LTM PERIOD ENDED
APRIL 4, 1999
---------------------
<S> <C>
Pro forma ratio of earnings to fixed charges............................... 1.0x
</TABLE>
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the Exchange Notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund capital expenditures and other
general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the restaurant industry;
- place us at a competitive disadvantage with regard to competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds.
RESTRICTIVE DEBT COVENANTS--OUR ABILITY TO ENGAGE IN CERTAIN TYPES OF
TRANSACTIONS WILL BE LIMITED.
The New Credit Facility, the indenture governing the Exchange Notes (the
"Indenture"), and the indenture (the "Senior Notes Indenture") governing our
9 3/4% Senior Notes Due 2006 (the "Senior Notes") contain a number of
significant covenants. These covenants will limit our ability to, among other
things:
- borrow additional money;
- make certain investments;
- pay dividends;
- merge, consolidate, or dispose of our assets;
- enter into transactions with our affiliates; and
- grant liens on our assets.
14
<PAGE>
The occurrence of certain events would, in certain cases, result in events
of default under the Senior Notes Indenture, the Indenture and the New Credit
Facility and permit acceleration of the indebtedness represented by the Senior
Notes Indenture, the Indenture and the New Credit Facility. These events
include, among other things:
- the failure to comply with our covenants;
- certain defaults under our other indebtedness; and
- events of bankruptcy or insolvency.
SUBORDINATION--YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES IS
SUBORDINATED TO OUR EXISTING INDEBTEDNESS AND POSSIBLY OUR FUTURE
INDEBTEDNESS.
The Exchange Notes and the guarantees are unsecured and will be
contractually subordinated to all of our and the guarantors' existing and future
senior indebtedness (including all indebtedness under the New Credit Facility
and the Senior Notes). As a result, upon any distribution to our creditors or
the creditors of the guarantors in a bankruptcy, liquidation or reorganization
or similar proceeding relating to us or the guarantors or our or their property,
the holders of our senior debt and senior debt of the guarantors will be
entitled to be paid in full in cash before any payment may be made with respect
to the Exchange Notes or the guarantees.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the Exchange Notes will
participate with trade creditors and all other holders of subordinated
indebtedness of us or the guarantors in the assets remaining after we and the
guarantors have paid all senior debt. However, because the Indenture requires
that amounts otherwise payable to holders of the Exchange Notes in a bankruptcy
or similar proceeding be paid to holders of senior debt instead, holders of the
Exchange Notes may receive less, ratably, than holders of trade payables in any
such proceeding. In any of these cases, we and the guarantors may not have
sufficient funds to pay all of our creditors, and holders of Exchange Notes may
receive ratably less than the holders of senior debt.
Assuming we had completed the offering of the Outstanding Notes and entered
into the New Credit Facility on April 4, 1999, the Outstanding Notes (and
therefore the Exchange Notes) and the guarantees would have been subordinated to
approximately $163.4 million of total senior debt. In addition, the New Credit
Facility provides for up to approximately $78.6 million of additional
borrowings, for a total availability of $125.0 million. Please refer to the
section in this Prospectus entitled "Description of the Exchange
Notes--Subordination."
NOT ALL SUBSIDIARIES ARE GUARANTORS--YOUR RIGHT TO RECEIVE PAYMENTS ON THE
EXCHANGE NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR NON-GUARANTOR
SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE OR REORGANIZE.
Some but not all of our subsidiaries will guarantee the Exchange Notes. In
the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of those subsidiaries before any assets are made available for distribution to
us. Assuming we had completed the offering of the Outstanding Notes on April 4,
1999, the Outstanding Notes (and therefore the Exchange Notes) would have been
effectively junior to $3.5 million of liabilities of these non-guarantor
subsidiaries. The non-guarantor subsidiaries generated approximately 9.0% and
14.6%, respectively, of our consolidated sales in the fiscal year ended January
3, 1999 and the thirteen week period ended April 4, 1999, and held 13.7% of our
consolidated assets as of April 4, 1999.
15
<PAGE>
TRANSITION TO PROPRIETARY BRANDS--WE WILL FACE CHALLENGES IN GROWING OUR OWN
CONCEPTS.
From 1986 until the second quarter of fiscal 1998, the majority of our sales
were derived from the operation of franchised Applebee's restaurants. Menus,
methods of operation and restaurant design for these restaurants were specified
by the franchisor, or to the extent developed by us, were subject to the
approval of the franchisor. We sold the last of our Applebee's restaurants in
May 1999. Consequently, our profitability and growth is now dependent
exclusively upon the success of our proprietary restaurant concepts and the
ability of our management to continue the successful development and expansion
of these concepts. Because of our decentralized management structure, this means
that the management of each brand will be substantially responsible for the
evolution and growth of the brand. Thus, it is very important that we be able to
maintain and attract highly qualified, brand level executives. Operating a
multi-concept company will continue to challenge our executive management team.
Failure to successfully complete the transition from a company that was
primarily a franchise concept operator to a multi-concept proprietary company
could adversely affect our financial condition and results of operations.
RELIANCE ON KEY MANAGEMENT--LOSS OF EXECUTIVE SERVICES COULD IMPACT OUR SUCCESS.
Our business is managed, and its business strategies formulated, by a
relatively small number of key executive officers and managers. The loss of key
management persons, including Tom E. DuPree, Jr., our Chief Executive Officer,
and our brand level chief executive officers, could adversely affect our
business.
COMPETITION--OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH OTHER
RESTAURANTS.
The food service industry is intensely competitive with respect to the
quality and value of food products offered, concept, service, price, dining
experience, location and other factors. Our competitors include a variety of
casual-dining, full service, health oriented and other mid-price restaurants. We
compete with many well-established national, regional and locally owned
restaurant companies, some of which have substantially greater financial,
marketing and other resources than we have. Those resources may allow them to
respond to changes in pricing, marketing and the food industry better than we
can. We compete in attracting guests, obtaining premium locations for our
restaurants and attracting and retaining employees. Many of our restaurants are,
and will be, located in areas of high concentration with our competitors. As our
competitors expand operations, we expect competition to intensify. Such
increased competition could have a material adverse effect on our financial
condition and results of operations.
THE FOOD SERVICE INDUSTRY--CONSUMER PREFERENCES AND PERCEPTIONS, SEASONALITY AND
GENERAL ECONOMIC CONDITIONS MAY HAVE SIGNIFICANT EFFECTS ON OUR BUSINESS.
Food service businesses are often affected by changes in consumer tastes,
national, regional, and local economic conditions and demographic trends. The
performance of individual restaurants may be adversely affected by traffic
patterns, demographics and the type, number and location of competing
restaurants. Restaurant performance may also be impacted by adverse weather
conditions. Multi-unit food service businesses such as ours can also be
adversely affected by publicity resulting from poor food quality, illness,
injury or other health concerns or operating issues stemming from one or a
limited number of restaurants. In addition, our dependence on frequent
deliveries of food and other supplies subjects our restaurants to the risk that
shortages or interruptions in supply, caused by adverse weather or other
conditions, could adversely affect the availability, quality and cost of
ingredients. Unfavorable trends or developments concerning factors such as
inflation, increased food, competitive labor and employee benefit costs,
regional weather conditions and the availability of experienced management and
hourly employees may also adversely affect our financial condition and results
of operations. Changes in economic conditions affecting our customers could
reduce traffic in some or all of our
16
<PAGE>
restaurants or impose practical limits on pricing, either of which could have a
material adverse effect on our financial condition and results of operations.
Our continued success will depend in part on our ability to anticipate, identify
and respond to changing conditions.
REGULATION--GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
All of our operations are subject to federal, state and local laws that
affect our business, including laws and regulations relating to employment,
health, sanitation, alcoholic beverage control and safety standards. To date,
federal and state environmental regulations have not had a material effect on
our operations, but more stringent and varied requirements of local government
with respect to zoning, building codes, land use and environmental factors have
in the past increased, and can be expected in the future to increase, the cost
of, and the time required for, opening new restaurants. Difficulties or failures
in obtaining required licenses or approvals could delay or prohibit the opening
of new restaurants. In some instances, we may have to obtain zoning variances
and land use permits for new restaurants.
Alcoholic beverage control regulations require each of our restaurants to
apply to a state authority and, in certain locations, county or municipal
authorities for a license to sell alcoholic beverages. Generally, our licenses
to sell alcoholic beverages must be renewed annually and may be suspended or
revoked at any time for cause, including violation by our employees of any law
or regulation pertaining to alcoholic beverage control, such as those regulating
the minimum age of patrons or employees, advertising, wholesale purchasing and
inventory control. In addition, each restaurant requires licenses from local
health authorities, and the development and construction of additional
restaurants will be subject to compliance with applicable zoning, land use and
environmental regulations. Difficulty or failure in obtaining or retaining the
required licenses or approvals could adversely affect our business, financial
condition and results of operations, including the delay or prevention of the
opening of a new restaurant in a particular location.
We may be subject in certain states to "dram-shop" statutes which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to such
intoxicated person. The Company carries liquor liability insurance as part of
its existing comprehensive general liability insurance.
Our Hops restaurants are subject to additional regulations as a result of
the microbrewery in each restaurant. For state liquor law purposes these
restaurants are classified as "brewpubs", and are required to comply with state
brewpub laws in order to obtain necessary state operating licenses and permits.
Certain states limit the number of brewpubs that may be owned by one company.
Our ability to own and operate Hops restaurants in any state is and will
continue to be dependent upon our ability to operate within the brewpub
regulatory schemes of the state.
POTENTIAL FUTURE ACQUISITIONS--ACQUIRING RESTAURANT BUSINESSES INVOLVES SPECIAL
RISKS.
We obtained our four Core Brands through acquisitions. We are not currently
contemplating any significant acquisitions. However, we will continue to
evaluate acquisition opportunities. Acquisitions involve the following risks
that could adversely affect our operating results:
- the assimilation of the operations and personnel of the acquired
companies;
- the diversion of management's attention; and
- the potential loss of key employees of the acquired companies.
We cannot assure you that any of our acquisitions or investments will not
materially or adversely affect us or that any such acquisition or investment
will enhance our business.
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MINIMUM WAGE LEGISLATION--OUR LABOR COSTS ARE SUBSTANTIAL AND WE MAY NOT BE ABLE
TO OFFSET INCREASED LABOR COSTS WITH INCREASED REVENUES.
Additional increases in the federal minimum wage rate have recently been
proposed by the President of the United States and appear likely to be adopted.
Current federal minimum wage laws set the minimum wage for tipped employees at
$2.13 per hour and allow the difference between that rate and the standard
minimum wage to be made up by tips. The majority of our hourly employees are
tipped employees, and the non-tipped employees have generally earned more than
the federal minimum wage. However, if federal or state minimum wage rates do
increase as expected, we may need to increase not only the wage rates of our
minimum wage employees, but also the wages paid to the employees at wage rates
which are above the minimum wage. Although an increase in the minimum wage could
be offset by pricing and cost control efforts, we cannot assure you that we will
be able to do so.
YEAR 2000 ISSUES--SOFTWARE FAILURES COULD AFFECT OUR BUSINESS.
We rely on various information systems to manage our restaurant operations
by means of financial controls through a centralized accounting system at each
brand's headquarters and a point-of-sale reporting system in each restaurant. We
have completed reviews of the ability of our hardware and software serving
critical internal functions in our restaurants and in our corporate offices to
accurately handle data involving the transition of dates from 1999 to 2000 and,
as a result, have made modifications to our computer systems. We believe that
these modifications are sufficient, but we cannot assure you that we have found
and corrected all non-compliant programs. A disruption in the operation of our
computer systems could result in additional expenses and reduced profitability
because of the need for additional personnel time to acquire necessary
information, additional record keeping costs and less efficient purchasing and
distribution. We have contacted our vendors who supply significant amounts of
goods and services to us to determine the status of their Year 2000 compliance
plans. We believe that our significant vendors will be Year 2000 compliant;
however, our vendors' operations could be adversely affected by the failure of
their suppliers, particularly food and beverage suppliers, to be compliant. Any
failure on the part of us, our vendors, their suppliers or providers of
utilities, telephone service or similar services to ensure compliance with Year
2000 requirements could have a material adverse effect on our financial
condition and results of operations.
FRAUDULENT CONVEYANCE--UNDER SPECIFIC CIRCUMSTANCES, THE GUARANTEES MAY BE
VOIDED.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require noteholders to return payments received from the
guarantors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the guarantees could be voided, or claims in respect
of the guarantees could be subordinated to all other debts of any guarantor if,
among other things, the guarantor, at the time it incurred the indebtedness
evidenced by its guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness;
- was insolvent or rendered insolvent by reason of the incurrence;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
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In addition, any payment by the guarantor pursuant to a guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
FINANCING CHANGE OF CONTROL OFFER--WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all Notes. However, it is possible
that we will not have sufficient funds at the time of the change of control to
make the required repurchase of Notes or that restrictions in the New Credit
Facility or the Senior Notes Indenture will not allow such repurchases. In
addition, certain important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would not
constitute a "Change of Control" under the Indenture. Please refer to the
section in this Prospectus entitled "Description of the Exchange
Notes--Repurchase of Exchange Notes upon a Change of Control."
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON TRADING MARKET
FOR OUTSTANDING NOTES
Holders of Outstanding Notes who do not exchange their Outstanding Notes for
Exchange Notes in the Exchange Offer will continue to be subject to the
restrictions on transfer of their Outstanding Notes as set forth in the legend
on the Outstanding Notes as a consequence of the issuance of the Outstanding
Notes pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Outstanding Notes may not be offered or sold unless
registered under or exempted from the Securities Act and applicable state laws.
Subject to our obligation to file a Shelf Registration Statement covering
resales of Outstanding Notes in certain circumstances, we do not intend to
register the Outstanding Notes under the Securities Act and, after consummation
of the Exchange Offer, will not be obligated to do so. In addition, any holders
of Outstanding Notes who tender in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Additionally, as a result of the
Exchange Offer, it is expected that a substantial decrease in the aggregate
principal amount of Outstanding Notes outstanding will occur. As a result, it is
unlikely that a liquid trading market will exist for the Outstanding Notes at
any time. This lack of liquidity will make transactions more difficult and may
reduce the trading price of the Outstanding Notes. See "The Exchange Offer" and
"Description of the Exchange Notes--Registration Rights Agreement; Penalty
Interest."
ABSENCE OF A PUBLIC MARKET--AN ACTIVE TRADING MARKET FOR THE EXCHANGE NOTES MAY
NOT DEVELOP.
The Exchange Notes will be new securities for which there is currently no
trading market. We do not intend to apply for listing of the Exchange Notes, on
any securities exchange or for quotation
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through the National Association of Securities Dealers Automated Quotation (the
"Nasdaq") system. The Initial Purchasers have informed us that they currently
intend to make a market in the Exchange Notes. However, the Initial Purchasers
are not obligated to do so and may discontinue any such market making at any
time without notice.
The liquidity of any market for the Exchange Notes will depend upon various
factors, including:
- the number of holders of the Exchange Notes;
- the interest of securities dealers making a market in the Exchange Notes;
- the overall market for high yield securities;
- our financial performance or prospects; and
- the prospects for companies in our industry generally.
Accordingly, we cannot assure you that a market or liquidity will develop for
the Exchange Notes.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Exchange Notes. We cannot assure you that the market for the
Exchange Notes, if any, will not be subject to similar disruptions. Any such
disruptions may adversely affect you as a holder of the Exchange Notes.
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USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of our obligations under
the Registration Rights Agreement. We will not receive any proceeds from the
issuance of the Exchange Notes. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, we will receive, in exchange, Outstanding
Notes in the same principal amount. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Outstanding
Notes, except as otherwise described herein under "The Exchange Offer--Terms of
the Exchange Offer." The Outstanding Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase in our
outstanding debt.
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CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth our historical capitalization and pro forma
capitalization as of April 4, 1999 after giving effect to (i) the proceeds from
the divestiture of our Applebee's restaurants, which was completed on May 3,
1999, (ii) the offering of the Outstanding Notes and the application of the
estimated net proceeds therefrom, (iii) expected initial borrowings under the
New Credit Facility and (iv) settlement of our two remaining equity forward
contracts. You should read this table in conjunction with the information
contained in "Pro Forma Financial Information" and our Consolidated Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 4, 1999
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Debt:
Existing Credit Facility (1)....................................... $ 137,491 $ --
New Credit Facility (2)............................................ -- 46,430
Other long-term debt (3)........................................... 457 457
9 3/4% Senior Notes due 2006....................................... 116,500 116,500
Senior Subordinated Notes due 2009 (4)............................. -- 98,561
---------- -----------
Total debt..................................................... 254,448 261,948
Preferred Securities (5)........................................... 115,000 115,000
Temporary equity, net (6).......................................... 39,849 --
Total shareholders' equity (7)..................................... 116,833 116,319
---------- -----------
Total capitalization........................................... $ 526,130 $ 493,267
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) The Existing Credit Facility consists of two senior, unsecured revolving
credit lines which mature on June 15, 1999 and June 30, 1999, respectively.
The Existing Credit Facility was reduced by proceeds from the divestiture of
our Applebee's restaurants, which was completed on May 3, 1999, and has been
replaced by the New Credit Facility.
(2) Concurrently with the closing of the offering of the Outstanding Notes, we
entered into the New Credit Facility, which consists of a revolving credit
facility with total availability of $125.0 million and a term of three
years.
(3) Represents capitalized leases and other senior obligations.
(4) Reflects the issuance of $100.0 million of Outstanding Notes, net of
original issue discount.
(5) Represents the Company-obligated mandatorily redeemable preferred securities
of Avado Financing I, a subsidiary holding solely Avado Brands, Inc. 7%
convertible subordinated debentures due March 1, 2027.
(6) Represents our two remaining equity forward contracts pending settlement for
approximately $40.0 million, net of collateral deposits of approximately
$10.5 million and other transaction costs of approximately $1.7 million.
These contracts represent the Company's remaining agreements with two
financial institutions which the Company plans to settle by purchasing a
total of 3.8 million shares of our common stock. The two equity forward
contracts expire on June 30, 1999 and July 31, 1999, respectively.
(7) Represents the impact of (i) the divestiture of our remaining Applebee's
restaurants on May 3, 1999 and (ii) the settlement of our two remaining
equity forward contracts by acquiring the related shares of common stock.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We sold the Outstanding Notes on June 22, 1999 to the Initial Purchasers,
who sold the Outstanding Notes to certain institutional investors in reliance on
Rule 144A promulgated by the Commission under the Securities Act. In connection
with the sale of the Outstanding Notes, we, the Guarantors and the Initial
Purchasers entered into the Registration Rights Agreement, pursuant to which we
agreed:
(i) to file a registration statement within 60 days after the date of
original issuance of the Outstanding Notes to register our offer to
exchange for the Outstanding Notes our senior subordinated debt
securities with terms substantially identical to the Outstanding Notes
(except that the Exchange Notes will not contain terms with respect to
transfer restrictions); and
(ii) to use our best efforts to cause the registration statement to become
effective under the Securities Act within 150 days after the issue date
of the Outstanding Notes.
If any holders of the Outstanding Notes notify us prior to the 20th day
following consummation of the Exchange Offer that:
(i) it is prohibited by law or Commission policy from participating in
the Exchange Offer;
(ii) it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and that the
Prospectus contained in the Exchange Offer Registration Statement
is not appropriate or available; or
(iii) it is a broker-dealer and owns Outstanding Notes acquired directly
from us or one of our affiliates,
then we will use our best efforts to cause to become effective a Shelf
Registration Statement with respect to the resale of the Outstanding Notes and
to keep the Shelf Registration Statement effective until the Outstanding Notes
registered under the Shelf Registration Statement have been sold or two years
after the effective date thereof, whichever occurs first. The interest rate on
the Outstanding Notes is subject to increase under certain circumstances if we
are not in compliance with our obligations under the Registration Rights
Agreement. See "Description of the Exchange Notes--Registration Rights
Agreement; Penalty Interest."
Each holder of Outstanding Notes who wishes to exchange such Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, and (ii)
it has no arrangement with any person to participate in the distribution of the
Exchange Notes. See "--Registration Rights Agreement; Penalty Interest" below.
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, we believe that, except as described
below, Exchange Notes issued pursuant to the Exchange Offer in exchange for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
any holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. Any holder who tenders in the Exchange Offer with the
intention or for the purpose of
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<PAGE>
participating in a distribution of the Exchange Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing the selling security
holders information required by Item 507 of Regulation S-K under the Securities
Act. This Prospectus may be used for an offer to resell, resale or other
retransfer of Exchange Notes only as specifically set forth herein. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Outstanding Notes, where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, we will accept for exchange any and all
Outstanding Notes properly tendered and not withdrawn prior to 5:00 p.m.,
Atlanta, Georgia time, on the Expiration Date. We will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes surrendered pursuant to the Exchange Offer. Outstanding Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Outstanding Notes except the Exchange Notes will be registered
under the Securities Act for their offer and sale, and hence they will not bear
legends restricting their transfer. The Exchange Notes will evidence the same
debt as the Outstanding Notes. The Exchange Notes will be issued under and
entitled to the benefits of the Indenture, which also authorized the issuance of
the Outstanding Notes, such that both series will be treated as a single class
of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. Holders of Outstanding
Notes do not have any appraisal or dissenters' rights in connection with the
Exchange Offer.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Outstanding Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Outstanding
Notes. There will be no fixed record date for determining registered holders of
Outstanding Notes entitled to participate in the Exchange Offer.
We intend to conduct the Exchange Offer in accordance with the provisions of
the Registration Rights Agreement and the applicable requirements of the
Exchange Act, and the rules and regulations of the Commission. Outstanding Notes
which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
We are deemed to have accepted for exchange properly tendered Exchange Notes
when we give oral or written notice thereof to the Exchange Agent and comply
with the applicable provisions of the Registration Rights Agreement. The
Exchange Agent will act as agent for the tendering holders for the purposes of
receiving the Exchange Notes from us. We expressly reserve the right to amend or
terminate the Exchange Offer, and not to accept for exchange any Outstanding
Notes not already accepted for exchange, upon the occurrence of any of the
conditions specified below under "--Certain Conditions to the Exchange Offer."
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Company will
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<PAGE>
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., Atlanta, Georgia time on
August 18, 1999, unless we, in our sole discretion, extend the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, we will notify the Exchange Agent of
any extension by oral or written notice and will mail to the registered holders
of Outstanding Notes an announcement thereof, each prior to 9:00 a.m., Atlanta,
Georgia time on the next business day after the then Expiration Date.
We reserve the right, in our sole discretion:
(i) to delay accepting for exchange any Exchange Notes, or to extend the
Exchange Offer if any of the conditions set forth below under "--Certain
Conditions To The Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay or extension to the Exchange
Agent; or
(ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders of Outstanding Notes. If the Exchange Offer is amended in a manner
determined by us to constitute a material change, we will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and we will extend the Exchange Offer, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 11 3/4% per annum,
payable semi-annually, on each June 15 and December 15, commencing December 15,
1999. Holders of Exchange Notes will receive interest on December 15, 1999 from
the date of initial issuance of the Exchange Notes, plus an amount equal to the
accrued interest on the Outstanding Notes from the date of initial issuance to
the date of exchange thereof for Exchange Notes. Interest on the Outstanding
Notes accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the Exchange Offer is open, and thereby delay
acceptance for exchange of any Outstanding Notes, by giving oral or written
notice of such extension to the holders thereof. During any such extensions, all
Outstanding Notes previously tendered will remain subject to the Exchange Offer
and may be accepted for exchange by us. Any Outstanding Notes not accepted for
exchange for any reason will be returned without expense to the tendering holder
thereof as promptly as practicable after the expiration or termination of the
Exchange Offer.
We expressly reserve the right to amend the Exchange Offer. We will give
oral or written notice of any extension, amendment or non-acceptance to the
holders of the Outstanding Notes as promptly as practicable, such notice in the
case of any extension to be issued no later than 9:00 a.m., Atlanta, Georgia
time on the next business day after the previously scheduled Expiration Date.
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<PAGE>
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. The failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time.
In addition, we will not accept for exchange any Outstanding Notes tendered,
and no Exchange Notes will be issued in exchange for any such Outstanding Notes,
if at such time any stop order shall be threatened or in effect with respect to
the Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., Atlanta, Georgia time on the Expiration Date. In
addition, either Outstanding Notes must be received by the Exchange Agent along
with the Letter of Transmittal, or a timely confirmation of book-entry transfer
(a "Book-Entry Confirmation") of such Outstanding Notes, if such procedure is
available, into the Exchange Agent's account at the Depository Trust Company
(the "Depository") pursuant to the procedure for book-entry transfer described
below must be received by the Exchange Agent prior to the Expiration Date. To be
tendered effectively, the Letter of Transmittal and other required documents
must be received by the Exchange Agent at the address set forth below under
"--Exchange Agent" prior to 5:00 p.m., Atlanta, Georgia time on the Expiration
Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO US. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Outstanding Notes to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Outstanding Notes, either make appropriate arrangements
to register ownership of the Outstanding Notes in such owner's name or obtain a
properly completed bond power from the registered holder of Outstanding Notes.
The transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case may be, must be guaranteed by an Eligible Institution (as
defined below) unless the Outstanding Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box
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entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantor must be a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is
a member of one of the recognized signature guarantee programs identified in the
Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Outstanding Notes listed therein, such Outstanding Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Outstanding
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by us,
evidence satisfactory to us of their authority to so act must be submitted with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by us in our sole discretion, which
determination will be final and binding. We reserve the absolute right to reject
any and all Outstanding Notes not properly tendered or any Outstanding Notes our
acceptance of which would, in the opinion of our counsel be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular Outstanding Notes. Our interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as we shall determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of Outstanding
Notes, we will not, nor will the Exchange Agent any other person incur any
liability for failure to give such notification. Tenders of Outstanding Notes
will not be deemed to have been made until such defects or irregularities have
been cured or waived. Any Outstanding Notes received by the Exchange Agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Exchange Notes or a timely Book-Entry
Confirmation of such Outstanding Notes into the Exchange Agent's account at the
Depository, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Outstanding Notes are not accepted for
exchange for any reason set forth in the terms and conditions of the Exchange
Offer or if Outstanding Notes are submitted for a greater principal amount than
the holder desires to exchange, such unaccepted or non-exchanged Outstanding
Notes will be returned without expense to the tendering holder thereof (or, in
the case of Outstanding Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depository pursuant to the book-entry transfer procedures
described below, such non-exchanged Exchange Notes will be credited to an
account maintained with such Depository) as promptly as practicable after the
expiration or termination of the Exchange Offer.
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<PAGE>
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make book-entry
delivery of Outstanding Notes by causing the Depository to transfer such
Outstanding Notes into the Exchange Agent's account at the Depository in
accordance with such Depository's procedures for transfer. However, although
delivery of Exchange Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date or, if the
guaranteed delivery procedures described below are to be complied with, within
the time period provided under such procedures. Delivery of documents to the
Depository does not constitute delivery to the Exchange Agent. For a further
discussion of book-entry procedures see "Description of the Exchange
Notes--Book-Entry, Delivery and Form" and "--Depository Procedures."
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., Atlanta, Georgia time on the
Expiration Date.
For a withdrawal to be effective, the Exchange Agent must receive a written
notice of withdrawal at one of the addresses set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Outstanding Notes to be withdrawn, identify the Outstanding Notes
to be withdrawn (including the principal amount of such Outstanding Notes), and
(where certificates for Outstanding Notes have been transmitted) specify the
name in which such Outstanding Notes were registered, if different from that of
the withdrawing holder. If certificates for Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then, prior to the
release of such certificates the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Outstanding Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Depository to
be credited with the withdrawn Outstanding Notes and otherwise comply with the
procedures of such facility. We will determine all questions as to the validity,
form and eligibility (including time of receipt) of such notices, and our
determination will be final and binding on all parties. Any Outstanding Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Outstanding Notes which have been tendered
for exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder (or, in the case of Outstanding Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Depository pursuant to the book-entry transfer procedures described above, such
Outstanding Notes will be credited to an account maintained with such Depository
for the Outstanding Notes) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Outstanding
Notes may be re-tendered by following one of the procedures described under
"--Procedures for Tendering" above at any time on or prior to the Expiration
Date.
EXCHANGE AGENT
SunTrust Bank, Atlanta has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance or requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent at SunTrust Bank, Atlanta, 25 Park Place, 24th
28
<PAGE>
Floor, Atlanta, GA 30303-2900, Attn: Corporate Trust Department, Telephone:
(404) 588-7296, Telecopy: (404) 588-7335.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are making the principal
solicitation by mail, however, we may make additional solicitations by
telegraph, telephone or in person through our officers and regular employees or
through our affiliates.
We have not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to broker-dealers or others soliciting
acceptances of the Exchange Offer. We will, however, pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the Exchange
Offer, which we estimate in the aggregate to be approximately $55,000. Such
expenses include registration fees, fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, and related fees and
expenses.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Outstanding Notes, as set forth in the legend
thereon as a consequence of the issuance of the Outstanding Notes pursuant to
the exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not currently anticipate that it will register the
Outstanding Notes under the Securities Act. Based on interpretations by the
staff of the Commission, Exchange Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by holders thereof
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement or understanding with respect to
the distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer. Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the Exchange Notes may
not be offered or sold by a holder in a resale transaction unless they have been
registered under applicable state law or the requirements of an exemption from
registration have been complied with. We have agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the Exchange Notes for offer or sale under
29
<PAGE>
the securities or blue sky laws of such jurisdictions as any holder of the
Exchange Notes reasonably requests in writing.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is based on our
audited Consolidated Financial Statements and the notes thereto for the fiscal
year ended January 3, 1999 and our unaudited interim Consolidated Financial
Statements and the notes thereto for the thirteen-week periods ended March 29,
1998 and April 4, 1999, respectively, included elsewhere in this Prospectus. The
unaudited pro forma statements of earnings for the LTM period ended April 4,
1999, the fiscal year ended January 3, 1999 and the thirteen-week period ended
April 4, 1999 reflect the operations of our Core Brands only and give effect to
the Transactions. The unaudited pro forma balance sheet as of April 4, 1999
gives effect to the Transactions and the settlement of our two remaining equity
forward contracts.
The pro forma financial information is not necessarily indicative of the
Company's financial position or results of operations had the Transactions
occurred on the dates assumed, or of the Company's future financial position or
results of operations.
The pro forma financial information is based on, and should be read in
conjunction with, the assumptions set forth in the notes to the unaudited Pro
Forma Financial Information and our Consolidated Financial Statements and notes
thereto, included elsewhere in this Prospectus.
30
<PAGE>
AVADO BRANDS, INC.
PRO FORMA BALANCE SHEET
AS OF APRIL 4, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS(2) PRO FORMA
--------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 794 $ 39,894 (a) $ 637
98,561 (b)
(7,500) (b)
(91,061) (c)
(40,051) (d)
Short-term investments.................................... 53 -- 53
Accounts receivable....................................... 8,049 -- 8,049
Inventories............................................... 8,960 (407) (a) 8,553
Prepaid expenses and other................................ 6,740 (226) (a) 6,514
Assets held for sale...................................... 39,481 (35,881) (a) 3,600
--------- ---------- -----------
Total current assets.................................... 64,077 (36,671) 27,406
Premises and equipment, net................................. 382,539 -- 382,539
Goodwill, net............................................... 137,127 -- 137,127
Investments in and advances to unconsolidated affiliates.... 17,095 -- 17,095
Other assets................................................ 41,311 7,500 (b) 48,811
--------- ---------- -----------
$ 642,149 $ (29,171) $ 612,978
--------- ---------- -----------
--------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 32,367 $ -- $ 32,367
Accrued liabilities....................................... 34,714 2,888 (a) 37,602
Current installments of long-term debt.................... 137,491 (91,061) (c) --
(46,430) (b)
Income taxes.............................................. 32,229 804 (a) 33,033
--------- ---------- -----------
Total current liabilities............................... 236,801 (133,799) 103,002
Long-term debt.............................................. 116,957 98,561 (b) 261,948
46,430 (b)
Deferred income taxes....................................... 8,200 -- 8,200
Other long-term liabilities................................. 8,509 -- 8,509
--------- ---------- -----------
Total liabilities....................................... 370,467 11,192 381,659
Preferred Securities........................................ 115,000 -- 115,000
Temporary equity, net....................................... 39,849 (39,849) (d) --
Shareholders' equity:
Preferred stock, $0.01 par value.......................... -- -- --
Common stock, $0.01 par value............................. 405 -- 405
Additional paid-in capital................................ 94,588 50,388 (d) 144,976
Retained earnings......................................... 167,985 1,313 (a) 169,298
Accumulated other comprehensive income.................... (317) -- (317)
Treasury stock at cost.................................... (145,828) (52,215) (d) (198,043)
--------- ---------- -----------
Total shareholders' equity.............................. 116,833 (514) 116,319
--------- ---------- -----------
$ 642,149 $ (29,171) $ 612,978
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGES)
31
<PAGE>
AVADO BRANDS, INC.
PRO FORMA STATEMENT OF EARNINGS
FOR THE TWELVE-MONTH PERIOD ENDED APRIL 4, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS(3) PRO FORMA(4)
--------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Restaurant sales:
Don Pablo's............................................... $ 285,508 $ -- $ 285,508
Hops...................................................... 115,534 -- 115,534
McCormick & Schmick's..................................... 108,952 -- 108,952
Canyon Cafe............................................... 48,105 -- 48,105
Applebee's................................................ 226,992 (226,992) (a) --
--------- ---------- ----------
Total restaurant sales.................................. 785,091 (226,992) 558,099
Restaurant operating expenses:
Food and beverage......................................... 220,016 (63,877) (a) 156,139
Payroll and benefits...................................... 251,813 (81,684) (a) 170,129
Depreciation and amortization............................. 17,702 -- (a) 17,702
Other operating expenses.................................. 183,238 (53,412) (a) 129,826
--------- ---------- ----------
Total restaurant operating expenses..................... 672,769 (198,973) 473,796
--------- ---------- ----------
Income from restaurant operations........................... 112,322 (28,019) 84,303
General and administrative expenses......................... 43,075 (8,457) (a) 33,015 (a)
(1,603) (b)
Asset revaluation and other special charges................. 2,940 (778) (a) 2,162
--------- ---------- ----------
Operating income............................................ 66,307 (17,181) 49,126
Other income (expense):
Interest expense, net..................................... (23,115) (3,177) (c) (26,292)
Dividends on Preferred Securities......................... (8,205) -- (8,205)
Gain (loss) on disposal of assets......................... 24,897 (35,712) (d) (10,815)
Income from investments carried at equity................. 189 -- 189
Other, primarily goodwill amortization.................... (5,291) 187 (e) (5,104) (b)
--------- ---------- ----------
Total other income (expense)............................ (11,525) (38,702) (50,227)
--------- ---------- ----------
Earnings before income taxes................................ 54,782 (55,883) (1,101)
Income taxes................................................ 19,625 (20,425) (f) (800)
--------- ---------- ----------
Net earnings................................................ $ 35,157 $ (35,458) $ (301)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGES)
32
<PAGE>
AVADO BRANDS, INC.
PRO FORMA STATEMENT OF EARNINGS
FOR THE YEAR ENDED JANUARY 3, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS(3) PRO FORMA(4)
--------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Restaurant sales:
Don Pablo's............................................... $ 270,399 $ -- $ 270,399
Hops...................................................... 106,329 -- 106,329
McCormick & Schmick's..................................... 102,489 -- 102,489
Canyon Cafe............................................... 48,187 -- 48,187
Applebee's................................................ 335,288 (335,288) (a) --
--------- ---------- ----------
Total restaurant sales.................................. 862,692 (335,288) 527,404
Restaurant operating expenses:
Food and beverage......................................... 241,689 (93,803) (a) 147,886
Payroll and benefits...................................... 279,274 (119,189) (a) 160,085
Depreciation and amortization............................. 17,014 -- (a) 17,014
Other operating expenses.................................. 202,994 (79,457) (a) 123,537
--------- ---------- ----------
Total restaurant operating expenses..................... 740,971 (292,449) 448,522
--------- ---------- ----------
Income from restaurant operations........................... 121,721 (42,839) 78,882
General and administrative expenses......................... 46,150 (11,908) (a) 32,002 (a)
(2,240) (b)
Asset revaluation and other special charges................. 2,940 (778) (a) 2,162
--------- ---------- ----------
Operating income............................................ 72,631 (27,913) 44,718
Other income (expense):
Interest expense, net..................................... (25,313) (1,311) (c) (26,624)
Dividends on Preferred Securities......................... (8,205) -- (8,205)
Gain (loss) on disposal of assets......................... 72,547 (81,286) (d) (8,739)
Income from investments carried at equity................. 1,025 -- 1,025
Other, primarily goodwill amortization.................... (5,641) 250 (e) (5,391) (b)
--------- ---------- ----------
Total other income (expense)............................ 34,413 (82,347) (47,934)
--------- ---------- ----------
Earnings before income taxes................................ 107,044 (110,260) (3,216)
Income taxes................................................ 39,300 (40,750) (f) (1,450)
--------- ---------- ----------
Earnings before cumulative effect of change in accounting
principle................................................. 67,744 (69,510) (1,766)
Cumulative effect of change in accounting principle, net of
tax benefit............................................... 1,461 (570) (g) 891
--------- ---------- ----------
Net earnings................................................ $ 66,283 $ (68,940) $ (2,657)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGES)
33
<PAGE>
AVADO BRANDS, INC.
PRO FORMA STATEMENT OF EARNINGS
FOR THE THIRTEEN WEEKS ENDED APRIL 4, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS(3) PRO FORMA(4)
--------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Restaurant sales:
Don Pablo's............................................... $ 74,372 $ -- $ 74,372
Hops...................................................... 32,532 -- 32,532
McCormick & Schmick's..................................... 27,805 -- 27,805
Canyon Cafe............................................... 11,899 -- 11,899
Applebee's................................................ 17,467 (17,467) (a) --
--------- ----------- ----------
Total restaurant sales.................................. 164,075 (17,467) 146,608
Restaurant operating expenses:
Food and beverage......................................... 45,644 (4,813) (a) 40,831
Payroll and benefits...................................... 51,187 (6,047) (a) 45,140
Depreciation and amortization............................. 4,892 -- (a) 4,892
Other operating expenses.................................. 36,702 (3,782) (a) 32,920
--------- ----------- ----------
Total restaurant operating expenses..................... 138,425 (14,642) 123,783
--------- ----------- ----------
Income from restaurant operations........................... 25,650 (2,825) 22,825
General and administrative expenses......................... 9,840 (503) (a) 9,337 (a)
--------- ----------- ----------
Operating income............................................ 15,810 (2,322) 13,488
Other income (expense):
Interest expense, net..................................... (4,941) (924) (c) (5,865)
Dividends on Preferred Securities......................... (2,012) -- (2,012)
Gain (loss) on disposal of assets......................... 1,350 (3,426) (d) (2,076)
Income (loss) from investments carried at equity.......... (133) -- (133)
Other, primarily goodwill amortization.................... (972) 8 (e) (964) (b)
--------- ----------- ----------
Total other income (expense)............................ (6,708) (4,342) (11,050)
--------- ----------- ----------
Earnings before income taxes................................ 9,102 (6,664) 2,438
Income taxes................................................ 3,150 (2,400) (f) 750
--------- ----------- ----------
Net earnings................................................ $ 5,952 $ (4,264) $ 1,688
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
(SEE FOOTNOTES ON THE FOLLOWING PAGES)
34
<PAGE>
AVADO BRANDS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The unaudited pro forma statements of earnings for the LTM period ended
April 4, 1999, the fiscal year ended January 3, 1999 and the thirteen-week
period ended April 4, 1999 reflect the operations of our Core Brands only and
give effect to the Transactions. The unaudited pro forma balance sheet as of
April 4, 1999, gives effect to the Transactions and the settlement of our two
remaining equity forward contracts.
The divestiture of our Applebee's restaurants was executed through 16
separate transactions beginning in March of 1998. Fifteen of the transactions
were completed prior to the period ending April 4, 1999 and the final
divestiture transaction was completed on May 3, 1999. During the divestiture
period, the operations of the unsold Applebee's restaurants were included in the
consolidated operating results of Avado Brands, Inc. When we announced the
decision to divest the Applebee's restaurants in December of 1997, the related
non-current assets were reclassified to "Assets held for sale" within the
current assets section of the consolidated balance sheet. Accordingly, no
depreciation and amortization was recorded during the divestiture period due to
the "held for sale" status of these assets. Each separate divestiture
transaction was recorded as an asset sale with corresponding gain or loss
recognition in the period the transaction was completed.
2. PRO FORMA BALANCE SHEET:
The unaudited pro forma balance sheet reflects the Transactions as though
each had occurred on April 4, 1999, and gives effect to the following:
(a) The divestiture of our remaining Applebee's restaurants on May 3, 1999
is recorded as follows:
<TABLE>
<S> <C>
Gross proceeds from divestiture.................................... $ 43,794
Less:
Assets held for sale............................................. 35,881
Inventory adjustments............................................ 407
Prepaid expenses and other adjustments........................... 226
Accrued transaction costs........................................ 2,888
Reserve for notes receivable from purchaser...................... 2,275
---------
Gain on divestiture................................................ 2,117
Income taxes....................................................... 804
---------
Net gain........................................................... $ 1,313
---------
---------
Gross proceeds received as follows:
Cash proceeds.................................................... $ 39,894
Notes receivable from purchaser.................................. 3,900
---------
$ 43,794
---------
---------
</TABLE>
35
<PAGE>
AVADO BRANDS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2. PRO FORMA BALANCE SHEET: (CONTINUED)
(b) The refinancing includes:
(i) The issuance of $100.0 million of the Outstanding Notes net of
original issue discount of $1.4 million, estimated issuance costs of
$3.5 million and fees of $2.5 million related to consents obtained
from the holders of our 9 3/4% Senior Notes to permit issuance of
the Outstanding Notes.
(ii) The $125.0 million New Credit Facility, after giving effect to the
Transactions and settlement of our remaining equity forward
contracts, will have approximately $46.4 million outstanding,
including related estimated issuance costs of $1.5 million.
(c) Net proceeds from the New Credit Facility and the Notes are used to
repay $137.5 million of indebtedness under the Existing Credit Facility
at April 4, 1999.
(d) Represents the settlement of our two remaining equity forward contracts
for approximately $40.0 million net of collateral deposits of
approximately $10.5 million and other transaction costs of approximately
$1.7 million.
3. PRO FORMA STATEMENTS OF EARNINGS:
The pro forma statements of earnings reflect the Transactions as though each
had occurred at the beginning of the periods, and give effect to the following:
(a) Elimination of all sales, operating expenses, and general and
administrative expenses related to the divestiture of our Applebee's
restaurants:
<TABLE>
<CAPTION>
TWELVE-MONTH YEAR ENDED THIRTEEN-WEEK
PERIOD ENDED JANUARY 3, PERIOD ENDED
APRIL 4, 1999 1999 APRIL 4, 1999
------------- -------------- -------------
<S> <C> <C> <C>
Restaurant sales................................................... $ 226,992 $ 335,288 $ 17,467
Restaurant operating expenses:
Food and beverage................................................ 63,877 93,803 4,813
Payroll and benefits............................................. 81,684 119,189 6,047
Depreciation and amortization (i)................................ -- -- --
Other operating expenses......................................... 53,412 79,457 3,782
------------- -------------- -------------
Total restaurant operating expenses............................ 198,973 292,449 14,642
------------- -------------- -------------
Income from restaurant operations.................................. 28,019 42,839 2,825
General and administrative expenses................................ 8,457 11,908 503
Asset revaluation and other special charges........................ 778 778 --
------------- -------------- -------------
Operating income................................................... $ 18,784 $ 30,153 $ 2,322
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
- ------------------------
(i) Depreciation and amortization on these long-lived assets were suspended in
December 1997, when management finalized the decision to dispose of these
restaurants.
36
<PAGE>
AVADO BRANDS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
3. PRO FORMA STATEMENTS OF EARNINGS: (CONTINUED)
(b) Adjustments to general and administrative expenses to give a full-year
effect to salary, benefits and other costs associated with termination of
employees in the fourth quarter of fiscal 1998 totaling $1,603 for the
twelve-month period ended April 4, 1999 and $2,240 for the fiscal year
ended January 3, 1999.
(c) Pro forma adjustments to interest expense are as follows:
<TABLE>
<CAPTION>
TWELVE-MONTH YEAR ENDED THIRTEEN-WEEK
PERIOD ENDED JANUARY 3, PERIOD ENDED
APRIL 4, 1999 1999 APRIL 4, 1999
--------------- -------------- -------------
<S> <C> <C> <C>
Existing Credit Facility (i)..................................... $ (11,665) $ (13,531) $ (2,787)
New Credit Facility (ii)......................................... 1,741 1,741 435
The Notes........................................................ 11,750 11,750 2,938
Amortization of deferred financing costs (iii)................... 1,351 1,351 338
--------------- -------------- -------------
Total pro forma interest adjustment............................ $ 3,177 $ 1,311 $ 924
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
- ------------------------
(i) Represents interest expense savings on average outstandings under the
Existing Credit Facility for the respective periods.
(ii) Represents interest expense of 7.50% per annum on average outstanding
balance.
(iii) Represents non-cash amortization of deferred financing costs, including
original issue discount.
A 1/4 of 1% change in the interest rate on the New Credit Facility would
increase annual interest expense by $58.
(d) Pro forma adjustments to eliminate gains on disposal of assets generated
by the divestiture of our Applebee's restaurants as follows:
<TABLE>
<CAPTION>
TWELVE-MONTH YEAR ENDED THIRTEEN-WEEK
PERIOD ENDED JANUARY 3, PERIOD ENDED
APRIL 4, 1999 1999 APRIL 4, 1999
--------------- -------------- -------------
<S> <C> <C> <C>
Gross proceeds from divestiture.................................. $ 375,426 $ 426,259 $ 43,871
Less:
Assets held for sale........................................... 265,466 273,875 31,338
Other assets................................................... 51,144 45,801 6,255
Transaction costs.............................................. 23,104 25,297 2,852
--------------- -------------- -------------
Gain on divestiture.............................................. 35,712 81,286 3,426
Income taxes..................................................... 13,570 30,888 1,302
--------------- -------------- -------------
Net gain......................................................... $ 22,142 $ 50,398 $ 2,124
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
- ------------------------
(e) Pro forma adjustments to "Other, primarily goodwill amortization" to
eliminate Applebee's related amounts.
37
<PAGE>
AVADO BRANDS, INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
3. PRO FORMA STATEMENTS OF EARNINGS: (CONTINUED)
(f) Income tax effects at a blended rate of 34% on operations and 38% on the
gain on disposal of assets.
(g) Pro forma adjustments to "Cumulative effect of change in accounting
principle, net of tax benefit" to eliminate the after-tax impact of
Applebee's related amounts.
4. OTHER:
(a) General and administrative expenses includes depreciation and
amortization expense related to corporate facilities as follows:
<TABLE>
<CAPTION>
TWELVE-MONTH THIRTEEN-WEEK
PERIOD ENDED YEAR ENDED PERIOD ENDED
APRIL 4, 1999 JANUARY 3, 1999 APRIL 4, 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Depreciation and amortization expense............................ $ 2,218 $ 2,275 $ 421
------ ------ -----
------ ------ -----
</TABLE>
- ------------------------
(b) Other, primary goodwill amortization expense includes certain expenses
(income) incurred by the Core Brands as follows:
<TABLE>
<CAPTION>
TWELVE-MONTH THIRTEEN-WEEK
PERIOD ENDED YEAR ENDED PERIOD ENDED
APRIL 4, 1999 JANUARY 3, 1999 APRIL 4, 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Miscellaneous expense (income)................................... $ 1,136 $ 1,459 $ (47)
------ ------ ---
------ ------ ---
</TABLE>
38
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
We derived the selected consolidated historical financial data presented below
from our audited Consolidated Financial Statements and the notes thereto, except
for the financial data for the thirteen-week periods ended March 29, 1998 and
April 4, 1999, which we derived from our unaudited interim Consolidated
Financial Statements and the notes thereto. You should read the financial data
presented below together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our Consolidated Financial Statements
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THIRTEEN-WEEK
FISCAL YEARS ENDED PERIODS ENDED
---------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, MAR. 29, APR. 4,
1994 1995 1996 1997 1999 1998 1999
-------- -------- -------- -------- --------- -------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Restaurant sales:
Don Pablo's........................... $57,192 $ 88,820 $133,261 $196,457 $ 270,399 $ 59,263 $ 74,372
Hops.................................. -- -- -- 49,511 106,329 23,327 32,532
McCormick & Schmick's................. -- -- -- 67,373 102,489 21,342 27,805
Canyon Cafe........................... -- -- -- 18,577 48,187 11,981 11,899
Applebee's............................ 201,359 300,928 379,042 454,127 335,288 125,763 17,467
Other................................. 42,008 50,442 33,719 22,275 -- -- --
-------- -------- -------- -------- --------- -------- ---------
Total restaurant sales.............. 300,559 440,190 546,022 808,320 862,692 241,676 164,075
Restaurant operating expenses:
Food and beverage..................... 84,910 120,630 150,090 225,302 241,689 67,317 45,644
Payroll and benefits.................. 87,236 129,424 162,017 249,356 279,274 78,648 51,187
Depreciation and amortization......... 11,119 17,662 22,509 31,441 17,014 4,204 4,892
Other operating expenses.............. 69,483 98,850 125,781 187,781 202,994 56,458 36,702
-------- -------- -------- -------- --------- -------- ---------
Total restaurant operating
expenses.......................... 252,748 366,566 460,397 693,880 740,971 206,627 138,425
-------- -------- -------- -------- --------- -------- ---------
Income from restaurant operations....... 47,811 73,624 85,625 114,440 121,721 35,049 25,650
General and administrative expenses..... 15,359 22,298 26,329 39,617 46,150 12,915 9,840
Merger, asset revaluation and other
special charges....................... -- 9,997(1) 27,700(2) -- 2,940(3) -- --
-------- -------- -------- -------- --------- -------- ---------
Operating income........................ 32,452 41,329 31,596 74,823 72,631 22,134 15,810
Other income (expense):
Interest expense, net................... (2,342) (5,551) (11,348) (20,504) (25,313) (7,139) (4,941)
Dividends on Preferred Securities....... -- -- -- (6,412) (8,205) (2,012) (2,012)
Gain on disposal of assets.............. -- -- -- -- 72,547 49,000 1,350
Income (loss) from investments carried
at equity............................. -- -- -- -- 1,025 703 (133)
Other, primarily goodwill
amortization.......................... (150) (1,349) (2,024) (5,834) (5,641) (1,322) (972)
-------- -------- -------- -------- --------- -------- ---------
Total other income (expense)........ (2,492) (6,900) (13,372) (32,750) 34,413 39,230 (6,708)
-------- -------- -------- -------- --------- -------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principle.................. 29,960 34,429 18,224 42,073 107,044 61,364 9,102
Income taxes............................ 10,900 14,150 6,550 13,625 39,300 22,825 3,150
-------- -------- -------- -------- --------- -------- ---------
Earnings before cumulative effect of
change in accounting principle........ 19,060 20,279(1) 11,674(2) 28,448 67,744(3) 38,539 5,952
Cumulative effect of change in
accounting principle, net of tax
benefit............................... -- -- -- -- 1,461 1,461 --
-------- -------- -------- -------- --------- -------- ---------
Net earnings............................ $19,060 $ 20,279 $ 11,674 $ 28,448 $ 66,283 $ 37,078 $ 5,952
-------- -------- -------- -------- --------- -------- ---------
-------- -------- -------- -------- --------- -------- ---------
</TABLE>
39
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN-WEEK
FISCAL YEARS ENDED PERIODS ENDED
---------------------------------------------------------- ------------------------
DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, MAR. 29, APR. 4,
1994 1995 1996 1997 1999 1998 1999
-------- -------- -------- -------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (4).............................. $43,421 $ 69,923 $ 83,522 $108,961 $ 93,151 $ 26,477 $ 21,170
EBITDA margin (5)....................... 14.4% 15.9% 15.3% 13.5% 10.8% 11.0% 12.9%
Depreciation and amortization (6)....... $11,119 $ 19,946 $ 26,250 $ 39,972 $ 23,221 $ 5,665 $ 6,332
Capital expenditures.................... 99,391 124,066 124,623 172,963 142,841 40,088 22,173
Number of restaurants (at end of
period)............................... 188 274 316 430 256 419 243
Ratio of earnings to fixed charges
(7)................................... 5.04x 3.83x(8) 1.92x(8) 2.05x 3.37x(8) 6.06x 1.86x
SELECTED BALANCE SHEET DATA:
Working capital (excluding assets held
for sale) (9)......................... $ 2,200 $(17,778) $(21,439) $(33,989) $(210,947) $(58,623)(10) $(212,205)
Premises and equipment, net............. 188,009 303,077 380,523 283,839 367,587 307,199 382,539
Total assets............................ 226,087 369,138 457,827 804,289 670,597 903,186 642,149
Total debt.............................. 75,561 121,933 216,177 382,049 257,478 414,962 254,448
Preferred Securities (11)............... -- -- -- 115,000 115,000 115,000 115,000
Shareholders' equity.................... 120,341 203,221 191,429 220,782 112,029 257,742 116,833
</TABLE>
- ------------------------------
(1) Reflects a one-time charge for merger expenses of $10.0 million before tax
($6.6 million after tax).
(2) Reflects asset revaluation charges of $27.7 million before tax ($18.3
million after tax).
(3) Reflects other special charges associated with termination of employees.
(4) "EBITDA" is defined as operating income before depreciation and amortization
expenses and merger, asset revaluation and other special charges, which are
included in operating income, less miscellaneous expenses (income) included
in non-operating expenses. While EBITDA should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity, management understands that it is widely used by
certain investors as one measure to evaluate the financial performance of
companies in the restaurant industry.
(5) "EBITDA margin" is EBITDA stated as a percentage of restaurant sales.
(6) Includes depreciation and amortization related to restaurant operations and
corporate facilities and includes amortization of goodwill, which is
included in non-operating expenses.
(7) 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 portion deemed representative of the
interest factor) of total restaurant lease payments.
(8) The ratio of earnings to fixed charges excluding the asset revaluation and
other special charges would have been 4.67x, 3.44x and 3.44x for fiscal
1995, fiscal 1996 and fiscal 1998, respectively.
(9) We operate with negative working capital since substantially all sales in
our restaurants are for cash and our accounts payable are due in 15 to 45
days.
(10) Excludes proceeds from the sales of assets of $94.7 million related to the
divestiture of certain of our Applebee's restaurants, which closed on March
29, 1998.
(11) Represents the Company-obligated mandatorily redeemable preferred
securities of Avado Financing I, a subsidiary holding solely Avado Brands,
Inc. 7% convertible subordinated debentures due March 1, 2027.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In December 1997, we announced our decision to divest our franchised
Applebee's restaurants in order to focus on the continued development of our
four higher margin Core Brands, which offered significantly greater growth
potential. At the time of the decision to divest, we were the largest Applebee's
operator in the world. We operated 264 Applebee's restaurants generating
approximately $454.0 million in annual sales during the fiscal year ended
December 28, 1997. As of April 4, 1999, we had completed the divestiture of 254
of our 279 Applebee's restaurants. Subsequent to April 4, 1999, we divested our
remaining Applebee's restaurants. Gross proceeds from the divestiture of all of
our Applebee's restaurants totaled approximately $514.0 million, including
approximately $11.3 million in notes. With the divestiture of our Applebee's
restaurants complete, we are now well positioned to continue to execute our
successful multi-concept, niche-leading brand strategy. To reflect the
divestiture of our Applebee's franchised restaurants and our strategy of
becoming the leading operator of multi-concept, niche-leading casual dining
brands, we changed our corporate name from "Apple South, Inc." to "Avado Brands,
Inc." in October, 1998. As a result, our financial condition and results of
operations after the divestiture will not be directly comparable to our
historical financial results of operations. See "Capitalization" and "Pro Forma
Financial Information."
You should read the following discussion in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus to understand some significant factors that influenced our
performance during the periods indicated.
RESULTS OF OPERATIONS
The following table sets forth certain historical operations data as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
THIRTEEN-WEEK
FISCAL YEARS ENDED PERIODS ENDED
------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
DEC. 29, DEC. 28, JAN. 3, MAR. 29, APR. 4,
1996 1997 1999 1998 1999
----------- ----------- ----------- ----------- -----------
Restaurant sales:
Don Pablo's.................................................. 24.4% 24.3% 31.3% 24.5% 45.3%
Hops......................................................... -- 6.1 12.3 9.7 19.8
McCormick & Schmick's........................................ -- 8.3 11.9 8.8 17.0
Canyon Cafe.................................................. -- 2.3 5.6 5.0 7.3
Applebee's................................................... 69.4 56.2 38.9 52.0 10.6
Other........................................................ 6.2 2.8 -- -- --
----- ----- ----- ----- -----
Total restaurant sales................................... 100.0 100.0 100.0 100.0 100.0
Restaurant operating expenses.................................. 84.3 85.8 85.9 85.5 84.4
General and administrative expenses............................ 4.8 4.9 5.4 5.3 6.0
Asset revaluation and other special charges.................... 5.1 -- 0.3 -- --
----- ----- ----- ----- -----
Operating income............................................... 5.8% 9.3% 8.4% 9.2% 9.6%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
COMPARISON OF HISTORICAL RESULTS-THIRTEEN-WEEK PERIODS ENDED APRIL 4, 1999 AND
MARCH 29, 1998
RESTAURANT SALES. Consolidated restaurant sales for the thirteen weeks ended
April 4, 1999 were $164.1 million as compared to $241.7 million for the same
period of fiscal 1998, reflecting fewer units in the Applebee's brand which
comprised 11% of sales in the thirteen weeks ended April 4, 1999 as compared to
52% in the same period of fiscal 1998. Sales from Core Brands increased by 26%
to
41
<PAGE>
$146.6 million in the thirteen weeks ended April 4, 1999 as compared to $115.9
million for the same period in fiscal 1998. Increases in Core Brand sales were
primarily attributable to a full quarter's sales from 59 restaurants opened
during fiscal 1998 and a partial quarter's sales from 11 restaurants opened in
fiscal 1999. On a Core Brand only basis, same-store sales for the thirteen weeks
ended April 4, 1999 were 1% positive as compared to the same period in fiscal
1998 (same-store sales comparisons include all restaurants open for 18 months as
of the beginning of the quarter). Adjusted for the impact of the Easter holiday,
same-store sales comparisons were positive for the thirteen weeks ended April 4,
for three of the four Core Brands, which represent approximately 92% of Core
Brand sales in thirteen weeks ended April 4, 1999.
RESTAURANT OPERATING EXPENSES. Consolidated restaurant operating expenses
decreased to 84.4% of sales in the thirteen weeks ended April 4, 1999 as
compared to 85.5% for the comparable period in fiscal 1998. The decrease was
primarily a result of a decrease in payroll and benefits expense at Applebee's
during the thirteen weeks ended April 4, 1999. This decrease was partially
offset by an increase in depreciation and amortization expense due primarily to
a decrease in the impact of Applebee's fixed assets which were not depreciated
due to their "held for sale" status.
Our Core Brand restaurant operating expenses for the thirteen weeks ended
April 4, 1999 decreased by 0.5% to 84.5% as compared to the same period of
fiscal 1998. The resulting increase in Core Brand income from restaurant
operations was primarily attributable to:
(i) a 0.5% decrease in other operating expenses resulting from lower manager
training costs associated with Don Pablo's reduced fiscal 1999
development schedule and lower preopening costs at McCormick & Schmick's
and Canyon Cafe as a result of no openings in the thirteen weeks ended
April 4, 1999 as compared to two openings for each brand in the thirteen
weeks ended March 29, 1998; and
(ii) a 0.2% decrease in food and beverage expenses generated primarily by
cost reductions at Hops associated with centralized distribution and
purchasing.
These expense decreases were partially offset by a 0.5% increase in payroll and
benefit expenses related primarily to initiatives to increase guest
satisfaction, which included increased management staffing at Hops and Don
Pablo's.
GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated general and administrative
expenses increased to 6.0% of sales in the first quarter of fiscal 1999 as
compared to 5.3% for the comparable period in fiscal 1998. The increase was
primarily attributable to an increase in the percentage of total restaurant
sales generated by Core Brands, which have higher expenses due primarily to
lower leverage on the fixed costs required to support these smaller,
higher-growth concepts. These increases were partially offset by initiatives
begun in the fourth quarter of fiscal 1998 to reorganize management and reduce
overhead costs as well as leverage gained from increased sales in Core Brand
restaurants. Core Brand general and administrative expenses for thirteen weeks
ended April 4, 1999 as compared to the thirteen weeks ended March 29, 1998,
decreased by 1.3% to 6.4%.
INTEREST EXPENSE. Our interest expense was $4.9 million in the thirteen
weeks ended April 4, 1999 as compared to $7.1 million for the thirteen weeks
ended March 29, 1998. The decrease was primarily attributable to lower average
borrowings under revolving credit agreements which were somewhat offset by
higher average borrowing rates.
LOSS FROM INVESTMENTS CARRIED AT EQUITY. Our loss from investments carried
at equity for thirteen weeks ended April 4, 1999 primarily reflects income from
the Company's 20% equity interest in Belgo Group PLC which was more than offset
by preopening expenses associated with the opening of a Belgo restaurant in New
York under the Company's joint venture agreement with Belgo Americas, LLC.
42
<PAGE>
INCOME TAXES. Our income tax expense as a percent of earnings before income
taxes was 34.6% in thirteen weeks ended April 4, 1999 as compared to 37.2% in
the thirteen weeks ended March 29, 1998. Income tax expense reflects, for each
period, the blend of income taxes on operating income provided for at 34.0% and
taxes on the gain on disposal of assets held for sale provided for at 38.0%.
NET EARNINGS. Net earnings for the thirteen weeks ended April 4, 1999 were
$6.0 million and included a $0.8 million after-tax gain on disposal of assets
held for sale. Net earnings for the thirteen weeks ended March 29, 1998 were
$37.1 million and included a $30.4 million after-tax gain on disposal of assets
held for sale and a $1.5 million after-tax charge related to a change in an
accounting principle which required the expensing of preopening costs as
incurred.
COMPARISON OF HISTORICAL RESULTS-FISCAL YEARS 1998, 1997 AND 1996
RESTAURANT SALES. Restaurant sales for fiscal 1998 increased by 7% to $862.7
million from $808.3 million in fiscal 1997 reflecting increased Core Brand
restaurant sales which were partially offset by declining revenues associated
with the divestitures of the Applebee's and Harrigans brands. For the Core Brand
restaurants, sales increased by 59% to $527.4 million in fiscal 1998 from $331.9
million in fiscal 1997. A full-year's sales attributable to the Core Brand
restaurants acquired in fiscal 1997, new unit growth, increased average unit
volumes in Hops and McCormick & Schmick's and a 53-week fiscal 1998 compared to
a 52-week fiscal 1997 contributed to the increase in Core Brand restaurant
sales. The number of operating weeks increased by 60% in Core Brand restaurants
due to a full-year's operations from 50 acquired restaurants and 41 restaurants
opened in fiscal 1997 and a partial-year's operations from 59 restaurants opened
in fiscal 1998, partially offset by two Canyon Cafe restaurants which we closed
in fiscal 1998. Same-store sales were approximately 6% higher at Hops, 4% higher
at Canyon Cafe, 2% higher at McCormick & Schmick's and 1% higher at Don Pablo's
as compared with fiscal 1997. On a pro forma basis (assuming the acquisitions of
Hops, McCormick & Schmick's and Canyon Cafe in fiscal 1997 were completed at the
beginning of the fiscal year), Core Brand restaurant sales increased by 44% and
operating weeks increased by 47% over fiscal 1997.
Restaurant sales for fiscal 1997 increased by 48% to $808.3 million from
$546.0 million in fiscal 1996 primarily due to increases in the number of
restaurant operating weeks through both restaurant openings and acquisitions, as
well as increases in average weekly sales over the prior year. For fiscal 1997,
operating weeks increased by 19% at Applebee's and 47% at Don Pablo's as
compared to the prior year. The increase in operating weeks was due to a
full-year's operations from 45 Applebee's and 19 Don Pablo's restaurants opened
in fiscal 1996 and a partial-year's operations from 34 Applebee's and 28 Don
Pablo's restaurants opened in fiscal 1997. In addition, fiscal 1997 sales
included ten months of operations related to McCormick & Schmick's and Hops and
six months of operations related to Canyon Cafe. The sales increases resulting
from the opening of new restaurants and acquisitions were slightly offset by the
absence of sales related to 21 Tomato Rumba's restaurants which we closed in
fiscal 1996. In addition, in fiscal 1997 we completed the sale of our ten-unit
Hardee's brand and closed one Harrigans restaurant.
RESTAURANT OPERATING EXPENSES. Our restaurant operating expenses as a
percent of sales increased to 85.9% in fiscal 1998 from 85.8% in fiscal 1997.
The resulting fiscal 1998 decrease in restaurant operating margins of 0.1% was
principally due to an increase in cost in the Applebee's brand generated by the
divestiture of the brand and an increase in Core Brand restaurant expenses due
primarily to costs associated with opening new restaurants. These increases were
partially offset by depreciation related to Applebee's which was suspended in
December 1997 when the related assets were classified as assets held for sale.
43
<PAGE>
The following discussion of restaurant operating expenses focuses on the
percentages which certain items of expense bear to total restaurant sales for
(i) our Core Brands and (ii) our brands which have been or are being
discontinued which include Applebee's, Harrigans, Tomato Rumba's and Hardee's.
Our Core Brand restaurant operating expenses for fiscal 1998 were 85.0% of
sales as compared to 84.1% in fiscal 1997 (84.9% on a pro forma basis). Don
Pablo's higher margins were offset by lower margins from smaller, developing
brands which were acquired in 1997, resulting in lower reported margins in
fiscal 1998. These lower margins were primarily attributable to:
(i) an increase in payroll and benefit expenses related to an increase in
the number of new unit openings which typically experience higher labor
costs during the first several months of operations;
(ii) an increase in food and beverage costs primarily related to an increase
in Hops sales as a percentage of total Core Brand sales compared to
Hops sales as a percentage of total Core Brand restaurant sales in the
prior year (Hops experiences higher food and beverage costs due to a
larger percentage of beef sales and a smaller percentage of alcoholic
beverage sales as compared to the other brands);
(iii) an increase in other operating expenses related primarily to an
increase in advertising in Don Pablo's and Hops; and
(iv) other operating costs also associated with an increase in the number of
new unit openings coupled with the policy of expensing preopening costs
as incurred which was adopted at the beginning of fiscal 1998.
Restaurant operating margins for all core restaurants were also negatively
impacted by seven underperforming Don Pablo's restaurants which opened in fiscal
1997. Excluding the operations of these seven restaurants, total Core Brand
income from restaurant operations was 15.4% in fiscal 1998.
Our restaurant operating expenses as a percent of sales for the Core Brand
restaurants increased to 84.1% in fiscal 1997 from 82.2% in fiscal 1996. The
corresponding decrease in restaurant operating margins during fiscal 1997 was
principally due to:
(i) the higher cost of goods and payroll expenses in the brands acquired
during fiscal 1997;
(ii) higher occupancy costs in the newly acquired brands due to restaurant
locations which are predominantly leased; and
(iii) higher payroll and training costs in Don Pablo's associated primarily
with new hourly kitchen positions.
These increases were offset somewhat by a decrease in advertising expense in Don
Pablo's and a decrease in occupancy cost generated by our tendency of owning
versus leasing restaurant locations.
Our restaurant operating expenses as a percent of sales for discontinued
brands increased to 87.2% in fiscal 1998 from 87.0% in fiscal 1997 and 84.9% in
fiscal 1996. The resulting decrease in fiscal 1998 restaurant operating margins
was principally due to increased payroll and benefits resulting from
performance-based, pay-to-stay bonus programs implemented to control management
turnover and operating costs during the Applebee's divestiture period.
The fiscal 1997 decrease in restaurant operating margins was principally due
to the escalation of payroll and benefits in anticipation of our disposition of
the Applebee's business. These increases were primarily attributable to:
(i) increased staffing at the hourly and management levels related to the
accelerated implementation of project "Exceed" (a program initiated by
the franchisor to enhance the performance of the Applebee's system); and
44
<PAGE>
(ii) an increase in management turnover and operating costs which often
escalate during the period prior to announcement of a divestiture.
GENERAL AND ADMINISTRATIVE EXPENSES. In fiscal 1998, our general and
administrative expenses as a percent of sales were 5.4% as compared with 4.9% in
fiscal 1997 and 4.8% in fiscal 1996. The fiscal 1998 increase is primarily due
to the brands acquired in fiscal 1997 which have higher expenses as a percentage
of revenue, due primarily to lower leverage on the fixed costs required to
support these smaller, higher-growth concepts. The increases in general and
administrative expenses at the new brands were offset by a continued decrease in
similar expenses for Don Pablo's as it gained leverage from its absolute size.
General and administrative expenses related to Core Brand restaurants were 6.5%
of total Core Brand restaurant sales in fiscal 1998 compared to 7.7% on a pro
forma basis for fiscal 1997.
ASSET REVALUATION AND OTHER SPECIAL CHARGES. In the fourth quarter of fiscal
1998, we initiated programs at Don Pablo's, Canyon Cafe and our corporate
headquarters to reorganize management and reduce overhead costs. We recorded a
pre-tax charge of $2.9 million which was primarily attributable to employee
termination and severance costs.
In fiscal 1996, we dissolved the Tomato Rumba's operating brand and
accelerated our efforts to sell our Hardee's restaurants. These decisions,
combined with the implementation of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of," resulted in an asset revaluation charge of
$27.7 million. During fiscal 1998 and fiscal 1997, our Hardee's restaurants and
several of our Tomato Rumba's restaurants were sold, several additional
locations were converted to other company brands, and the remaining assets were
redeployed.
INTEREST AND OTHER EXPENSES. Our interest expense increased to $25.3 million
in fiscal 1998 from $20.5 million in fiscal 1997 and $11.3 million in fiscal
1996 due to higher average borrowings. The cost of construction of new
restaurants and the acquisition of new brands in fiscal 1997 required more cash
than we generated by operations. We obtained additional cash by assuming greater
debt levels under our revolving credit facilities. We later used a portion of
the proceeds of various divestitures to reduce our obligations on our revolving
credit facilities. Our weighted average interest rate on borrowings was
approximately 8.0% in fiscal 1998 as compared to 7.9% in fiscal 1997 and 8.1% in
fiscal 1996. Expenses related to dividends on Preferred Securities reflect the
fiscal 1997 issuance of $115.0 million of Preferred Securities which were
outstanding for the full year in fiscal 1998.
Gain on disposal of assets primarily reflects the gain recognized on the
Applebee's divestiture. The unsold premises and equipment and franchise cost
related to the brand are included in "Assets Held for Sale" in the consolidated
balance sheets. Income from investments carried at equity reflects our pro rata
share of earnings from our 20% equity interest in Belgo Group PLC and our 25%
equity interest in Harrigans.
Other expenses relate primarily to amortization of goodwill. Our total
fiscal 1998 other expenses were comparable to fiscal 1997 as a result of
increases in amortization expense resulting from a full-year of goodwill
amortization from the brands we acquired in fiscal 1997, which was offset by
goodwill amortization related to Applebee's that was suspended in December 1997
when the related assets were classified as assets held for sale. Our other
expenses increased in fiscal 1997 compared to fiscal 1996 primarily due to the
amortization of goodwill and other intangible assets associated with the
acquisition of three of the four Core Brands in fiscal 1997.
INCOME TAX EXPENSE. Income tax expense as a percentage of our earnings
before income taxes was 36.7% in fiscal 1998 compared to 32.4% in fiscal 1997
and 35.9% in fiscal 1996. The increase in the effective tax rate for fiscal 1998
compared with fiscal 1997 was due primarily to an increase in taxable income
generated primarily by the gain on sale of assets and a corresponding decrease
in the
45
<PAGE>
impact of FICA tip credits. The decrease in the effective tax rate for fiscal
1997 compared with fiscal 1996 was due primarily to an increased impact of FICA
tip credits and the allocation of earnings among states associated with our
fiscal 1997 acquisitions.
NET EARNINGS. Net earnings as a percent of sales was 7.7% in fiscal 1998,
3.5% in fiscal 1997 and 2.1% in fiscal 1996. The increase from fiscal 1997 to
fiscal 1998 was primarily a result of a $72.5 million pre-tax gain on disposal
of assets. This increase was partially offset by:
(i) a $4.8 million increase in interest expense;
(ii) a $1.8 million increase in dividends on Preferred Securities; and
(iii) a $2.2 million decrease in operating income resulting from a
combination of increased Core Brand operating income and a decline in
Applebee's operating income.
The increase from fiscal 1996 to fiscal 1997 was primarily a result of the $27.7
million pre-tax asset revaluation charge recorded in fiscal 1996. The resulting
increase in fiscal 1997 was partially offset by:
(i) higher interest expense and intangible amortization related to the
fiscal 1997 acquisitions;
(ii) dividends related to the Preferred Securities; and
(iii) a decrease in operating margins associated with the Applebee's
division.
LIQUIDITY AND CAPITAL RESOURCES
Our historical and projected growth and our preference to own the real
estate on which our restaurants are situated cause us to be a net user of cash
even after a significant amount of expansion financing is internally generated
from operations. Principal sources of funds in the thirteen weeks ended April 4,
1999 consisted of proceeds from the disposal of assets in the amount of $45.6
million and cash generated from operations in the amount of $8.8 million. Our
primary uses of funds consisted of the acquisition of stock through the
settlement of an equity forward agreement of $32.4 million and capital
expenditures of $22.2 million.
In fiscal 1998, our principal financing sources consisted of proceeds from
the divestiture of Applebee's and cash generated from operations of $41.0
million. Our principal uses of funds during 1998 consisted of:
(i) capital expenditures of $142.8 million;
(ii) stock purchases of $92.0 million;
(iii) net repayment of revolving credit facilities of $114.7 million;
(iv) equity investments of $15.1 million; and
(v) the retirement of $8.5 million of the Senior Notes.
Most sales in our restaurants are for cash and our accounts payable are
generally due in 15 to 45 days. As a result, we operate with negative working
capital. Increases in accounts receivable, prepaid and other expenses,
inventory, accounts payable and accrued liabilities occurred in our Core Brand
restaurants during fiscal 1998 and thirteen weeks ended April 4, 1999 primarily
as a result of new restaurant openings. In some instances, these increases were
more than offset by decreases resulting from the divestiture of our Applebee's
restaurants. We expect further increases in current asset and liability accounts
as we continue our restaurant development program. In fiscal 1998, the increase
in other assets was principally due to:
(i) equity investments;
(ii) loans to our Chief Executive Officer and certain other executive
officers;
46
<PAGE>
(iii) certain properties retained in connection with our Applebee's
divestiture which are being leased to several buyers;
(iv) consent fees paid to bondholders in connection with stock repurchases;
and
(v) the annual increase in cash surrender value on a life insurance policy
on our Chief Executive Officer.
For the thirteen weeks ended April 4, 1999, the decrease in other assets was
primarily related to the sale of the properties discussed in (iii) above.
Our capital expenditures during the thirteen weeks ended April 4, 1999
provided for the opening of seven Don Pablo's and four Hops restaurants. In
addition, we also opened one restaurant with each of our joint venture partners,
Belgo Group PLC and PizzaExpress PLC, and closed three Core Brand restaurants.
During fiscal 1998, capital expenditures provided for the opening of 32 Don
Pablo's, 17 Hops, five McCormick & Schmick's and five Canyon Cafe restaurants in
addition to ongoing refurbishments of existing restaurants. In addition, we
completed the construction of and opened 15 Applebee's restaurants, which were
sold subsequent to April 4, 1999.
The following table presents Core Brand restaurants open as of the end of
fiscal 1997, fiscal 1998 and the thirteen weeks ended April 4, 1999, and
anticipated restaurant openings for the Core Brands for fiscal 1999 and fiscal
2000:
<TABLE>
<CAPTION>
RESTAURANTS OPEN AT ANTICIPATED
------------------------------------ OPENINGS
DECEMBER 28, JANUARY 3, APRIL 4, -----------
1997 1999 1999 1999 2000
------------ ---------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Don Pablo's....................................... 91 123 129 15 27
Hops.............................................. 30 47 51 20 24
McCormick & Schmick's............................. 18 23 22 4 5
Canyon Cafe....................................... 16 19 18 1 4
--- --- --- ---- ----
Total......................................... 155 212 220 40 60
--- --- --- ---- ----
--- --- --- ---- ----
</TABLE>
Aggregate capital requirements for the construction of new Core Brand
restaurants are expected to be approximately $180.0 million for the remainder of
fiscal 1999 and fiscal 2000, over half of which is expected to be generated
internally. Our management believes that cash flow from operations, together
with available borrowings under the New Credit Facility, will provide funding
sufficient to satisfy our expansion plans through fiscal 2000.
Our Board of Directors, from time to time and depending on market
conditions, can and has authorized the purchase of our common shares. In
connection with a purchase program, we obtained consent from the holders of the
Senior Notes to amend certain covenants contained in the Senior Notes Indenture,
bondholder consent was finalized on July 1, 1998, and the Company paid $4.2
million to the consenting bondholders. During fiscal 1998, we repurchased 7.3
million shares of our common stock, and repurchased an additional 2.5 million
shares during the thirteen weeks ended April 4, 1999.
In fiscal 1998, third parties purchased a total of 8.3 million shares of our
common stock at an average price per share of $13.36 (or a total acquisition
cost of $110.9 million) pursuant to four equity forward contracts. Upon
expiration of the contracts, we have the option to:
(i) acquire the shares at the third parties' average acquisition cost as
described above or
(ii) instruct the third parties to sell the shares in the market and settle
in cash any appreciation or depreciation in the market value of the
stock at the sale date compared to the acquisition cost described
above.
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Any such appreciation or depreciation in the value of the shares would be
reflected in equity and would not impact net earnings. One of these contracts
for 2.0 million shares was settled in December 1998, and we exercised our option
to acquire the related shares for $29.9 million. An additional contract for 2.5
million shares was settled in March 1999, and we acquired the related shares for
$32.4 million. At April 4, 1999, two equity forward contracts covering 3.8
million shares were pending settlement. The third parties' total acquisition
price for these shares of approximately $52.2 million, including approximately
$10.5 million in collateral deposits and other transaction costs of
approximately $1.7 million, is reflected as "Temporary equity, net" in the
consolidated balance sheet as of April 4, 1999. The remaining two contracts
expire in June and July of 1999, respectively. We anticipate that we will settle
the pending equity forward contracts by using borrowings under the New Credit
Facility.
EFFECT OF INFLATION
Our management believes that inflation has not had a material effect on our
earnings during the past several years. Inflationary increases in the cost of
labor, food and other operating costs could adversely affect our restaurant
operating margins. In the past, however, we generally have been able to modify
our operations, including raising prices, to offset increases in our operating
costs.
YEAR 2000
Historically, certain computer programs were written and certain computer
chips were designed using two-digit year designations. These programs and chips
may experience problems handling dates beyond fiscal 1999. Incomplete or
untimely resolution of these problems by us, by our critical suppliers, or by
governmental entities or utility providers could have a material adverse effect
on our consolidated financial position or results of operations. Work on Year
2000 related issues began in fiscal 1997 with executive awareness programs and
the engagement of outside consultants to assist in developing a consistent Year
2000 methodology, time line and project plan. An inventory and assessment of
information technology ("IT") systems as well as non-IT systems was completed
during fiscal 1998, and the solution implementation and testing phases have been
substantially completed. As we have invested primarily in licensed software
rather than developing it internally, remediation efforts and related
expenditures have not been material. An evaluation of key suppliers to determine
the status of their Year 2000 compliance programs is also in process. Currently,
our management does not anticipate any material adverse effects related to the
Year 2000. Contingency plans, however, are being developed to address all
aspects of operation level functionality and vendor management in the event
unforeseen circumstances arise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and changes in
commodity prices. Exposure to interest rate risk relates primarily to variable
rate U.S. LIBOR obligations on revolving credit agreements. Interest rate swap
agreements are utilized to manage overall borrowing costs and reduce exposure to
adverse fluctuations in interest rates. Two interest rate swap agreements are
currently in place under which we pay an average of certain foreign LIBOR-based
variable rates. These agreements also contain interest rate caps which further
limit interest rate exposures. If interest rates related to our U.S. LIBOR
obligations increased by 100 basis points over the rates in effect at April 4,
1999, interest expense, after considering the effects of interest rate swap
agreements, would increase by approximately $1.0 million for the remainder of
fiscal 1999. If an additional 100 basis point interest rate increase occurred in
our foreign LIBOR-based obligations, interest expense in fiscal 1999 would
increase by an additional $0.9 million. These amounts were determined by
considering the impact of hypothetical interest rates on our borrowing cost and
interest rate swap agreements. The analyses do not consider the effects of the
overall reduced debt levels anticipated in fiscal 1999. Further, in the
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event of a change of such magnitude, management would likely take actions to
further mitigate its interest rate exposures.
We purchase certain commodities such as beef, chicken, flour and cooking
oil. Purchases of these commodities are generally based on vendor agreements
which often contain contractual features that limit the price paid by
establishing price floors or caps. As commodity price aberrations are generally
short term in nature and have not historically had a significant impact on
operating performance, we do not use financial instruments to hedge commodity
price risk.
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BUSINESS
GENERAL
Avado Brands, Inc. (formerly Apple South, Inc.) is a leading full service,
casual dining restaurant company, which acquires, develops and operates growth
oriented niche-leading restaurant brands. As of April 4, 1999, we owned four
niche-leading restaurant brands operating 220 restaurants, which consisted of
129 Don Pablo's Mexican Kitchen restaurants, 51 Hops Restaurant Bar & Brewery
restaurants, 22 McCormick & Schmick's seafood dinner houses and 18 Canyon Cafe
restaurants (collectively, the "Core Brands"). In addition, we operated 23
Applebee's Neighborhood Grill & Bar restaurants, which were divested subsequent
to April 4, 1999. We also own a 20% equity interest in Belgo Group PLC, a
thirteen-unit United Kingdom restaurant company, a 50% equity interest in Belgo
Americas, LLC, and a 50% equity interest in San Marzano, LLC. Since acquiring
the Core Brands, we have significantly increased pro forma restaurant sales and
EBITDA, with increases of approximately 44% and 55%, respectively, for fiscal
1998 as compared to fiscal 1997 (as if we owned these brands at the beginning of
the period). For the latest twelve-month period ("LTM period") ended April 4,
1999, we generated pro forma restaurant sales and EBITDA of $558.1 million and
$70.1 million, respectively, from our Core Brands.
We operate multi-concept, niche-leading restaurant brands using a
decentralized organizational structure in order to enhance growth and
profitability. Since 1986, we have developed a strong track record of acquiring
and growing leading casual dining concepts, beginning with Applebee's, where we
became the leading Applebee's operator and franchisee with 264 restaurants and
approximately $454.0 million in annual sales, prior to the divestiture of our
Applebee's restaurants in fiscal years 1998 and 1999. More recently, we have
continued this strong growth trend, more than doubling the number of our
niche-leading Core Brand restaurants from 94 at the time of acquisition during
1995 through 1997 to 220 as of April 4, 1999. For the thirteen-weeks ended April
4, 1999, we have improved restaurant operating margins from 14.9% to 15.6% for
our Core Brands, calculated on a pro forma basis, as compared to the thirteen
weeks ended March 30, 1997. For the LTM period ended April 4, 1999, we have
improved EBITDA margins to 12.6% from 11.4% for our Core Brands, calculated on a
pro forma basis, as compared to fiscal 1997. We intend to continue to execute
this successful operating strategy which emphasizes decentralized operating
management and the benefits of centralized economies of scale in the areas of
finance, accounting, human resource services and selective purchasing
opportunities.
STRATEGY
Our strategy is to continue to acquire, develop and operate growth oriented
niche-leading restaurant brands using a decentralized organizational structure
to enhance growth and profitability. Our key strategies are to:
- CONTINUE TO DEVELOP AND GROW CORE BRANDS--Since the mid 1980's, we have
grown to become a leading multi-concept operator of niche-leading
restaurant brands. Our first success was with Applebee's, where we grew
from one restaurant in 1986 to become the largest operator in the
Applebee's system, with 264 restaurants and approximately $454.0 million
in annual sales in fiscal 1997. Since the acquisition of our four Core
Brands, we have grown the total number of Core Brand restaurants from 94
to 220 and total Core Brand restaurant sales to approximately $558.1
million, creating niche-leading market positions for each of our Core
Brands. For fiscal 1999, we plan to open approximately 40 new restaurants,
consisting of 15 Don Pablo's, 20 Hops, four McCormick & Schmick's and, if
an appropriate site is located, one Canyon Cafe.
- BENEFIT FROM DECENTRALIZED BRAND MANAGEMENT--Each brand functions on a
decentralized basis with its own executive management, real estate
development, purchasing, recruiting, training, marketing and restaurant
operations. This strategy provides our Core Brands a competitive
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advantage by tailoring the management of each brand to its respective
market, while allowing each brand to share best practices and leverage
centralized corporate functions such as finance, accounting, human
resource services and selective purchasing opportunities. In addition,
this decentralized management structure encourages entrepreneurial
decision making on the part of brand level management by placing decisions
closer to the customer. Each brand's performance is also monitored by
strict financial targets including returns on investment and restaurant
level growth and profitability.
- CONTINUE TO IMPROVE MARGINS AND PROFITABILITY--In connection with our
Applebee's divestitures, we undertook a strategic review of our corporate
operations, resulting in the identification of significant opportunities
for cost savings. We expect these initiatives to reduce corporate level
expenses by approximately $2.2 million annually. In addition, each of the
Core Brands focuses on improving restaurant level operating margins by
benefiting from the Company's economies of scale in areas such as finance,
accounting, human resource services and selective purchasing
opportunities, as well as leveraging the best practices of each of the
four Core Brands. For the thirteen weeks ended April 4, 1999, we have
improved restaurant operating margins from 14.9% to 15.6% for our Core
Brands, calculated on a pro forma basis, as compared to the thirteen weeks
ended March 30, 1997. For the LTM period ended April 4, 1999, we have
improved EBITDA margins to 12.6% from 11.4% for our Core Brands,
calculated on a pro forma basis, as compared to fiscal 1997.
- CONSISTENTLY PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER
SERVICE--We believe that food quality, attentive service and dining
atmosphere all contribute to customer satisfaction. As such, each of our
Core Brands continually evaluates new initiatives that will improve food
presentation and taste and customer service. Additionally, as we expand
the market presence of our brands, we strive to create a consistent brand
image for each concept that our customers will find appealing. To achieve
and maintain a consistently rewarding dining experience for our customers,
each of our brands has implemented stringent operational controls and
extensive employee training.
- PURSUE SELECTIVE OPPORTUNITIES TO GROW INTERNATIONALLY--We are selectively
seeking opportunities to export one or more of our brands to other
countries through joint ventures or strategic alliances. Additionally, we
may selectively make equity investments in strategic international
partners. For example, in fiscal 1998, we made an equity investment in
Belgo Group PLC, which resulted in two joint ventures, Belgo Americas, LLC
and Belgo Ventures Limited. A leading restaurant guide has rated two of
the restaurants in the Belgo portfolio to be among the top three in
London. We also established San Marzano, LLC, a joint venture with
PizzaExpress PLC, to develop upscale pizza restaurants in the United
States. PizzaExpress PLC owns and operates more than 200 upper-end pizza
restaurants in the United Kingdom and other countries in Europe and Asia.
These equity ownership positions and joint ventures provide us with
several potential growth vehicles, which are designed to allow for
development outside our current geographic and industry niches.
- OPPORTUNISTICALLY PURSUE STRATEGIC ACQUISITIONS--While we are not
currently contemplating any significant additional acquisitions or
investments, we will continue to evaluate opportunities to expand our
operations by making strategic acquisitions of innovative concepts which
can be developed into niche-leading brands and established concepts with
potential for growth. Currently, however, our primary focus is to continue
developing our four niche-leading Core Brand concepts and our Belgo and
San Marzano joint ventures.
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RESTAURANT CONCEPTS
DON PABLO'S
CONCEPT. Known as "The Real Enchilada," Don Pablo's is the leading casual
dining Mexican restaurant brand in the United States and generates among the
highest operating margins in the casual dining industry. The restaurants feature
traditional Mexican dishes served in a distinctive, festive dining atmosphere
reminiscent of a Mexican village plaza. Each restaurant is staffed with an
experienced management team that is visible in the dining area and interacts
with customers and staff to ensure attentive customer service and consistent
food quality. Don Pablo's relatively low priced menu items are prepared fresh
on-site using high-quality ingredients. The diverse menu, generous portions and
attractive price/value relationship appeal to a broad customer base. The Don
Pablo's concept was initiated in 1985, with the opening of the first Don Pablo's
restaurant in Lubbock, Texas. We acquired this brand through a merger with DF&R
Restaurants, Inc. in November 1995. At acquisition, Don Pablo's included 44
then-existing restaurants, and we have since opened 86 additional restaurants
and closed one restaurant as of April 4, 1999. We believe the build-out
potential for this concept is approximately 400 restaurants. For the LTM period
ended April 4, 1999, this brand generated sales of approximately $285.5 million,
representing 51% of sales of our Core Brands. Don Pablo's is based in Bedford,
Texas.
MENU. The menu offers a wide variety of entrees, including enchiladas and
tacos served with various sauces, homemade salsa and mesquite-grilled items such
as fajitas, carne asada and chicken. The menu also includes tortilla soup, a
selection of salads, Mexican-style appetizers such as quesadillas and unique
desserts. During fiscal 1998, the cost of a typical meal, including beverages,
was $8.00 to $9.50 for lunch and $9.50 to $11.50 for dinner. In addition to its
regular menu, Don Pablo's offers 15 lunch specials priced from $4.49 to $7.19
each and a lower-priced children's menu. Full bar service is also provided.
RESTAURANT LAYOUT. Distinctive Mexican architecture and interior decor
provide a casual, fun dining atmosphere. A typical restaurant has an open,
spacious feel, created with the use of sky-lights and a Mexican village plaza
design, which is enhanced by an indoor fountain and the use of stucco, brick and
tile, plants, signs and art work. Homemade tortillas cooked in the dining area
underscore the commitment to fresh, authentic Mexican food. Both one and
two-story building designs are utilized. The two-story design features a balcony
which provides seating for bar patrons and dining customers. The one-story
design incorporates a smaller bar, also available to dining customers, adjacent
to the dining area. Both designs use high ceiling architecture and have similar
dining capacities. Restaurants range in size from 6,000 square feet to 9,900
square feet, with the average restaurant containing approximately 8,000 square
feet. The restaurants generally have dining room seating for approximately 230
customers and bar seating for approximately 70 additional customers.
UNIT ECONOMICS. In fiscal 1998, management estimates that the average cost
of developing and opening a Don Pablo's restaurant was approximately $1.7
million, excluding land costs and preopening expenses. The cost of land for
these restaurants ranged from approximately $600,000 to $1.3 million. Preopening
expenses, which 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, averaged $185,000. For the LTM period ended April
4, 1999, this brand generated revenues of $285.5 million, with average sales
volume per unit of approximately $2.4 million. Alcoholic beverage sales
accounted for approximately 19% of sales in fiscal 1998. Income from restaurant
operations for the thirteen weeks ended April 4, 1999 was 17.4% of sales.
FIELD MANAGEMENT AND EMPLOYEES. Management is shared by 17 directors and
assistant directors who report to a Regional Vice President of Operations. A
typical restaurant has a management staff of
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one general manager, one kitchen manager and three assistant managers, and
employs 85 to 95 full- and part-time employees. General managers and kitchen
managers are eligible to receive bonuses equal to a percentage of their
restaurant's sales, subject to operating at certain sales levels and within
budgeted costs.
ADVERTISING AND MARKETING. Don Pablo's advertising and marketing strategy
combines the use of television and radio advertising in core markets with a
focus on local efforts and community involvement at all locations. For the LTM
period ended April 4, 1999, we spent $10.9 million for Don Pablo's related
advertising and marketing, representing 3.8% of Don Pablo's sales for the same
period. Current strategies are expected to continue in fiscal 1999 with a focus
on efforts, such as Manager's Specials and other promotions, designed to
increase the number of customers and check average.
HOPS RESTAURANT BAR & BREWERY
CONCEPT. Hops is the nation's largest restaurant brand with an on-premise
brewery. Unlike many traditional brewpub concepts, Hops emphasizes a high
quality restaurant menu, which is complemented by fresh microbrewed beer. The
Hops concept was initiated in 1989, with the opening of the first Hops
restaurant in Clearwater, Florida. We acquired this brand for $58.4 million in
March 1997, including 21 then-existing restaurants, and have since opened 30
additional restaurants. We believe the build-out potential for this concept is
approximately 400 restaurants. For the LTM period ended April 4, 1999, this
brand generated sales of $115.5 million, representing 21% of the sales of our
Core Brands. Hops is based in Tampa, Florida.
MENU. Hops restaurants feature an American-style menu that includes top
choice steaks and prime rib, baby-back ribs, fresh fish, chicken and pasta
dishes, deluxe burgers and sandwiches, hand-tossed salads with homemade
dressings, appetizers, soups and desserts-all of which are freshly prepared in a
display kitchen. The menu offers separate selections for children. The cost of a
typical meal, including beverages, ranges from $6.00 to $9.00 per person for
lunch and $13.00 to $15.00 per person for dinner. Each restaurant offers four
distinctive lager-style beers and ales, plus a variety of blends of these beers,
that are brewed on-premises. Except for one non-alcoholic beer, the brewed beers
are typically the only beers served. Full bar service is also available at each
restaurant.
RESTAURANT LAYOUT. Restaurants range in size from approximately 5,000 to
7,300 square feet. The on-premise brewing equipment is an integral aspect of the
design and occupies from 450 to 750 square feet. An observation microbrewery at
each restaurant allows customers to view the entire brewing process. The
restaurant dining and bar areas seat from 160 to 240 customers.
UNIT ECONOMICS. In fiscal 1998, management estimates that the cost of
developing and opening a restaurant averaged approximately $1.5 million,
excluding land and preopening costs but including approximately $160,000 in
microbrewery equipment. Land costs ranged from $675,000 to $1.0 million with
preopening costs averaging $170,000. For the LTM period ended April 4, 1999,
this brand generated revenues of $115.5 million, with average sales volume per
unit of approximately $2.6 million. Alcoholic beverages accounted for
approximately 16% of sales in fiscal 1998. Income from restaurant operations for
the thirteen weeks ended April 4, 1999 was 15.1% of sales.
FIELD MANAGEMENT AND EMPLOYEES. Management is shared by seven operating
partners and three area managers who report to both the Vice President of
Operations and the Chief Executive Officer. Operating partners have equity
investments in the restaurants they manage, which increases their entreprenurial
incentives. Each operating partner and area manager is responsible for no more
than five restaurants, thus facilitating a focus on quality of operations and
unit profitability. A typical restaurant has a management staff of one general
manager, one kitchen manager and two assistant managers, and employs 55 to 75
full- and part-time employees. General managers and kitchen managers are
eligible to receive bonuses equal to a percentage of their restaurant's
controllable income, subject to operating above a minimum operating margin.
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ADVERTISING AND MARKETING. Hops' advertising and marketing strategy has
historically focused primarily on grassroots efforts utilizing special
promotions in local markets and special event equipment designed to increase
customer awareness and name recognition. For the LTM period ended April 4, 1999,
we spent $5.1 million for Hops related advertising and marketing, representing
4.4% of Hops sales for the same period. In fiscal 1999, we expect to use
television advertising in core markets and the continued use of radio and print
media as well as grassroots efforts.
MCCORMICK & SCHMICK'S
CONCEPT. McCormick & Schmick's is the leading upper-end casual dining
seafood group in the United States with 22 traditional, classic restaurants
specializing in fresh seafood. It is recognized for its traditional-style full
service bar, regional taste and superior service. The restaurants are designed
to capture the distinctive attributes of each local market, and vary in design
from a traditional, New England-style fish house to a more contemporary dinner
house with spectacular waterfront views. Many of the restaurants are located in
historical buildings. The same philosophy of distinctiveness and quality applies
equally to the bar operation and the dining rooms. Restaurants are operated
under the names "MCCORMICK & SCHMICK'S SEAFOOD RESTAURANT," "MCCORMICK'S FISH
HOUSE & BAR," "MCCORMICK & SCHMICK'S FISH HOUSE," "MCCORMICK & SCHMICK'S
HARBORSIDE AND PILSNER ROOM," "JAKE'S FAMOUS CRAWFISH," "JAKE'S GRILL," "M&S
GRILL" AND "MCCORMICK & KULETO'S SEAFOOD RESTAURANT." The McCormick & Schmick's
concept was initiated in 1972, with the acquisition of its first restaurant in
Portland, Oregon. We acquired this brand for $68.3 million in March 1997,
including 16 then-existing restaurants, and have since opened seven additional
restaurants and closed one restaurant as of April 4, 1999. We believe the
build-out potential for this concept is approximately 125 restaurants. For the
LTM period ended April 4, 1999, this brand generated sales of approximately
$109.0 million, representing 19% of the sales of our Core Brands. McCormick &
Schmick's is based in Portland, Oregon.
MENU. McCormick & Schmick's features a daily menu, offering the freshest
seafood available based on price and product availability. With 25 to 30
varieties of fresh fish and seafood and over 85 individual selections, the menu
gives range in culinary appeal as well as price selection. The cost of a typical
meal, including beverages, is approximately $10.00 to $20.00 for lunch and
$25.00 to $35.00 for dinner. Full bar service is also provided.
RESTAURANT LAYOUT. Restaurants range in size from 6,000 to 14,000 square
feet with an average restaurant containing approximately 8,500 square feet. The
restaurants generally seat 200 to 300 customers in the dining room with some
locations having 40 to 60 additional seats available in the patio area.
UNIT ECONOMICS. In fiscal 1998, management estimates that the average cost
of developing a restaurant was approximately $2.5 million, including leasehold
improvements, fixtures and equipment. All restaurant real estate is leased.
Additionally, preopening expenses average $300,000. For the LTM period ended
April 4, 1999, this brand generated revenues of $109.0 million with average
sales volume per unit of approximately $5.0 million. Alcoholic beverages
accounted for approximately 27% of sales in fiscal 1998. Income from restaurant
operations for the thirteen weeks ended April 4, 1999 was 14.3% of sales.
FIELD MANAGEMENT AND EMPLOYEES. Management is shared by eight multi-unit
senior managers, three of whom have regional responsibility, and two Vice
Presidents of Operations. Staffing levels vary depending on restaurant size. A
typical restaurant has a general manager, an executive chef, a sous chef and
four assistant managers and will employ 80 to 90 full-and part-time employees.
The McCormick & Schmick's operating philosophy encourages and trains the
management of individual restaurant units to be creative by promoting a large
degree of self-sufficiency.
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ADVERTISING AND MARKETING. Advertising and marketing efforts are focused on
a grassroots philosophy. Each region utilizes the services of a public relations
firm and makes full use of media events targeting the local market. Advertising
strategies focus on existing and local customers, but also emphasize out-of-town
travelers as a key customer component. Marketing begins in each restaurant with
daily printed menus and other local efforts. A primary focus is to expand name
and location awareness through the use of promotional discount certificates and
periodic contact with organizations in the travel/convention industry such as
hotels, travel agents and convention centers. For the LTM period ended April 4,
1999, we spent approximately $4.0 million for McCormick & Schmick's related
advertising and marketing, representing 3.7% of McCormick & Schmick's sales for
the same period.
CANYON CAFE
CONCEPT. Canyon Cafe is the leader in the emerging concept of Southwestern
cuisine, with 18 locations that bring the flavors of the Southwest to life with
a convergence of great creative food, a visually entertaining environment and a
soothing yet invigorating ambiance. This brand combines three distinct cultures,
Native American, Spanish and Mexican, to create a unique upscale casual dining
experience. Restaurants are operated under the names "CANYON CAFE," "DESERT
FIRE" AND "SAM'S CAFE." The Canyon Cafe concept was initiated in 1989, with the
opening of the first restaurant in Dallas, Texas. We acquired this brand for
$46.3 million in July 1997, including 13 then-existing restaurants, and have
since opened eight additional restaurants and closed three restaurants as of
April 4, 1999. Canyon Cafe is the only brand in this niche that has a broad
geographic presence, and we believe the build-out potential for this concept is
approximately 125 restaurants. For the LTM period ended April 4, 1999, this
brand generated sales of approximately $48.1 million, representing 9% of the
sales of our Core Brands. Canyon Cafe is based in Dallas, Texas.
MENU. The menu offers a wide variety of unique items such as "Desert Fire
Pasta," "Chile-Rubbed Grilled Tuna" and "Chipotle Chicken." A variety of more
traditional items including chicken tacos and grilled chicken salad are also
offered. In addition to the set items that appear on each restaurant's menu, the
executive chefs at each location offer their original recipes. During 1998, the
cost of a typical meal, including beverages, was $9.00 to $14.00 for lunch and
$14.00 to $20.00 for dinner. Full bar service is also provided.
RESTAURANT LAYOUT. The restaurants are based on a Santa Fe design which
reflects a strong southwestern influence through the use of heavy ponderosa pine
timbers. The walls, floors and furniture reflect surfaces and colors native to
the American Southwest. Restaurants are located in malls, in-line power centers
and as freestanding buildings. In-line and mall sites average 7,000 square feet
with some locations featuring an additional 800-1,000 square foot patio. The
freestanding buildings average 6,700 square feet with a 1,050 square foot patio.
All locations typically have a minimum of 190 interior dining seats, an average
of 26 bar seats and 45-50 seats in the patio area.
UNIT ECONOMICS. In fiscal 1998, management estimates that the cost of
developing and opening a restaurant averaged $1.4 million for in-line/mall
locations and $1.6 million for freestanding locations, excluding land costs and
preopening expenses. In 1998, one land site was purchased at a cost of $947,000.
Preopening expenses averaged $151,000. For the LTM period ended April 4, 1999,
this brand generated revenues of $48.1 million with average sales volume per
unit of approximately $2.6 million. Alcoholic beverages accounted for
approximately 18% of sales in fiscal 1998. Income from restaurant operations for
the thirteen weeks ended April 4, 1999 was 11.9% of sales.
FIELD MANAGEMENT AND EMPLOYEES. Management is structured with a general
manager, two to three assistant managers, an executive chef and a sous chef.
Typical restaurants employ 50 to 70 full- and part-time employees. Regional
Directors are responsible for quality of operations and sales and profitability
of four to five restaurants and report to a Vice President of Operations. All
managers are eligible to receive bonuses based on individual restaurant
operating performance.
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ADVERTISING AND MARKETING. Advertising and marketing strategy relies on
grassroots efforts focused on developing a strong brand identity and strong
core-customer recommendations. Advertising and marketing efforts include local
radio, media appearances and event involvement as well as direct mail and other
print media. Additional local efforts, such as a system-wide "neighborhood
networking" program, are utilized to develop a direct relationship with targeted
customers. For the LTM period ended April 4, 1999, we spent approximately $2.0
million for Canyon Cafe related advertising and marketing, representing 4.2% of
Canyon Cafe's sales for the same period.
INVESTMENT IN OTHER CONCEPTS
We have entered into relationships with Belgo Group PLC ("Belgo") and
PizzaExpress PLC ("PizzaExpress") as the initial step in developing strategic
international alliances. We believe that working with our joint venture partners
will enable us to gain expertise in international operations and potentially
provide additional growth concepts for the U.S. market.
BELGO. In January 1998, we established a strategic alliance with Belgo, a
public restaurant company headquartered in London, England. We have acquired 20%
of Belgo's outstanding stock for $14.9 million. Belgo owns and operates thirteen
restaurants, consisting of six Belgian-themed restaurants and seven up-scale
restaurants. The Belgian-themed restaurants feature Belgian-style mussels and
french fries and an extensive selection of Belgian beer, along with items such
as chicken, steak, lobster and other seafood. The seven up-scale restaurants
include "THE IVY" and "LE CAPRICE," which have been rated among the top three
restaurants in London in 1998 according to a leading restaurant guide. In
addition, we have formed two joint ventures with Belgo, (i) to develop Belgian-
themed restaurants in North and South America and (ii) to explore developing one
of our existing concepts in Europe. Under these joint ventures, we opened our
first Belgian-themed restaurant in New York in January, 1999. We and Belgo own
equal interests in the joint ventures. The total capital invested in the initial
restaurant was approximately $3.0 million.
SAN MARZANO. In February 1998, we entered into a joint venture with
PizzaExpress to develop PizzaExpress's upscale pizza restaurants in the United
States. PizzaExpress owns and operates more than 200 upper-end pizza restaurants
in the United Kingdom and other countries in Europe and Asia. In March 1999, the
joint venture opened its first U.S. restaurant in Philadelphia under the name
San Marzano. San Marzano offers upper-end Neopolitan-style pizza at casual
dining prices. The restaurant specializes in individual-size pizzas with
traditional and gourmet toppings and also offers baked pasta dishes, appetizers,
salads and desserts along with full bar service. The total capital invested in
the initial restaurant was approximately $2.5 million.
HARRIGANS. As part of the acquisition of Don Pablo's in fiscal 1995, we
acquired the Harrigans brand, currently operating 11 restaurants. In April 1998,
we sold our Harrigans restaurants for $7.0 million including a $4.0 million
note, and retained a 25% equity interest in the ongoing business.
OTHER RESTAURANT OPERATIONAL FUNCTIONS
QUALITY CONTROL. All levels of management are responsible for ensuring that
our restaurants are operated in accordance with strict quality standards. Our
management structure allows restaurant general managers to spend a significant
portion of their time in the dining area of the restaurant supervising staff and
providing service to customers. We monitor compliance with quality standards by
periodic on-site visits and formal periodic inspections by multi-unit managers.
TRAINING. Each brand requires employees to participate in formal training
programs. Management training programs generally last ten to 16 weeks and
encompass three general areas, including (i) all service positions, (ii)
management accounting, personnel management and dining room and bar operations
and (iii) kitchen management. Management positions at new restaurants are
typically staffed
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with personnel who have had previous experience in a management position at
another of the brands' restaurants. In addition, a highly experienced opening
team assists in opening each restaurant. Prior to opening, all personnel undergo
intensive training conducted by the restaurant opening team.
PURCHASING AND DISTRIBUTION. We strive to obtain consistent quality items
at competitive prices from reliable sources for all of our brands. We
continually research and test various products in an effort to maintain the
highest quality products and to be responsive to changing customer tastes.
Purchasing is handled by each brand, with ingredients and supplies common to all
brands coordinated by corporate-level personnel in order to maximize economies
of scale. With the exception of McCormick & Schmick's, our Core Brands use one
primary distributor for all food products except for produce, which is typically
purchased locally. At McCormick & Schmick's, purchasing is under the direction
of each restaurant's executive chef in order to obtain the freshest, highest
quality seafood available with a focus on local tastes. This also enables local
management to maintain margins through product selection and daily pricing. All
food and beverage products are available on short notice from alternative
qualified suppliers. The Company has not experienced any significant delays in
receiving food and beverage inventories, restaurant supplies or equipment.
RESTAURANT REPORTING AND RELATED MANAGEMENT INFORMATION SYSTEMS. We
maintain financial controls through a centralized accounting system at each
brand's headquarters. Each brand reports profits and loss information to our
corporate headquarters for financial consolidation and reporting. Point-of-sale
reporting systems are used in each restaurant. Restaurant management submits to
brand and/or corporate headquarters various daily and weekly reports of cash,
deposits, sales, labor and key business indicator metrics. Physical inventories
of all food and beverage items are taken at least monthly, with more frequent
inventories taken of key items. Both brand and corporate personnel closely
monitor operating results compared to prior periods, budgets and performance
goals.
We believe that our management information systems provide us with the
ability to efficiently manage our restaurants and to ensure consistent
application of operating controls. Our point-of-sale systems report data on a
daily basis to our brand and corporate headquarters. Our corporate headquarters
houses mid-range, PC and server-based application and decision support systems.
These systems facilitate financial and management control of restaurant
operations.
We have a number of projects underway, principally based on existing and
available software and software tools, that are designed to further enhance our
capabilities and to upgrade our information systems. We are implementing brand
data marts and a corporate data warehouse as well as an intranet to facilitate
information access.
INDUSTRY OVERVIEW
The restaurant industry consists of the quick service segment and the full
service segment, as well as other segments including, but not limited to, bars
and taverns, commercial cafeterias, military services and catering. The full
service segment can be further categorized into family dining and casual dining.
Family dining restaurants focus on quality, convenience, service, atmosphere and
value. Casual dining provides more elaborate decor, blends in some level of
perceived "entertainment" or "fun" and offers alcohol.
According to the National Restaurant Association ("NRA"), 1998 restaurant
industry sales reached $338.4 billion, representing a 4.9% nominal growth rate
over 1997, or 2.6% in inflation adjusted terms. Quick service restaurants
accounted for 31.2% of total restaurant industry sales, and full service
restaurants accounted for 33.1% of total restaurant industry sales in 1998.
Based on the Technomic, Inc. 1999 Top 100 Report, casual dining restaurant
chains which are included in the largest 100 restaurant companies (the "Top
100"), generated sales of $19.1 billion in 1998, representing a 12.8% increase
over 1997. The casual dining segment of the Top 100 has been the fastest growing
segment of the Top 100 full service restaurant category for the past 20 years
growing at a CAGR of
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14.9% for the last five years. The number and variety of casual full service
restaurants has increased to include a far greater variety of foods. In 1998,
the Mexican food category of the Top 100 accounted for $1.4 billion in sales,
representing a 27.6% increase over 1997. The Seafood category of the Top 100
accounted for $2.4 billion in sales in 1998, representing a 12.5% increase over
1997. Companies in the Top 100 offering varied menus and full service, which
include Hops and Canyon Cafe, generated sales of $9.0 billion in 1998,
representing an 11.9% increase over 1997.
The NRA estimates that total industry sales should reach $354 billion in
1999, representing 4.6% nominal growth and 1.8% real growth over 1998.
1999 is expected to mark the eighth consecutive year of real sales growth
for restaurants. The NRA projects that full service restaurants will achieve
higher growth in 1999 than their quick service counterparts, posting nominal and
real sales growth of 4.9% and 2.1%, respectively. Quick service sales are
expected to grow 4.6% and 1.8% in nominal and real terms, respectively.
COMPETITION
The restaurant industry in the U.S. is highly competitive with respect to
price, service, location, and food type and quality. This competition is
expected to intensify. There are a few, well-established competitors with
greater financial and other resources than us. Some of our competitors have been
in existence for a substantially longer period than us and may be better
established in the markets where our restaurants are or may be located. Don
Pablo's competes with Chi Chi's, On The Border Mexican Cafe, Rio Bravo Cantina,
Chevys Fresh Mex, Taco Cabana, many locally owned Mexican restaurants, and other
casual dining restaurants with different types of menus, but with similar meal
price points. Hops faces competition from other concepts with on-premises
breweries, such as Rock Bottom Restaurant & Brewery, John Harvard's Brew House
and Gordon Biersch Brewery Restaurants. However, management believes, based on
exit interviews with patrons, that its chief competitors are concepts such as
Outback Steakhouse and Houston's that also offer high quality, freshly prepared
American-style food. McCormick & Schmick's competes mostly with local
non-franchised, higher-end seafood restaurants. Canyon Cafe's principal
competition comes from local southwestern-style restaurants and select
non-southwestern restaurants, which serve distinctive ethnic or regional food
with price points similar to Canyon Cafe.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the availability and cost of suitable locations. The type, number
and location of competing restaurants also impacts restaurant sales. We also
experience competition in attracting and retaining qualified operating
management. 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 our restaurants in particular.
GOVERNMENTAL REGULATION
ALCOHOLIC BEVERAGE REGULATION. Each of our restaurants is subject to
licensing and regulation by a number of governmental authorities, which include
alcoholic beverage control and health, safety and fire agencies in the state,
county and municipality in which the restaurant is located. Difficulties or
failures in obtaining the required licenses or approvals could delay or prevent
the opening of a new restaurant in a particular area. Alcoholic beverage control
regulations require 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 counties 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 a restaurant's operations, including
minimum age of patrons
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and employees, hours of operation, advertising, wholesale purchasing, inventory
control and handling, storage and dispensing of alcoholic beverages.
We 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. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance.
BREWPUB REGULATION. Our Hops restaurants are subject to additional
regulations as a result of the microbrewery in each restaurant. Historically,
the alcoholic beverage laws of most states prohibited the manufacture and retail
sale of beer to consumers by the same company. Now, all states allow limited
brewing and retail sale of microbrewed beer by restaurants and bars classified
as "brewpubs" under state law. Our Hops restaurants are required to comply with
these state brewpub laws in order to obtain necessary state licenses and
permits. Additionally, many states impose restrictions on the operations of
brewpubs, such as a prohibition on the bottling of beer, a prohibition on the
sale of beer for consumption off of restaurant premises and a limitation on the
volume of beer that may be brewed at any location, as well as certain geographic
limitations. In addition, certain states limit the number of brewpubs that may
be owned by one company. Our ability to own and operate Hops restaurants in any
state is and will continue to be dependent upon our ability to operate within
the regulatory scheme of the state.
OTHER REGULATION. Our restaurants are also subject to Federal and state
laws governing such matters as minimum wage, working conditions, and overtime
and tip credits. We experienced a slight increase in hourly labor costs as a
result of the 1996 and 1997 increases in the federal minimum wage rate.
TRADEMARKS
We own the following registered trademarks: Don
Pablo's-Registered Trademark-, Mama's Skinny-Registered Trademark-, The Real
Enchilada-Registered Trademark-, Hops! -Registered Trademark-, Hops Grill & Bar
Microbrewery-Registered Trademark-, Wait'll You See What's Brewing on the
Grill-Registered Trademark-, Hop E. Hare-Registered Trademark-, Hammerhead
Red-Registered Trademark-, Clearwater Light-Registered Trademark-, Lightning
Bold Gold-Registered Trademark-, Golden Hammer, -Registered Trademark- McCormick
& Schmick's-Registered Trademark-, McCormick & Schmick's
Harborside-Registered Trademark-, Jake's-Registered Trademark-,
McCormick's-Registered Trademark-, Canyon Cafe-Registered Trademark- and Prairie
Fire-Registered Trademark-. In addition, we own a number of trademarks that are
in the process of being registered. We believe our trademarks have significant
value and play an important role in our marketing efforts.
EMPLOYEES
On April 4, 1999, we employed approximately 19,200 people in 29 states plus
the District of Columbia excluding employees related to the operation of
Applebee's restaurants. Of those employees, approximately 270 held management or
administrative positions, 1,500 were involved in restaurant management, and the
remainder were engaged in the operation of restaurants. We believe that our
continued success will depend to a large degree on our ability to attract and
retain good management employees. While we will have to continually address the
high level of employee attrition normally expected in the food-service industry,
we have taken steps to attract and keep qualified management through a variety
of employee benefit plans, including an Employee Stock Ownership Plan, a 401(k)
Plan, and an incentive stock option plan for our key employees. None of our
employees are covered by a collective bargaining agreement. We consider our
employee relations to be good.
PROPERTIES
We own a renovated historic building in Madison, Georgia, containing
approximately 19,000 square feet of office space and an adjoining building
containing approximately 41,000 square feet of office space. These office
buildings serve as our corporate headquarters. In 1997, we completed
construction
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of a new 44,100 square foot facility in Bedford, Texas, to house the Don Pablo's
headquarters. The headquarters for Hops is located in approximately 15,000
square feet of leased space in Tampa, Florida. The headquarters for McCormick &
Schmick's is located in approximately 12,000 square feet of leased space in
Portland, Oregon. The headquarters for Canyon Cafe is located in approximately
7,500 square feet of leased space in Dallas, Texas. We believe that our
corporate and brand headquarters are sufficient for our present needs.
In selecting restaurant sites, the Company attempts to acquire prime
locations in market areas to maximize both short and long-term revenues. Site
selection is made by each brand's development department, subject to executive
officer approval. Within the target market areas, the brands evaluate major
retail and office concentrations and major traffic arteries to determine focal
points. Site specific factors include visibility, ease of ingress and egress,
proximity to direct competition, accessibility to utilities, local zoning
regulations, laws regulating the sale of alcoholic beverages, and various other
factors.
As of April 4, 1999, the Company operated 220 restaurants. The following
table presents leased and owned restaurants by brand:
<TABLE>
<CAPTION>
PROPERTY AND PROPERTY LEASED, PROPERTY AND
BRAND BUILDING OWNED BUILDING OWNED BUILDING LEASED TOTAL
- ------------------------------------------------------- ------------------- ------------------- ------------------- -----
<S> <C> <C> <C> <C>
Don Pablo's............................................ 45 80 4 129
Hops................................................... 22 28 1 51
McCormick & Schmick's.................................. -- -- 22 22
Canyon Cafe............................................ 2 2 14 18
--- --- --- ---
Total.................................................. 69 110 41 220
--- --- --- ---
--- --- --- ---
</TABLE>
LEGAL PROCEEDINGS
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. Although the ultimate outcome of the
remaining lawsuit cannot be determined at this time, the Company believes that
the allegations therein are without merit and intends to vigorously defend
itself.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
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MANAGEMENT
The following table sets forth information about our executive officers and
our directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Tom E. DuPree, Jr................ 47 Chairman of the Board of Directors and Chief Executive Officer
Erich J. Booth................... 50 Chief Financial Officer, Treasurer, Director
John G. McLeod................... 55 Senior Vice President of Human Resources, Secretary
Margaret E. Waldrep.............. 43 Chief Administrative Officer
Louis J. Profumo................. 47 Senior Vice President of Finance and Chief Accounting Officer
Thomas R. Williams............... 70 Director
Dr. Ruth G. Shaw................. 51 Director
John L. Moorhead................. 56 Director
</TABLE>
Certain biographical information regarding our executive officers and our
directors is set forth below:
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. He
also serves as a member of the Finance and Planning Committee. Mr. DuPree has
been actively involved in developing and managing restaurants since 1978. He is
a graduate of the Georgia Institute of Technology and holds a Master's degree in
Accounting from Georgia State University.
Erich J. Booth became a director in June, 1997. He also serves as a member
of the Finance and Planning Committee. Mr. Booth has served as the Chief
Financial Officer and Treasurer of the Company since 1991. Before joining us,
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, United Kingdom-based parent, specialty retailer. Mr. Booth,
a Certified Public Accountant, worked from 1973 to 1984 for Peat, Marwick,
Mitchell & Co. He is a graduate of the University of North Carolina at
Greensboro.
John G. McLeod, Jr. has served as Senior Vice President of Human Resources
since 1992, Vice President of Human Resources from 1987 to 1992, and a director
and Secretary of the Company since its formation in 1986. Mr. McLeod rotated off
the Board of Directors in December 1997, but continues to serve as Corporate
Secretary and Senior Vice President of Human Resources. From 1983 to 1987, Mr.
McLeod was the Personnel Director of a predecessor of the Company. He is a
graduate of Wofford College.
Margaret E. Waldrep was elected to the position of Chief Administrative
Officer of the Company in May 1997. Ms. Waldrep joined us in 1985. From 1978 to
1985, Ms. Waldrep was a long-range planner with the Greenville Planning
Commission in Greenville, South Carolina. She earned a Bachelor's degree in
Political Science in 1977 and a Master's degree in City and Regional Planning in
1979 from Clemson University.
Louis J. Profumo joined the Company in July, 1997 as Senior Vice President
of Planning and Acquisitions and was appointed to the position of Senior Vice
President of Finance and Chief Accounting Officer in December 1998. From 1974 to
1997, Mr. Profumo worked for KPMG Peat Marwick LLP serving as an Audit Partner
since 1986 in the firm's manufacturing, retailing and distribution practice. He
received both a bachelor's of science degree in hotel administration in 1973 and
a master's of business administration in 1974 from Cornell University.
Thomas R. Williams became a director in December, 1991. He also serves as
Chairman of the Finance and Planning Committee and as a member of the
Compensation and Human Resources Committee. Mr. Williams is President of The
Wales Group, Inc., a closely held corporation engaged in
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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., ConAgra, Inc., and National Life Insurance Company of Vermont and a
trustee of The Fidelity Group of Mutual Funds.
Dr. Ruth G. Shaw became a director in May, 1996. She also serves as
Chairperson of the Compensation and Human Resources Committee. Dr. Shaw is
Executive Vice President and Chief Administrative Officer for Duke Energy
Corporation. She joined Duke Energy in 1992 as Vice President of Corporate
Communications, was named Senior Vice President in 1994 and Executive Vice
President in 1997. Prior to joining Duke Energy, she was President of
Charlotte's Central Piedmont Community College from 1986 to 1992. Dr. Shaw is a
director of First Union Corporation and of TEPPCO.
John L. Moorhead became a director of the Company in January, 1997. He also
serves as a member of the Audit Committee. Mr. Moorhead is President of
Bestfoods Affiliates. He joined Bestfoods in 1992 as Vice President of Business
Management and Marketing. Prior to joining Bestfoods, he was with PepsiCo, Inc.
from 1979 to 1991 and last served as Vice President of Marketing Services for
the Pepsi-Cola Company, a division of PepsiCo, Inc. Prior to establishing
Pepsi-Cola's Marketing Services Group, Mr. Moorhead had served as Vice President
of Marketing for the Taco Bell Worldwide Division, Marketing Director at Frito
Lay and within the brand management system at General Mills.
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 or her successor is elected and has
qualified.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes the compensation paid or accrued by us for
services rendered during the years indicated to the Chief Executive Officer and
the four most highly compensated executive officers, other than the Chief
Executive Officer, and our former President and Chief Operating Officer. We did
not grant any stock appreciation rights or make any long-term incentive plan
payouts during the years indicated.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION --------------------------
---------------------- RESTRICTED SECURITIES ALL OTHER
SALARY STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) AWARDS OPTIONS (#) ($) (1)
- ------------------------------------------------ --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tom E. DuPree, Jr............................... 1998 525,000 269,600 -- -- 265,762
Chairman and Chief Executive Officer 1997 425,000 -- -- -- 195,470
1996 285,577 81,750 -- -- 122,218
Erich J. Booth.................................. 1998 245,000 141,000 -- -- 5,226
Chief Financial Officer and Treasurer 1997 230,000 -- -- 10,125 4,600
1996 160,000 69,525 -- 10,125 3,706
Louis J. Profumo................................ 1998 259,965 45,740 -- -- 5,226
Chief Accounting Officer 1997 111,635 -- 72,500 65,000 --
Margaret E. Waldrep............................. 1998 220,000 82,950 -- -- 5,226
Chief Administrative Officer 1997 171,291 -- -- 6,835 3,426
1996 100,000 82,025 -- 6,835 2,440
John G. McLeod, Jr.............................. 1998 120,000 82,950 -- -- 3,919
Senior Vice President of Human Resources and 1997 120,000 -- -- -- 2,400
Secretary 1996 100,000 64,890 -- -- 2,000
S. Kirk Kinsell................................. 1998 405,091 148,485 -- -- --
Former President and Chief Operating Officer 1997 281,250 50,000 -- 200,000 --
</TABLE>
- ------------------------
(1) Except for Mr. DuPree, the amounts shown in this column consist of
contributions by us to our 401(k) savings plan on behalf of the named
executive officers, and the fair market value of shares of Common Stock
allocated to the executive officer's account pursuant to our Employee Stock
Ownership Plan and Trust ("ESOP"). Mr. DuPree does not participate in either
the ESOP or the 401(k) plan. The amount shown in this column for Mr. DuPree
includes $265,762 reflecting the current dollar value of the benefit to Mr.
DuPree of the unreimbursed portion of the premiums paid by us with respect
to a split-dollar insurance agreement (See "Certain Relationships and
Related Transactions" below for a description of such agreement), which
benefit was determined by calculating the time value of money (using our
1998 weighted average borrowing rate of 8.0%) of the unreimbursed portion of
the premiums paid by us for the period ended January 3, 1999.
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<PAGE>
The following table sets forth information concerning the value of
unexercised options as of January 3, 1999 held by the executives named in the
summary compensation table. No options were exercised or granted during the
fiscal year ended January 3, 1999 to the executives named in the summary
compensation table and no stock appreciation rights were outstanding during
1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES VALUE JANUARY 3, 1999 (#) JANUARY 3, 1999 ($)
ACQUIRED ON REALIZED ----------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------- --------------- ----------- ----------------------- -------------------------
<S> <C> <C> <C> <C>
Tom E. DuPree, Jr...................... -- -- 23,152/176,564 --/--
Erich J. Booth......................... -- -- 8,565/76,435 --/--
Louis J. Profumo....................... -- -- --/65,000 --/--
Margaret E. Waldrep.................... -- -- 7,633/62,367 --/--
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of June 30, 1999 by (i) each person known by us
to own beneficially more than 5% of our Common Stock, (ii) each of our directors
and executive officers and (iii)all of our executive officers and directors as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1) (2)
--------------------
NAME NUMBER PERCENT
- -------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Tom E. DuPree, Jr. (3).................................................... 8,113,453 32.0%
John G. McLeod, Jr. (4)................................................... 283,084 1.1%
Erich J. Booth (5)........................................................ 67,110 *
Margaret E. Waldrep (6)................................................... 54,046 *
Thomas R. Williams (7).................................................... 54,936 *
James W. Rowe (8)......................................................... 41,625 *
Louis J. Profumo (9)...................................................... 6,000 *
Dr. Ruth G. Shaw (10)..................................................... 4,000 *
John L. Moorhead (11)..................................................... 664 *
State of Wisconsin Investment Board (12).................................. 3,121,000 12.3%
Brown Investment Advisory & Trust Company (13)............................ 3,038,405 12.0%
All directors and executive officers as a group (9 persons) (14).......... 8,418,340 33.2%
</TABLE>
Mr. DuPree, the State of Wisconsin Investment Board and Brown Investment
Advisory & Trust Company are the only shareholders known by us to be the
beneficial owners of more than 5% of our Common Stock. Mr.DuPree's address is
Hancock at Washington, Madison, Georgia 30650. The addressof the State of
Wisconsin Investment Board is P.O. Box 7842, Madison, Wisconsin 53707. The
address of Brown Investment Advisory & Trust Company is 19 South Street,
Baltimore, Maryland 21202.
- ------------------------
* Less than one percent.
(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 our 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
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by the ESOP presently rests with our Employee Benefit Committee, whose
members are Messrs. DuPree and McLeod; however, each ESOP participant, age
55 and with 10 years of service, may elect to direct the investment of 25%
of shares allocated to his account.
(2) Except as indicated below, does not include shares issuable upon exercise of
stock options.
(3) Includes 651,512 shares held by various Foundations, Partnerships and Trusts
of which Mr. Dupree's wife is the sole trustee. Includes 232,500 shares held
by DuPree Holdings, LLC. Includes 46,305 shares which Mr. DuPree has the
right to acquire within 60 days upon the exercise of stock options at an
average exercise price of $20.39. Includes 198,229 shares held by the ESOP
which are allocated to 10 other employees and for which Mr. DuPree has
shared investment power. See Footnote (1) above. Mr. DuPree is our Chairman
of the Board of Directors and Chief Executive Officer.
(4) Includes 11,392 shares held by the ESOP which are vested and allocated to
Mr. McLeod and 186,837 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 our Senior Vice President of Human Resources and
Secretary.
(5) Includes 1,125 shares held by the ESOP which are vested and allocated to Mr.
Booth. Includes 17,040 shares which Mr. Booth has the right to acquire
within 60 days upon the exercise of stock options at an average exercise
price of $20.02. Mr. Booth is our Chief Financial Officer and Treasurer and
one of our Directors.
(6) Includes 7,224 shares held by the ESOP which are vested and allocated to Ms.
Waldrep. Includes 15,266 shares which Ms. Waldrep has the right to acquire
within 60 days upon the exercise of stock options at an average exercise
price of $20.00. Ms. Waldrep is our Chief Administrative Officer.
(7) Includes 2,793 deferred stock units credited to Mr. Williams' account in our
Outside Director Deferred Stock Unit Plan, which are convertible to shares
of common stock upon termination of Board service. Mr. Williams is one of
our Directors.
(8) Includes 32,000 shares held by Rowe Family Investments, L.P. Mr. Rowe is one
of our Directors.
(9) Includes 4,000 shares held under a Restricted Stock Agreement. Does not
include 227 shares held by the ESOP which are allocated to Mr. Profumo but
are unvested. Mr. Profumo is our Senior Vice President of Finance and Chief
Accounting Officer.
(10) Includes 2,000 shares which Dr. Shaw has the right to acquire within 60
days upon the exercise of stock options at an average exercise price of
$21.25.
(11) Includes 589 deferred stock units credited to Mr. Moorhead's account in our
Outside Director Deferred Stock Unit Plan, which are convertible to shares
of common stock upon termination of Board service. Mr. Moorhead is one of
our Directors.
(12) Based on a Form 13G/A dated June 4, 1999, filed by the State of Wisconsin
Investment Board.
(13) Based on a Form 13G/A dated May 10, 1999 filed by Brown Investment Advisory
& Trust Company.
(14) Includes 80,611 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 $20.26 per share, 19,741 shares held by the ESOP which are
vested and allocated to directors and executive officers, and 178,488 shares
held by the ESOP which are unvested or allocated to other employees. See
Footnote (1) above.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1995, we entered into a Split Dollar Insurance Agreement (the
"Agreement") with The DuPree Insurance Trust (the "Insurance Trust"). Under the
Agreement, we agreed to make premium payments on certain life insurance policies
of which the Insurance Trust is the owner and beneficiary. These policies
provide a total of $50 million in death proceeds payable upon death of the
survivor of Tom E. DuPree, Jr., our Chairman of the Board and Chief Executive
Officer, and his wife. The devisees under the wills of Mr. DuPree and his wife
are the beneficiaries of the Insurance Trust. The Insurance Trust has agreed to
reimburse us on an annual basis for that portion of the premiums which equals
the current value of the economic benefit, as defined by the Internal Revenue
Service, attributable to the life insurance protection provided. The premiums
due under the policies total $850,000 per year. Reimbursements for the current
value of the economic benefit attributable to the life insurance provided in
fiscal 1998 totaled $2,308. There were no reimbursements due to us from the
Insurance Trust at April 4, 1999. We or the Insurance Trust can cancel the
Agreement at any time. Upon cancellation, the Insurance Trust is obligated to
repay to us an amount equal to the lesser of either the cash surrender value of
the policies or the total amount of unreimbursed premiums paid by us. Upon
receipt of the death proceeds under the policies, the Insurance Trust is
required to repay to us all unreimbursed premium payments. The policies have
been assigned to us to secure the repayment obligations of the Insurance Trust.
During the fourth quarter of fiscal 1998, our Board of Directors approved
loans to certain of our executive officers. Since that time and at April 30,
1999, we had outstanding loans to Tom E. DuPree, Jr., our Chairman of the Board
and Chief Executive Officer, in the principal amount of $7,851,500. This loan is
evidenced by three notes from Mr. DuPree, each of which bears interest at 7.0%.
All principal and interest on these notes is due in November and December of
2000 or earlier upon our demand. In addition, we had outstanding loans to Erich
J. Booth, our Chief Financial Officer and Treasurer, in the principal amount of
$107,000. These loans are evidenced by two notes from Mr. Booth, each of which
bears interest at 5.06%. All principal and interest on these notes is due in
October and November of 1999. We also had an outstanding loan to Margaret E.
Waldrep, our Chief Administrative Officer, in the principal amount of $41,500.
This loan is evidenced by three notes from Ms. Waldrep, each of which bears
interest at 5.06%. All principal and interest on these notes is due in October
and November of 1999.
In October and November 1998, we purchased a total of 1,340,146 shares of
our common stock from Mr. DuPree for an aggregate purchase price of $12,234,924.
We made these purchases on eight different days, each at a purchase price per
share equal to the closing price per share of our common stock as reported on
the Nasdaq Stock Market for the previous trading date.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of some important terms of certain of our
indebtedness does not purport to be complete and does not contain all the
information that may be important to you. For a more complete understanding of
the following indebtedness, we encourage you to obtain and read the agreements
and documents governing the New Credit Facility, the Senior Notes, the
Convertible Subordinated Debentures and Preferred Securities, and the Financing
Lease Arrangements, all of which we will provide to you upon your request to our
Director of Investor Relations (see "Where You Can Find More Information").
NEW CREDIT FACILITY
Concurrently with the closing of the offering of the Outstanding Notes, we
entered into a credit facility with Wachovia Bank, N.A. ("Wachovia") as agent,
and with Wachovia, BankBoston, N.A. ("BankBoston"), and other financial
institutions as lenders (the "New Credit Facility"). The New Credit Facility
replaced the following two senior, unsecured, revolving credit lines: the Credit
Agreement dated April 1, 1998, among the Company and Wachovia and other
financial institutions and the Credit Agreement dated May 8, 1998, between the
Company and First Union National Bank, each as amended.
The New Credit Facility consists of a revolving credit facility providing
revolving loans to us in an aggregate principal amount not to exceed $125.0
million at any one time, with a maturity of three years. The New Credit Facility
also includes a $10.0 million sub-limit available for swing line loans. Until
our total debt to EBITDA ratio is less than 2.0 to 1.0, the aggregate principal
amount available under the New Credit Facility will be lowered by an amount
equal to 75% of all net proceeds from asset sales of over $10.0 million
annually. Subject to the satisfaction of customary conditions, advances under
the New Credit Facility may be made at any time during its term.
Our borrowings under the New Credit Facility will be general, senior,
unsecured, obligations of the Company and will be guaranteed by all of our
wholly-owned subsidiaries which have $10,000 or more in assets, other than
certain of our subsidiaries where it is expected that a portion of the ownership
interests of such subsidiaries will be acquired by management of such
subsidiaries.
At our option, the interest rates per annum applicable under the New Credit
Facility will be either (i) the rate (adjusted for reserve requirements) at
which LIBOR deposits for one, two, three or six months (as selected by us) are
offered in the interbank LIBOR market plus a margin of between 1.75% and 3.25%
(depending on our ratio of total debt to EBITDA) or (ii) the Base Rate plus a
margin of between 0.00% and 1.50% (depending on our ratio of total debt to
EBITDA). The "Base Rate" is the higher of (a) the interest rate publicly
announced by Wachovia as its prime rate or (b) the overnight federal funds rate
plus 0.50%. The swing line loans will bear interest at either the base rate
option or at an as-offered basis by Wachovia.
The New Credit Facility contains customary representations and warranties.
The New Credit Facility contains several significant covenants that, among other
things, restricts our ability to dispose of assets, to incur indebtedness,
create liens on assets, pay dividends, repurchase our outstanding stock and
Senior Notes, engage in mergers and consolidations, make investments and
acquisitions, and engage in certain transactions with affiliates and certain
subsidiaries. The New Credit Facility also requires that we comply with
specified financial ratios and tests, including an adjusted debt to adjusted
capitalization ratio, a total debt to EBITDA ratio, a senior debt to EBITDA
ratio, and a fixed charge coverage ratio. In addition, the New Credit Facility
contains customary events of default, including violations of the covenants,
failure to pay interest, principal or fees when due, a change in control of the
Company, defaults under our other credit facilities, material unsatisfied
judgments against the Company, a material adverse effect on the Company and the
insolvency or bankruptcy of the Company.
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SENIOR NOTES
In May 1996, we issued Senior Notes consisting of our general, senior,
unsecured obligations in the aggregate principal amount of $125.0 million. The
Senior Notes mature on June 1, 2006 and bear interest at the rate of 9.75% from
the most recent interest payment date on which interest was paid. Interest on
the Senior Notes is payable semiannually on June 1 and December 1. In 1998, we
repurchased $8.5 million of the Senior Notes.
The indebtedness evidenced by the Senior Notes ranks PARI PASSU in right of
payment with all of our other unsubordinated indebtedness. Each of our
wholly-owned subsidiaries which has $10,000 or more in assets has guaranteed the
indebtedness evidenced by the Senior Notes, other than certain of our
subsidiaries where it is expected that a portion of the ownership interests of
such subsidiaries will be acquired by management of such subsidiaries.
Upon a change of control (as defined in the Senior Notes Indenture) of the
Company, we are required to make an offer to repurchase the Senior Notes at a
purchase price equal to 101% of their principal amount, subject to adjustment,
together with accrued interest. We cannot redeem the Senior Notes at our option.
The Senior Notes Indenture contains certain covenants and events of default
customary for senior note transactions.
CONVERTIBLE SUBORDINATED DEBENTURES AND PREFERRED SECURITIES
We issued $115.0 million of our 7% Convertible Subordinated Debentures due
March 1, 2027 (the "Convertible Debentures") in March of 1997. They are all held
by a Delaware trust we set up in 1997 called Avado Financing I (the "Trust"),
and these are the only assets of the Trust. The Trust in turn issued its
preferred securities known as $3.50 Term Convertible Securities, Series A (the
"Preferred Securities"), each with a par value of $50. We pay the Trust
quarterly interest on the Convertible Debentures, and the Trust pays quarterly
distributions to holders of the Preferred Securities at an annual rate of $3.50
per Preferred Security. We can defer interest payments to the Trust under
certain conditions for up to 20 consecutive quarters (but not beyond maturity),
and the Trust would then likewise defer its quarterly distributions. At the end
of such an extension period, we would have to pay all of the accrued interest
(compounded quarterly). During any such extension, we would be unable to pay
dividends on our common stock.
We have guaranteed the payments the Trust is required to make to holders of
the Preferred Securities (i) of dividends, (ii) of the amount to be paid for
redemption of Preferred Securities if any are redeemed, and (iii) of any amount
to be paid holders of the Preferred Securities if the trust is liquidated, but
our guarantee only applies to the extent the Trust has funds available for any
of these payments. Our guarantee is not secured, and it is subordinate and
junior in right of payment to all other liabilities we may have other than
preferred stock payments.
Holders may convert their Preferred Securities into shares of our common
stock at any time prior to maturity of the Convertible Debentures. Conversion is
accomplished by the Trust converting all or a portion of the Convertible
Debentures and then using those shares to convert the Preferred Securities. For
each Preferred Security, the holder would receive 3.3801 shares of our common
stock. This equates to a conversion price of $14.793 per share of our common
stock (subject to adjustment). The last reported bid price for our common stock
on June 30, 1999 was $8.375 per share.
If the Trust were liquidated, then holders of Preferred Securities would be
entitled to receive $50 per Preferred Security, plus any accumulated but unpaid
distributions, or we could pay them in Convertible Debentures. We may redeem
Convertible Debentures for cash after March 3, 2000, in which case the Trust
would redeem Preferred Securities having a liquidation amount equal to the
principal amount of the Convertible Debentures redeemed.
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Holders of Preferred Securities generally have no voting rights, but if we
are in default under the indenture we entered into for the Preferred Securities
financing, then they can vote to cause the institutional trustee to accelerate
payment under the Convertible Debentures. The vote of only 25% in liquidation
amount of the Preferred Securities would be enough.
The Convertible Debentures are subordinated to the Senior Notes and will be
subordinated to the New Credit Facility and the Exchange Notes. We may not make
any payments of principal or interest on the Convertible Debentures if we are in
default under our senior indebtedness. We are under no limitation in the
indenture we entered into in connection with our issuance of the Convertible
Debentures as to the amount of senior indebtedness we may incur.
The Preferred Securities are traded on NASDAQ under the symbol "AVDOP."
FINANCING LEASE ARRANGEMENTS
In September 1997, we entered into financing lease arrangements with a
special purpose trust and several financial institutions. Since then, we have
financed the acquisition of the equipment and related items in many of our new
restaurants through these arrangements. At the end of each fiscal quarter during
this period, we designated certain newly opened restaurants which were to have
their equipment acquisitions financed through these arrangements. The trust then
purchased the equipment for those restaurants from third parties and
subsequently leased the equipment to us or to one of our subsidiaries. The trust
financed its purchases of the equipment by issuing its senior notes to the
participating financial institutions. The Company and its subsidiaries are not
obligors on these notes. The trust's notes are secured both by the financed
restaurant equipment and by the trust's interest in the equipment leases. The
total amount of the equipment financed at the time of financing under these
lease arrangements was approximately $30.0 million.
Our lease payments are due quarterly, and the total quarterly lease payments
due to the trust under all these arrangements for the thirteen weeks ended April
4, 1999 was approximately $1.4 million. The lease payments are based on a
variable formula which is different for each quarterly equipment financing
transaction. At April 4, 1999, we had financed the equipment acquisitions for
102 of our restaurants through these financing lease arrangements. However, we
do not intend to finance the acquisition of any more restaurant equipment
through these financing lease arrangements. Our lease payments are guaranteed by
each of our wholly-owned subsidiaries which has $10,000 or more in assets, other
than certain of our subsidiaries where it is expected that a portion of the
ownership interests of such subsidiaries will be acquired by management of such
subsidiaries.
For each of these quarterly equipment financings, the lease term is 60
months from date of the trust's original purchase of that equipment. Upon the
expiration of that 60-month period, we have the option of purchasing that
equipment at a cost equal to 20% of the original price paid for the equipment by
the trust.
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DESCRIPTION OF THE EXCHANGE NOTES
The Company issued the Outstanding Notes under an indenture (the
"Indenture"), among itself, the Guarantors and SunTrust Bank, Atlanta, as
trustee (the "Trustee"). The Exchange Notes will also be issued under the
Indenture. The following is a summary of the material provisions of the
Indenture. It does not include all of the provisions of the Indenture. We urge
you to read the Indenture because it defines your rights. The terms of the
Exchange Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). The form and terms of the Exchange Notes will be the same as the
Outstanding Notes, except that the issuance of the Exchange Notes will be
registered under the Securities Act and thus the Exchange Notes will not bear
legends restricting their transferability. The Exchange Notes will evidence the
same indebtedness as the Outstanding Notes, will be entitled to the benefits of
the Indenture, and will be treated as a single class under the Indenture with
any Outstanding Notes that remain outstanding after the Exchange Offer. A copy
of the Indenture may be obtained from the Company, the Initial Purchasers, or
from the Commission (as an exhibit to the Registration Statement). You can find
definitions of certain capitalized terms used in this description under
"--Certain Definitions." For purposes of this section, references to the
"Company" include only Avado Brands, Inc. and not its Subsidiaries.
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Debt of the Company.
The Company will issue the Exchange Notes in fully registered form in
denominations of $1,000 and integral multiples thereof. The Trustee will
initially act as paying agent (the "Paying Agent") and registrar (the
"Registrar") for the Exchange Notes. The Exchange Notes may be presented for
registration of transfer and exchange at the offices of the Registrar. The
Company may change any Paying Agent and Registrar without notice to holders of
the Exchange Notes (the "Holders"). The Company will pay principal (and premium,
if any) on the Exchange Notes at the Trustee's office in New York, New York. At
the Company's option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders. Any Outstanding
Notes that remain outstanding after the completion of the Exchange Offer,
together with the Exchange Notes issued in connection with the Exchange Offer,
will be treated as a single class of securities under the Indenture (and
together are referred to in this description as "Notes").
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million. The
Notes will mature on June 15, 2009. Interest on the Notes will accrue at the
rate of 11 3/4% per annum and will be payable semiannually in cash on each June
15 and December 15, commencing on December 15, 1999, to the persons who are
registered Holders at the close of business on the June 1 and December 1
immediately preceding the applicable interest payment date. Interest on the
Exchange Notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
The initial offering price of the Exchange Notes in this offering is 100%
plus accrued interest, if any, from the Issue Date. If a bankruptcy case is
commenced by or against the Company under applicable bankruptcy law after the
issuance of the Exchange Notes, the claim of a Holder of the Exchange Notes with
respect to the principal amount thereof may be limited to an amount equal to the
sum of: (i) the initial offering price; and (ii) that portion of the original
issue discount that had been amortized as of any such bankruptcy filing.
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REDEMPTION
OPTIONAL REDEMPTION. Except as described below, the Notes are not
redeemable before June 15, 2004. Thereafter, the Company may redeem the Notes at
its option, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the following redemption prices (expressed as percentages of the
principal amount thereof) if redeemed during the twelve-month period commencing
on June 15 of the year set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2004.............................................................................. 105.875%
2005.............................................................................. 103.917%
2006.............................................................................. 101.959%
2007 and thereafter............................................................... 100.000%
</TABLE>
In addition, the Company must pay accrued and unpaid interest on the Notes
redeemed.
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to June 15, 2002, the Company may, at its option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 35% of the principal amount of the Notes issued under the Indenture
at a redemption price of 111.75% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption; PROVIDED that:
(1) at least 65% of the principal amount of Notes issued under the
Indenture remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 90 days after the
consummation of any such Public Equity Offering.
"Public Equity Offering" means an underwritten public offering of Capital
Stock of the Company (other than Redeemable Stock) pursuant to a registration
statement filed with the Commission in accordance with the Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem less than all of the Notes,
selection of the Notes for redemption will be made by the Trustee either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed; or,
(2) on a pro RATA basis, by lot or by such method as the Trustee shall
deem fair and appropriate.
No Notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of a Public Equity Offering,
the Trustee will select the Notes only on a PRO RATA basis or on as nearly a PRO
RATA basis as is practicable (subject to DTC procedures). Notice of redemption
will be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. On and after the redemption date, interest will cease to accrue on
Notes or portions thereof called for redemption as long as the Company has
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price.
SUBORDINATION
The payment of all Obligations on or relating to the Notes is subordinated
in right of payment to the prior payment in full in cash or Cash Equivalents of
all Obligations on Senior Debt of the Company (including the Obligations with
respect to the Credit Agreement). Notwithstanding the
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foregoing, payments and distributions made relating to the Notes pursuant to the
trust described under "--Legal Defeasance and Covenant Defeasance" shall not be
so subordinated in right of payment.
The holders of Senior Debt will be entitled to receive payment in full in
cash or Cash Equivalents of all Obligations due in respect of Senior Debt
(including interest after the commencement of any bankruptcy or other like
proceeding at the rate specified in the applicable Senior Debt whether or not
such interest is an allowed claim in any such proceeding) before the Holders of
Notes will be entitled to receive any payment or distribution of any kind or
character with respect to any Obligations on, or relating to, the Notes in the
event of any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of the Company's assets and liabilities.
The Company also may not make any payment or distribution of any kind or
character with respect to any Obligations on, or relating to, the Notes or
acquire any Notes for cash or property or otherwise if:
(1) a payment default on any Senior Debt occurs and is continuing; or
(2) any other default occurs and is continuing on Designated Senior Debt
that permits holders of the Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Representative of any Designated Senior Debt.
Payments on and distributions with respect to any Obligations on, or with
respect to, the Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such
default is cured or waived; and
(2) in case of a nonpayment default, the earliest of (x) the date on
which all nonpayment defaults are cured or waived (so long as no other event
of default exists), (y) 180 days after the date on which the applicable
Payment Blockage Notice is received or (z) the date on which the Trustee
receives notice from the Representative for such Designated Senior Debt
rescinding the Payment Blockage Notice, unless the maturity of any
Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 90 consecutive days (it being
acknowledged that any subsequent action, or any breach of any financial
covenants for a period commencing after the date of delivery of such initial
Payment Blockage Notice that in either case would give rise to a default
pursuant to any provisions under which a default previously existed or was
continuing shall constitute a new default for this purpose).
The Company must promptly notify holders of Senior Debt if payment of the
Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of the Company, Holders of the
Exchange Notes may recover less ratably than creditors of the Company who are
holders of Senior Debt. See "Risk Factors-Subordination."
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After giving effect to the offering of the Outstanding Notes and the
application of the proceeds therefrom, on a PRO FORMA basis, at April 4, 1999,
the aggregate amount of Senior Debt outstanding was approximately $163.4 million
(excluding unused commitments of $78.6 million under the Credit Agreement).
GUARANTEES
The Guarantors will jointly and severally guarantee the Company's
obligations under the Indenture and the Notes on a senior subordinated basis.
Each Guarantee will be subordinated to Guarantor Senior Debt on the same basis
as the Notes are subordinated to Senior Debt. The obligations of each Guarantor
under its Guarantee will be limited as necessary to prevent the Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly-Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the Indenture. See "Certain Covenants-- Consolidation, Merger and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by
the Company and the sale complies with the provisions set forth in "Certain
Covenants--Limitation on Asset Sales," the Guarantor's Guarantee will be
released.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS. Under the terms of the Indenture, the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur any Indebtedness (other than Permitted Indebtedness (as
defined below)); PROVIDED, HOWEVER, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
Incurrence of any such Indebtedness, the Company or any Restricted Subsidiary
that is a Guarantor may Incur Indebtedness (including, without limitation,
Acquired Indebtedness) and any Restricted Subsidiary that is not a Guarantor may
Incur Acquired Indebtedness, in each case if on the date of the Incurrence of
such Indebtedness, after giving effect to the Incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company would be greater than
2.0 to 1.0.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following (each,
"Permitted Indebtedness"):
(1) Indebtedness of the Company and any Guarantor outstanding at any
time in an aggregate principal amount not to exceed an amount equal to
$150.0 million under the Credit Agreement, less any amount of Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales"
covenant described below;
(2) Indebtedness under the Notes and the related Guarantees;
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(4) 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;
(5) 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 (1) or (4) above or clause (6) or (7)
below, 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
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that is PARI PASSU with, or subordinated in right of payment to, the Notes
shall only be permitted under this clause (5) if:
(i) in the case where 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 Notes;
(ii) in the case where 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
(iii) 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;
(6) Indebtedness:
(i) in respect of performance, surety, or appeal bonds provided in
the ordinary course of business consistent with past practice;
(ii) 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
(iii) 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
(7) Indebtedness of the Company and its Restricted Subsidiaries not to
exceed $20.0 million at any time outstanding.
For purposes of determining compliance with the "Limitation on Indebtedness"
covenant described above;
(1) 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 (or
later reclassify) such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one such clause; and
(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in conformity with GAAP.
Accrual of interest, accretion or amortization of original issue discount,
the payment of interest on any Indebtedness in the form of additional
Indebtedness with the same terms, and the payment of
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dividends on Redeemable Stock in the form of additional shares of the same class
of Redeemable Stock will not be deemed to be an Incurrence of Indebtedness or an
issuance of Redeemable Stock for purposes of the "Limitation on Indebtedness"
covenant.
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;
(1) 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 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;
(2) 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;
(3) 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
(4) make any Investment that is a Restricted Investment (each of such
payments or any other actions described in clauses (1) through (4) being
referred to as a "Restricted Payment") if, at the time of, and after giving
effect to, the proposed Restricted Payment:
(i) a Default or Event of Default shall have occurred and be
continuing;
(ii) the Company could not Incur at least $1.00 of Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant; or
(iii) 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 Issue Date shall exceed the
sum of:
(A) 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 fiscal quarter in which the Issue Date occurs
and ending on the last day of the last fiscal quarter preceding the
Transaction Date, PLUS
(B) 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 of its
Capital Stock (other than Redeemable Stock) to a person who is not a
Subsidiary of the Company, (including Capital Stock of the Company
(other than Redeemable Stock) issued upon the conversion of
convertible Indebtedness, in exchange for outstanding Indebtedness or
upon the exercise of any options, warrants or other rights to acquire
Capital Stock (other than Redeemable Stock) of the Company), PLUS
(C) without duplication, the sum of:
(I) the aggregate amount returned in cash on or with respect
to Investments (other than Permitted Investments) made subsequent
to the Issue Date whether
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through interest payments, principal payments, dividends or other
distributions or payments;
(II) the net cash proceeds received by the Company or any
Restricted Subsidiary of the Company from the disposition of all
or any portion of such Investments (other than to a Subsidiary of
the Company); and
(III) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of such Subsidiary
(valued in each case as provided in the definition of
"Investments");
PROVIDED, HOWEVER, that the sum of clauses (I), (II) and (III)
above shall not exceed the aggregate amount of all such
Investments made by the Company or any Restricted Subsidiary in
the relevant person or Unrestricted Subsidiary subsequent to the
Issue Date, PLUS
(D) $10.0 million.
The foregoing provision shall not take into account, and shall not be
violated by reason of:
(1) 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;
(2) 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;
(3) 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;
(4) the acquisition of Indebtedness of the Company that is subordinated
in right of payment to the Notes 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);
(5) 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
(6) 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; or
(7) the payment of amounts due with respect to the Forward Equity
Contracts in effect on the Issue Date;
provided that, except in the case of clauses (1) and (3), 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
(other than Redeemable 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 Indebtedness that is subordinated in right of payment to
the Exchange Notes out of the proceeds of such issuance, then, in
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calculating whether the conditions of clause (iii) above have been met with
respect to any subsequent Restricted Payments, the proceeds of any such issuance
shall be included under such clause (iii) only to the extent such proceeds are
not applied as described in clause (1) or (2) of this paragraph.
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:
(1) 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;
(2) pay any Indebtedness or other obligation owed to the Company or any
other Restricted Subsidiary;
(3) make loans or advances to the Company or any other Restricted
Subsidiary; or
(4) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Issue Date in the Credit Agreement, the Indenture,
or any other agreements in effect on the Issue 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;
(2) existing under or by reason of applicable law;
(3) 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
(i) 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 (ii) 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;
(4) in the case of clause (4) of the first paragraph of this covenant;
(i) 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;
(ii) 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
(iii) not relating to any Indebtedness, and, in each of cases (i),
(ii), or (iii), 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
(5) 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.
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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 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.
Without limiting the foregoing:
(1) any Related Party Transaction or series of Related Party
Transactions with an aggregate value in excess of $1.0 million 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
(2) with respect to any Related Party Transaction or series of Related
Party Transactions with an aggregate value in excess of $10.0 million, 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
Restricted Subsidiary, as the case may be.
The foregoing limitation does not limit, and will not apply to:
(1) any transaction between the Company and any of its Wholly-Owned
Restricted Subsidiaries or between Wholly-Owned Restricted Subsidiaries of
the Company;
(2) the payment of reasonable and customary regular fees to directors of
the Company who are not employees of the Company;
(3) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant; or
(4) 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.
LIMITATION ON LIENS. Under the terms of the Indenture, the Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
create, Incur, assume or permit or suffer to exist any Liens of any kind against
or upon any property or assets of the Company or any of its Restricted
Subsidiaries whether owned on the Issue Date or acquired after the Issue Date,
or any proceeds therefrom, or assign or otherwise convey any right to receive
income or profits therefrom unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens; and
(2) in all other cases, the Notes are equally and ratably secured,
except for:
(i) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
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(ii) Liens securing Senior Debt and Liens securing Guarantor Senior
Debt;
(iii) Liens securing the Notes and the Guarantees;
(iv) Liens of the Company or a Wholly-Owned Restricted Subsidiary of
the Company on assets of any Restricted Subsidiary of the Company;
(v) Liens securing Indebtedness which is Incurred to refinance any
Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been Incurred in accordance with the provisions
of the Indenture; PROVIDED, HOWEVER, that such Liens: (A) are no less
favorable to the Holders and are not more favorable to the lienholders
with respect to such Liens than the Liens in respect of the Indebtedness
being refinanced; and (B) do not extend to or cover any property or
assets of the Company or any of its Restricted Subsidiaries not securing
the Indebtedness so refinanced; and
(vi) Permitted Liens.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. Under the terms of
the Indenture, the Company will not, and will not permit any Restricted
Subsidiary that is a Guarantor to, Incur or suffer to exist Indebtedness that is
senior in right of payment to the Notes or such Guarantor's Guarantee, as the
case may be, and subordinate in right of payment to any other Indebtedness of
the Company or such Guarantor, as the case may be.
LIMITATION ON ASSET SALES. Under the terms of the Indenture, the Company
shall not effect or permit any Asset Sale unless:
(1) such Asset Sale is effected at least fair market value (as
determined in good faith by the board of directors);
(2) in the case of any Asset Sale or series of related Asset Sales for a
total consideration in excess of $10.0 million, at least 80% of the
consideration is received in cash; and
(3) 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 Issue Date exceed $10.0 million;
then the Company shall or shall cause the relevant Restricted Subsidiary to:
(1) within 270 days after the date Net Cash Proceeds so received exceed
$10.0 million:
(i) apply an amount equal to such excess Net Cash Proceeds to
permanently repay Senior Debt, Guarantor Senior Debt or Indebtedness of
any Restricted Subsidiary that is not a Guarantor 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
(ii) invest an equal amount, or the amount not so applied pursuant to
clause (i) (or enter into a definitive agreement committing so to invest
within 270 days after the date of receipt of such Net Cash Proceeds and
investing within 360 days of the receipt of such Net Cash Proceeds), 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
(2) apply (no later than the end of the periods referred to in clause
(1)) such excess Net Cash Proceeds (to the extent not applied pursuant to
clause (1)) as provided below. The amount of such
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excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 270-day period as set forth in clause (1) of the
preceding sentence and not applied as so required by the end of such period
(or, with respect to such Net Cash Proceeds committed to be applied, such
360-day 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 $10.0 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:
(1) 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;
(2) 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");
(3) that any Exchange Note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless the Company defaults in the payment of the Excess
Proceeds Payment, any Exchange Note accepted for payment pursuant to the
Excess Proceeds Offer shall cease to accrue interest on and after the Excess
Proceeds Payment Date;
(5) that Holders electing to have an Exchange Note purchased pursuant to
the Excess Proceeds Offer will be required to surrender the Exchange Note,
together with the form entitled "Option of the Holder to Elect Purchase" on
the reverse side of the Exchange 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;
(6) 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
(7) 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 Exchange Note purchased and each new
Exchange Note issued shall be in a principal amount of $1,000 or integral
multiples thereof.
On the Excess Proceeds Payment Date, the Company shall:
(1) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to the Excess Proceeds Offer;
(2) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and
(3) 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.
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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 Exchange Note equal in principal
amount to any unpurchased portion of the Exchange Note surrendered; PROVIDED
that each Exchange Note purchased and each new Exchange 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 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.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. Under the terms of the
Indenture, the Company will not permit any of its Restricted Subsidiaries,
directly or indirectly, by way of the pledge of any intercompany note or
otherwise, to assume, guarantee or in any other manner become liable with
respect to any Indebtedness of the Company or any other Restricted Subsidiary of
the Company (other than Permitted Indebtedness of a Restricted Subsidiary of the
Company), unless, in any such case:
(1) such Restricted Subsidiary executes and delivers a supplemental
indenture to the Indenture, providing a guarantee of payment of the Notes by
such Restricted Subsidiary; and
(2) (i) if any such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Senior Debt, the
guarantee or other instrument provided by such Restricted
Subsidiary in respect of such Senior Debt may be senior to the
Guarantee pursuant to subordination provisions no less favorable
to the Holders of the Notes than those contained in the
Indenture; and
(ii) if such assumption, guarantee or other liability of such
Restricted Subsidiary is provided in respect of Indebtedness that
is expressly subordinated to the Notes, the guarantee or other
instrument provided by such Restricted Subsidiary in respect of
such subordinated Indebtedness shall be subordinated to the
Guarantee pursuant to subordination provisions no less favorable
to the Holders of the Notes than those contained in the
Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon:
(1) the unconditional release of such Restricted Subsidiary from its
liability in respect of the Indebtedness in connection with which such
Guarantee was executed and delivered pursuant to the preceding paragraph; or
(2) any sale or other disposition (by merger or otherwise) to any person
which is not a Restricted Subsidiary of the Company of all of the Company's
Capital Stock in, or all or substantially all of the assets of, such
Restricted Subsidiary; PROVIDED that (i) such sale or disposition of such
Capital Stock or assets is otherwise in compliance with the terms of the
Indenture and (ii) such assumption, guarantee or other liability of such
Restricted Subsidiary has been released by the holders of the other
Indebtedness so guaranteed.
REPORTS TO HOLDERS. The Indenture will provide that, whether or not
required by the rules and regulations of the Commission, so long as any Notes
are outstanding, the Company will furnish the Holders of Notes:
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(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations
of the Company and its consolidated Subsidiaries and, with respect to the
annual information only, a report thereon by the Company's certified
independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations.
In addition, whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability within the time periods specified in
the Commission's rules and regulations (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company has agreed that,
for so long as any Notes remain outstanding, it will furnish to the Holders and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
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:
(1) repay in full all Indebtedness of the Company that would prohibit
the repurchase of the Notes as provided for in the succeeding paragraph; or
(2) 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 clause (1) above 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:
(1) 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;
(2) 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");
(3) that any Exchange Note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless the Company defaults in the payment of the Change of
Control Payment, any Exchange 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;
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(5) that Holders electing to have any Exchange Note or portion thereof
purchased pursuant to the Change of Control Offer will be required to
surrender such Exchange Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of such Exchange 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;
(6) 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
(7) 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 Exchange Note purchased and each new
Exchange 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:
(1) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer;
(2) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and
(3) 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 Exchange Note
equal in principal amount to any unpurchased portion of the Notes
surrendered; PROVIDED that each Exchange Note purchased and each new
Exchange 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.
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"
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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 Exchange Note
repurchase, either prior to or concurrently with such Note repurchase. The terms
of the Credit Agreement and the 9 3/4% Senior Notes 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:
(1) 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 (whether or not
such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) 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 (whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(3) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture with respect to the
Exchange Notes or under the Exchange Notes and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or by the Holders of 25% or more in aggregate principal amount of
the Exchange Notes;
(4) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Restricted Subsidiary having an outstanding principal
amount of $10.0 million or more in the aggregate for all such issues of all
such persons, whether such Indebtedness now exists or shall hereafter be
created:
(i) 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
(ii) the failure to make a principal payment at the final (but not
any interim) fixed maturity;
(5) any final judgment or order (not covered by insurance) for the
payment of money in excess of $10.0 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
Restricted Subsidiary 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 $10.0 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;
(6) a court having jurisdiction in the premises enters a decree or order
for:
(i) relief in respect of the Company or any Restricted Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency, or other
similar law now or hereafter in effect;
(ii) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator, or similar official of the Company or any
Restricted Subsidiary or for all or substantially all of the property and
assets of the Company or any Restricted Subsidiary; or
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(iii) the winding up or liquidation of the affairs of the Company or
any Restricted Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days;
(7) the Company or any Restricted Subsidiary:
(i) 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;
(ii) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator, or
similar official of the Company or any Restricted Subsidiary or for all
or substantially all of the property and assets of the Company or any
Restricted Subsidiary; or
(iii) effects any general assignment for the benefit of creditors; or
(8) any Guarantee of a Restricted Subsidiary ceases to be in full force
and effect or any Guarantee of a Restricted Subsidiary is declared to be
null and void and unenforceable or any Guarantee of a Restricted Subsidiary
is found to be invalid or any Guarantor that is a Restricted Subsidiary
denies its liability under its Guarantee (other than by reason of release of
such Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(6) or (7) 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 (4) 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
(4) shall be remedied or cured by the Company and/or the relevant Restricted
Subsidiary 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 (6) or (7) 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 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
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
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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:
(1) the Holder gives the Trustee written notice of a continuing Event of
Default;
(2) the Holders of at least 25% in aggregate principal amount of Notes
make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory to
the Trustee against any costs, liability, or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) 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 Exchange 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 be issued or
distributed to the stockholders of the Company) or permit any person to merge
with or into the Company unless:
(1) 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 state thereof or the District of Columbia
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;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) 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;
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(4) 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
(5) the Company delivers to the Trustee an officers' certificate
(attaching the arithmetic computations to demonstrate compliance with clause
(3)) 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 (3)
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.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any person other than the Company or any
other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indenture all of the obligations
of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, the Company could satisfy
the provisions of clause (4) of the first paragraph of this covenant.
Any merger or consolidation of a Guarantor with and into the Company (with
the Company being the surviving entity) or any merger or consolidation of a
Guarantor and a Restricted Subsidiary of the Company (with a Guarantor being the
surviving entity) need only comply with clause (5) of the first paragraph of
this covenant.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
Notes ("Legal Defeasance"). Such Legal Defeasance
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means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the Notes, except for:
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the Notes when such payments
are due;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
on the Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that:
(i) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling; or
(ii) since the date of the Indenture, there has been a change in the
applicable federal income tax law;
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
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(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that:
(i) the trust funds will not be subject to any rights of holders of
Senior Debt, including, without limitation, those arising under the
Indenture; and
(ii) assuming no intervening bankruptcy of the Company between the
date of deposit and the 91st day following the date of deposit and that
no Holder is an insider of the Company, after the 91st day following the
date of deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause (2)
above with respect to a Legal Defeasance need not be delivered if all Notes not
theretofore delivered to the Trustee for cancellation (1) have become due and
payable or (2) will become due and payable on the maturity date within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all Notes when:
(1) either:
(i) all the Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or
(ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit
together with irrevocable instructions from the Company directing the
Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) the Company has paid all other sums payable under the Indenture by
the Company; and
(3) the Company has delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have
been complied with.
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MODIFICATION AND WAIVER
The Indenture provides that the Company, the Guarantors and the Trustee may
amend or supplement the Indenture or the Notes without notice to or the consent
of any Holder:
(1) 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;
(2) to comply with the provisions in the Indenture described above under
the caption entitled "Consolidation, Merger, and Sale of Assets";
(3) to comply with any requirements of the Commission in connection with
the qualification of the Indenture under the TIA;
(4) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee;
(5) to establish the form or forms or terms of the Notes as permitted by
the Indenture;
(6) to provide for uncertificated Notes and to make all appropriate
changes for such purpose; or
(7) 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, the Guarantors and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Notes; PROVIDED, HOWEVER, that no such modification or amendment may,
without the consent of each Holder affected thereby:
(1) change the stated maturity of the principal of, or any installment
of interest on, any Note;
(2) reduce the principal amount of, or premium, if any, or interest on,
any Note;
(3) change the place or currency of payment of principal of, or premium,
if any, or interest on, any Note;
(4) 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;
(5) reduce the above-stated percentage of Notes the consent of whose
Holders is necessary to modify or amend the Indenture;
(6) waive a default in the payment of principal of, premium, if any, or
interest on the Notes;
(7) 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;
(8) after the Company's obligation to purchase Notes arises thereunder,
amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or make and consummate an Excess Proceeds Offer with
respect to any Asset Sale that has been consummated or, after such Change of
Control has occurred or such Asset Sale has been consummated, modify any of
the provisions or definitions with respect thereto; or
(9) modify or change any provision of the Indenture or the related
definitions affecting the subordination or ranking of the Notes or any
Guarantee in a manner which adversely affects the Holders.
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It shall not be necessary for the consent of the Holders under 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 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 Exchange 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.
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 TIA 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.
GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
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.
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"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):
(1) 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 (i) are actually paid in cash to the Company or any
of its Restricted Subsidiaries by such person during such period and (ii)
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;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (iii) 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 (1) 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;
(3) 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;
(4) any net gains or losses (on an after-tax basis) attributable to
Asset Sales; and
(5) all net after-tax extraordinary gains and extraordinary losses.
"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:
(1) 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
(2) 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:
(1) all or substantially all of the Capital Stock of any Restricted
Subsidiary; or
(2) 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.
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"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":
(1) any transaction or series of related transactions for which the
Company or any Restricted Subsidiary of the Company receives aggregate
consideration of less than $1.0 million;
(2) 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;
(3) 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);
(4) 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";
(5) 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;
(6) 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
(7) 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.
"AVERAGE LIFE" is defined to mean, at any date of determination with respect
to any Exchange Note, the quotient obtained by dividing:
(1) the sum of the products of (i) the number of years from such date of
determination to the dates of each successive scheduled principal payment of
such Exchange Note and (ii) the amount of such principal payment by
(2) 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 Issue Date, 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.
"CASH EQUIVALENTS" is defined to mean:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
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(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250.0
million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
and
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through (5)
above.
"CHANGE OF CONTROL" is defined to mean such time as:
(1) 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
(2) 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.
"CONSOLIDATED EBITDA" is defined to mean, for any period, the sum of the
amounts for such period of:
(1) Adjusted Consolidated Net Income;
(2) Consolidated Interest Expense;
(3) 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);
(4) depreciation expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income;
(5) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income; and
(6) 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;
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PROVIDED that, if any Restricted 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:
(i) the amount of the Adjusted Consolidated Net Income attributable
to such Restricted Subsidiary multiplied by
(ii) the quotient of (A) 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
(B) 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 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") to
the aggregate Consolidated Fixed Charges during such Reference Period.
In making the foregoing calculation;
(1) pro forma effect shall be given to:
(i) any Indebtedness Incurred subsequent to the end of the Reference
Period and prior to the Transaction Date;
(ii) any Indebtedness Incurred during such Reference Period to the
extent such Indebtedness is outstanding at the Transaction Date; and
(iii) any Indebtedness to be Incurred on the Transaction Date, in
each case as if such Indebtedness had been Incurred on the first 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;
(2) 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;
(3) 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 (2) above) during such Reference
Period under a revolving credit or similar working capital facility in the
ordinary course for working capital purposes;
(4) 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 and the Consolidated EBITDA relating to
such Asset Acquisitions or Asset Dispositions) 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;
(5) with respect to any such Reference Period commencing prior to the
Issue Date, the issuance of the Notes shall be deemed to have taken place on
the first day of such Reference Period; and
(6) 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
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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 (4) or (6) above 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:
(1) Consolidated Interest Expense for such period; and
(2) 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 Subsidiaries.
"CONSOLIDATED INTEREST EXPENSE" is defined to mean, for any period, the
aggregate amount of:
(1) 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 (3)
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 (3) of the definition thereof);
and
(2) the amount of dividends accrued or payable by such person or any of
its consolidated Restricted Subsidiaries in respect of preferred stock
(other than by Restricted Subsidiaries of such person to such person or such
person's Wholly-Owned Restricted 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:
(1) amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness;
(2) cost of treasury stock; and
(3) the principal amount of any promissory notes receivable from the
sale of the Capital 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).
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"CREDIT AGREEMENT" is defined to mean the Credit Agreement dated as of June
22, 1999, between the Company, the lenders party thereto in their capacities as
lenders thereunder and Wachovia Bank, N.A., as agent, together with the related
documents thereto (including, without limitation, any guarantee agreements and
security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from
time to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (PROVIDED that such increase in borrowings is
permitted by the "Limitation on Indebtedness" covenant above) or adding
Restricted Subsidiaries of the Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"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.
"DESIGNATED SENIOR DEBT" is defined to mean:
(1) Indebtedness under or in respect of the Credit Agreement; and
(2) any other Indebtedness constituting Senior Debt which, at the time
of determination, has an aggregate principal amount of at least $25.0
million and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"FORWARD EQUITY CONTRACTS" is defined to mean (1) the master agreement (with
attached schedule) dated as of August 12, 1998, as amended, and the confirmation
thereto dated September 9, 1998 between Cooperative Centrale
Raiffeisen-Boerenleenbank B.A. and the Company and (2) the master agreement
(with attached schedule) dated as of July 22, 1998, and the confirmation thereto
dated July 28, 1998 between SunTrust Bank, Atlanta and 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:
(1) the amortization of any expenses incurred in connection with the
offering of the Notes; and
(2) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"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:
(1) 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
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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
(2) 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.
"GUARANTEE" is defined to mean each guarantee by a Guarantor of the
Company's obligations under the Notes and the Indenture.
"GUARANTOR" is defined to mean:
(1) each of the Company's Subsidiaries that guarantees the Notes on the
Issue Date; and
(2) each of the Company's Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees
to be bound by the terms of the Indenture as a Guarantor;
PROVIDED that any person constituting a Guarantor as described above shall cease
to constitute a Guarantor when its respective Guarantee is released in
accordance with the terms of the Indenture.
"GUARANTOR SENIOR DEBT" is defined to mean, with respect to any Guarantor:
the principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of a Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Guarantee of such Guarantor. Without limiting the generality of the foregoing,
"Guarantor Senior Debt" shall also include the principal of, premium, if any,
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other amounts owing in respect of:
(1) all monetary obligations of every nature of such Guarantor under, or
with respect to, the Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities (and guarantees thereof);
(2) the guarantee by such Guarantor of the Company's obligations under
the 9 3/4% Senior Notes;
(3) all Interest Rate Agreements (and guarantees thereof); and
(4) all obligations (and guarantees thereof) under Currency Agreements;
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include:
(1) any Indebtedness of such Guarantor to a Subsidiary of such
Guarantor;
(2) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of such Guarantor or any Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation)
other than a shareholder who is also a lender (or an Affiliate of a lender)
under the Credit Agreement;
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(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) Indebtedness represented by Redeemable Stock;
(5) any liability for federal, state, local or other taxes owed or owing
by such Guarantor;
(6) that portion of any Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Indebtedness" (but, as
to any such obligation, no such violation shall be deemed to exist for
purposes of this clause (6) if the holder(s) of such obligation or their
representative shall have received an officers' certificate of the Company
to the effect that the incurrence of such Indebtedness does not (or, in the
case of revolving credit indebtedness, that the incurrence of the entire
committed amount thereof at the date on which the initial borrowing
thereunder is made would not) violate such provisions of the Indenture);
(7) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company; and
(8) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of such Guarantor.
"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 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.
"INDEBTEDNESS" is defined to mean, with respect to any person at any date of
determination (without duplication):
(1) all indebtedness of such person for borrowed money;
(2) all obligations of such person evidenced by bonds, debentures,
notes, or other similar instruments;
(3) all obligations of such person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto);
(4) 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);
(5) all obligations of such person as lessee under Capitalized Leases;
(6) all Indebtedness of other persons secured by a Lien on any asset of
such person, whether or not such Indebtedness is assumed by such person;
PROVIDED that the amount of such Indebtedness shall be the lesser of (i) the
fair market value of such asset at such date of determination and (ii) the
amount of such Indebtedness;
(7) all Indebtedness of other persons guaranteed by such person to the
extent such Indebtedness is guaranteed by such person;
(8) all Redeemable Stock of such person; and
(9) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements.
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The amount of Indebtedness of any person at any date will 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
(1) 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
(2) that Indebtedness will 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:
(1) "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;
(2) 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; and
(3) the amount of any Investment shall be the original cost of such
Investment plus the cost of all additional Investments by the Company or any
of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment, reduced by the payment of dividends or distributions in
connection with such Investment or any other amounts received in respect of
such Investment; PROVIDED that no such payment of dividends or distributions
or receipt of any such other amounts shall reduce the amount of any
Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Adjusted Consolidated Net Income.
"ISSUE DATE" is defined to mean the date on which the Outstanding Notes were
originally issued under the Indenture.
"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).
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"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:
(1) brokerage commissions and other fees and expenses (including fees
and expenses of counsel and investment bankers) related to such Asset Sale;
(2) 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;
(3) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (i) is secured by a
Lien on the property or assets sold or (ii) is required to be paid as a
result of such sale; and
(4) appropriate amounts to be provided by the Company or any Restricted
Subsidiary as a reserve against any 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.
"9 3/4% SENIOR NOTES" is defined to mean the Company's 9 3/4% Senior Notes
due 2006 outstanding on the Issue Date.
"OBLIGATIONS" is defined to mean all obligations for principal, premium,
interest, penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" is defined to mean:
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company;
(2) Investments in the Company by any Restricted Subsidiary of the
Company; PROVIDED that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture;
(3) Investments in cash and Cash Equivalents;
(4) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $10.0 million at any one time
outstanding;
(5) Currency Agreements and Interest Rate Agreements entered into in the
ordinary course of the Company's or its Restricted Subsidiaries' businesses
and otherwise in compliance with the Indenture;
(6) additional Investments (including joint ventures) (in addition to
Investments existing on the Issue Date) not to exceed $15.0 million at any
one time outstanding;
(7) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
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(8) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; and
(9) Investments existing on the Issue Date.
"PERMITTED LIENS" is defined to mean:
(1) 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;
(2) 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;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance, and other
types of social security;
(4) 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);
(5) 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;
(6) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; PROVIDED that
(i) such Lien is created solely for the purpose of securing
Indebtedness Incurred:
(A) 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
(B) to refinance any Indebtedness previously so secured;
(ii) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost; and
(iii) 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;
(7) 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;
(8) 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;
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(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(11) 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;
(12) Liens in favor of the Company or any Restricted Subsidiary;
(13) 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;
(14) fm]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;
(15) 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;
(16) 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;
(17) 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 Issue Date; and
(18) Liens on or sales of receivables.
"REDEEMABLE STOCK" is defined to mean any class or series of Capital Stock
of any person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the Notes;
(2) 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
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) 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.
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"REPRESENTATIVE" is defined to mean the indenture trustee or other trustee,
agent or representative in respect of any Designated Senior Debt; PROVIDED that
if, and for so long as, any Designated Senior Debt lacks such a representative,
then the Representative for such Designated Senior Debt shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Debt in respect of any Designated Senior Debt.
"RESTRICTED INVESTMENT" is defined to mean any Investment other than a
Permitted Investment.
"RESTRICTED SUBSIDIARY" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"SENIOR DEBT" is defined to mean the principal of, premium, if any, and
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on any Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes.
Without limiting the generality of the foregoing, "Senior Debt" shall also
include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of:
(1) all monetary obligations of every nature of the Company under, or
with respect to, the Credit Agreement, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities (and guarantees thereof);
(2) all monetary obligations of the Company under the 9 3/4% Senior
Notes;
(3) all Interest Rate Agreements (and guarantees thereof); and
(4) all obligations (and guarantees thereof) under Currency Agreements;
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include:
(1) any Indebtedness of the Company to a Subsidiary of the Company;
(2) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Subsidiary of the
Company (including, without limitation, amounts owed for compensation) other
than a shareholder who is also a lender (or an Affiliate of a lender) under
the Credit Agreement;
(3) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services;
(4) Indebtedness represented by Redeemable Stock;
(5) any liability for federal, state, local or other taxes owed or owing
by the Company;
(6) that portion of any Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Indebtedness" (but, as
to any such obligation, no such violation shall be deemed to exist for
purposes of this clause (6) if the holder(s) of such obligation or their
representative shall have received an officers' certificate of the Company
to the effect that the incurrence of such Indebtedness does not (or, in the
case of revolving credit indebtedness, that the
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incurrence of the entire committed amount thereof at the date on which the
initial borrowing thereunder is made would not) violate such provisions of
the Indenture);
(7) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company; and
(8) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of the Company.
"STATED MATURITY" is defined to mean:
(1) 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
(2) 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.
"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:
(1) 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
(2) 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:
(1) the Subsidiary to be so designated has total assets of $1,000 or
less; or
(2) 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
(1) the Company could Incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "Limitation on Indebtedness"
covenant; and
(2) 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.
Avado Financing I shall be designated as an Unrestricted Subsidiary as of
the Issue Date.
"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.
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"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.
BOOK-ENTRY, DELIVERY AND FORM
The Outstanding Notes were offered and sold to qualified institutional
buyers in reliance on Rule 144A and also were offered and sold in offshore
transactions in reliance on Regulation S. They were issued in registered, global
form in minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof (the "Global Notes").
The Global Notes were deposited upon issuance with the Trustee as custodian
for The Depository Trust Company ("DTC"), in New York, New York, and registered
in the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of Notes in certificated
form.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them from time to time. The Company takes no responsibility for
these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants and not on the records maintained by DTC.
DTC has also advised the Company that, pursuant to procedures established by
it:
(1) upon deposit of the Global Notes, DTC credits the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes; and
(2) ownership of such interests in the Global Notes are shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants
and the Indirect Participants (with respect to other owners of beneficial
interest in the Global Notes).
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Investors in the Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having beneficial interests in a Global Note to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Additional
Interest, if any, and interest on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in the principal amount of beneficial interest in the relevant security
as shown on the records of DTC unless DTC has reason to believe it will not
receive payment on such payment date.
Payments by the Participants and the Indirect Participants to the beneficial
owners of the Notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the Trustee or the
Company. Neither the Company nor the Trustee will be liable for any delay by DTC
or any of its Participants in identifying the beneficial owners of the Notes,
and the Company and the Trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee for all purposes.
Interests in the Global Notes (other than those sold under Regulation S, in
some circumstances) are expected to be eligible to trade in DTC's Same-Day Funds
Settlement System, and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants. See "Same Day Settlement and
Payment."
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of
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the Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange the Global Notes for legended Notes in
certificated form, and to distribute such Notes to its Participants.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if:
(1) DTC
(i) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company thereupon fails to
appoint a successor depositary; or
(ii) has ceased to be a clearing agency registered under the Exchange
Act;
(2) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the Notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request, but upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the Indenture. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear a restrictive legend, unless the Company
determines otherwise in compliance with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interest in any Global Note unless the transferor first delivers to the Trustee
a written certificate (in the form provided in the Indenture) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Notes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Additional Interest, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to Notes
in certificated form, the Company will make all payments of principal, premium,
if any, interest and Additional Interest, if any, by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. The Notes represented by the Global Notes are expected to be
eligible to trade in the PORTAL market and to trade in the Depository's Same Day
Funds Settlement System, and any permitted secondary market trading activity in
such Notes will, therefore, be required by the Depositary to be settled in
immediately, available funds. The Company expects that secondary trading in any
certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
The Company, the Guarantors and the Initial Purchasers have entered into the
Registration Rights Agreement. Pursuant to the Registration Rights Agreement,
the Company and the Guarantors agreed to file with the Commission the Exchange
Offer Registration Statement (as defined in the Registration
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Rights Agreement) on the appropriate form under the Securities Act with respect
to the Exchange Notes.
If any Holder of Transfer Restricted Securities notifies the Company prior
to the 20th day following consummation of the Exchange Offer that:
(i) it is prohibited by law or Commission policy from participating
in the Exchange Offer;
(ii) it would not be able to resell the Exchange Notes acquired by it
in the Exchange Offer to the public without delivering a prospectus and
the prospectus contained in the Exchange Offer Registration Statement is
not appropriate or available for such resales; or
(iii) it is a broker-dealer and owns Outstanding Notes acquired
directly from the Company or an affiliate of the Company,
then, in each such case, the Company will file with the Commission a Shelf
Registration Statement (as defined in the Registration Rights Agreement) to
cover resales of the Outstanding Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement.
The Company will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Outstanding Note until:
(1) the date on which such Outstanding Note has been exchanged by a
person other than a broker-dealer for an Exchange Note in the Exchange
Offer;
(2) following the exchange by a broker-dealer in the Exchange Offer of
an Outstanding Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of the prospectus contained in the Exchange
Offer Registration Statement;
(3) the date on which such Outstanding Note has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement; or
(4) the date on which such Outstanding Note is distributed to the public
pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that:
(1) the Company will commence the Exchange Offer and use its best
efforts to issue on or prior to 30 business days after the date on which the
Exchange Offer Registration Statement was declared effective by the
Commission, Exchange Notes in exchange for all Exchange Notes tendered prior
thereto in the Exchange Offer; and
(2) if obligated to file the Shelf Registration Statement, the Company
will use its best efforts to file the Shelf Registration Statement with the
Commission on or prior to 60 days after such filing obligation arises and to
cause the Shelf Registration to be declared effective by the Commission on
or prior to 150 days after such obligation arises.
If (1) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date
specified for such filing;
(2) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date");
(3) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement; or
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(4) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the periods specified in the Registration Rights Agreement (each such event
referred to in clauses (1) through (4) above a "Registration Default"),
then, in each such case, the Company will pay Additional Interest to each
Holder of Exchange Notes, with respect to the first 90-day period immediately
following the occurrence of the first Registration Default in an amount equal to
$0.05 per week per $1,000 principal amount of Exchange Notes held by such
Holder. The amount of the Additional Interest will increase by an additional
$0.05 per week per $1,000 principal amount of Exchange Notes with respect to
each subsequent 90-day period until all Registration Defaults have been cured up
to a maximum amount of Additional Interest for all Registration Defaults of
$0.50 per week per $1,000 principal amount of Exchange Notes. All accrued
Additional Interest will be paid by the Company on each Interest Payment Date to
the Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Additional Interest will cease.
Holders of Outstanding Notes will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver certain information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Outstanding Notes included in the Shelf Registration Statement and benefit
from the provisions regarding Additional Interest set forth above. Holders of
Outstanding Notes will also be required to suspend their use of the prospectus
included in the Shelf Registration Statement under certain circumstances upon
receipt of written notice to that effect from the Company.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain material United States
federal income and estate tax considerations relating to the purchase, ownership
and disposition of the Exchange Notes by an initial beneficial owner of the
Exchange Notes, and the exchange by an initial beneficial owner of the
Outstanding Notes for Exchange Notes. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations and judicial decisions and administrative interpretations
thereunder, as of the date of this Prospectus, all of which are subject to
change, possibly with retroactive effect, or to different interpretations. We
cannot assure you that the Internal Revenue Service (the "IRS") will not
challenge one or more of the tax considerations described herein, and we have
not obtained, nor do we intend to obtain, a ruling from the IRS or an opinion of
counsel with respect to the United States federal tax considerations resulting
from acquiring, holding or disposing of the Exchange Notes.
In this discussion, we do not purport to address all tax considerations that
may be important to a particular holder in light of the holder's circumstances
(such as the alternative minimum tax provisions of the Code), or to certain
categories of investors (including, but not limited to, certain financial
institutions, insurance companies, tax-exempt organizations, dealers in
securities, persons who hold the Exchange Notes as part of a hedge, conversion
transaction, straddle or other risk reduction transaction, pass-through entities
(e.g., partnerships) or persons who hold the Exchange Notes through a
pass-through entity, or individuals who are United States expatriates) that may
be subject to special rules. This discussion is limited to initial holders who
hold the Exchange Notes as capital assets. This discussion also does not address
the tax considerations arising under the laws of any foreign, state or local
jurisdiction.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSIDERATIONS TO YOU OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
EXCHANGE NOTES, INCLUDING THE EFFECT AND APPLICABILITY OF STATE, LOCAL OR
FOREIGN TAX LAWS.
U.S. HOLDERS
As used in this discussion, the term "U.S. Holder" means a holder of an
Exchange Note that is:
- a citizen or resident of the United States for United States federal
income tax purposes, including an alien individual who is a lawful
permanent resident of the United States or meets the "substantial
presence" test prescribed under the Code;
- a corporation (including an entity treated as a corporation for United
States federal income tax purposes) created or organized in or under the
laws of the United States or of any political subdivision thereof;
- an estate, the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust, the administration of which is subject to the primary supervision
of a court within the United States and which has one or more United
States persons with authority to control all substantial decisions, or if
the trust was in existence on August 20, 1996 and has elected to continue
to be treated as a United States person.
As used in this discussion, the term "Non-U.S. Holder" means a holder of an
Exchange Note that is not a U.S. Holder.
INTEREST ON EXCHANGE NOTES. Interest on the Exchange Notes will be taxable
to a U.S. Holder as ordinary income at the time it is paid or accrued, depending
on the holder's method of tax accounting.
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SALE, EXCHANGE, RETIREMENT OR OTHER TAXABLE DISPOSITION OF THE EXCHANGE
NOTES. Upon the sale, exchange, retirement or other taxable disposition of an
Exchange Note, a U.S. Holder will recognize gain or loss equal to the difference
between the fair market value of the proceeds received in exchange for the
Exchange Note (except to the extent attributable to the payment of accrued
interest, which generally will be taxable as ordinary income) and the U.S.
Holder's adjusted tax basis in the Exchange Note.
A U.S. Holder's adjusted tax basis in an Exchange Note generally will equal
the price paid by the U.S. Holder for the Exchange Note decreased by any
repayments of principal received thereon. Gain or loss, realized on the sale,
exchange or retirement of an Exchange Note will be capital gain or loss. For
U.S. Holders who are individuals, the gain generally is taxed at ordinary income
tax rates if the Exchange Note is held for 12 months or less, and at a maximum
statutory federal income tax rate of 20% if the Exchange Note is held for more
than 12 months.
EXCHANGE OFFER. In satisfaction of the holders' registration rights as
described in this Prospectus, we intend to offer to exchange Exchange Notes for
the Outstanding Notes. The Exchange Notes should not differ materially in kind
or extent from the Outstanding Notes, and therefore a U.S. Holder's exchange of
Outstanding Notes for Exchange Notes should not constitute a taxable disposition
of the Outstanding Notes for United States federal income tax purposes. As a
result, a U.S. Holder should not recognize taxable income, gain or loss on the
exchange, the holder's holding period for the Exchange Notes should generally
include the holding period for the Outstanding Notes so exchanged, and the
holder's adjusted tax basis in the Exchange Notes should generally be the same
as the holder's adjusted tax basis in the Outstanding Notes so exchanged.
PAYMENTS OF ADDITIONAL INTEREST. We intend to take the position for United
States federal income tax purposes that payments of Additional Interest, as
described above under "Description of the Exchange Notes-Registration Rights;
Additional Interest," if paid as required therein, should be taxable to a U.S.
Holder as additional interest income when received or accrued, in accordance
with the holder's method of tax accounting. This position is based in part on
the assumption that as of the date of issuance of the Exchange Notes, the
possibility that Additional Interest will have to be paid is a "remote" or
"incidental" contingency. Our determination that the possibility is a remote or
incidental contingency is binding on a U.S. Holder, unless the holder explicitly
discloses to the IRS, on the holder's return for the year during which the
Exchange Note is acquired, that the holder is taking a different position.
Regardless of our position, however, the IRS may take the contrary position that
the payment of Additional Interest is not a remote or incidental contingency,
which could cause the Exchange Notes to be treated as having been issued with
original issue discount. This contrary position could affect the timing and
character of both the holder's income from the Exchange Notes and our deduction
with respect to the payments of Additional Interest. Prospective holders should
consult their own tax advisers regarding the tax considerations that relate to
the payment or potential payment of Additional Interest.
NON-U.S. HOLDERS
In the following discussion, we summarize the principal United States
federal income and estate tax considerations resulting from the acquisition,
ownership and disposition of the Exchange Notes by Non-U.S. Holders.
INTEREST ON EXCHANGE NOTES. Subject to the discussion below of backup
withholding, interest paid on the Exchange Notes to a Non-U.S. Holder generally
will not be subject to United States federal income tax if:
- such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder;
112
<PAGE>
- the Non-U.S. Holder does not actually or constructively own 10% or more of
the total voting power of all classes of our stock entitled to vote;
- the Non-U.S. Holder is not a controlled foreign corporation with respect
to which we are a "related person" within the meaning of the Code; and
- the beneficial owner, under penalty of perjury, certifies that the owner
is not a United States person and provides the owner's name and address.
If certain requirements are satisfied, the certification described in the
last clause above may be provided by a securities clearing organization, a bank,
or other financial institution that holds customers securities in the ordinary
course of its trade or business.
Under Treasury Regulations, which generally are effective for payments made
after December 31, 2000, subject to certain transition rules, the certification
described in the last clause above may also be provided by a qualified
intermediary on behalf of one or more beneficial owners (or other
intermediaries), provided that such intermediary has entered into a withholding
agreement with the IRS and certain other conditions are met. A holder that is
not exempt from tax under these rules will be subject to United States federal
income tax withholding at a rate of 30% unless:
- the interest is effectively connected with the conduct of a United States
trade or business, in which case the interest will be subject to the
United States federal income tax on net income that applies to United
States persons generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax); or
- the rate of withholding is reduced or eliminated by an applicable income
tax treaty; and
- in either case, the Non-U.S. Holder provides us with proper certification
as to the holder's exemption from withholding.
In the event any Additional Interest we are required to pay pursuant to a
failure to register the Exchange Notes for sale to the public is treated as
interest, the tax treatment of such payments should be the same as other
interest payments received by a Non-U.S. Holder. However, the IRS may treat such
payments as other than interest, in which case they would be subject to United
States federal withholding tax at a rate of 30%, unless the holder qualifies for
a reduced rate of tax or an exemption under a tax treaty.
GAIN ON DISPOSITION OF THE EXCHANGE NOTES. A Non-U.S. Holder generally will
not be subject to United States federal income tax on gain realized on the sale,
exchange or redemption of an Exchange Note, including an exchange of an
Outstanding Note for an Exchange Note, unless:
- in the case of an individual Non-U.S. Holder, such holder is present in
the United States for 183 days or more in the year of such sale, exchange
or redemption, and certain other requirements are met;
- the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates; or
- the gain is effectively connected with the conduct of a United States
trade or business of the Non-U.S. Holder.
U.S. FEDERAL ESTATE TAX. An Exchange Note held by an individual who at the
time of death is not a citizen or resident of the United States (as specially
defined for United States federal estate tax purposes) will not be subject to
United States federal estate tax if the individual did not actually or
constructively own 10% or more of the total combined voting power of all classes
of our stock and, at the time of the individual's death, payments with respect
to such Exchange Note would not have been effectively connected with the conduct
by such individual of a trade or business in the United States.
113
<PAGE>
OPTIONAL REDEMPTION
At certain times and subject to certain conditions, we are entitled to
redeem all or a portion of the Exchange Notes. Treasury regulations contain
special rules for determining the yield to maturity and maturity date on a debt
instrument in the event the debt instrument provides for a contingency that
could result in the acceleration or deferral of one or more payments. We believe
that under these rules the redemption provisions of the Exchange Notes should
not affect the computation of the yield to maturity or maturity date of the
Exchange Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. HOLDERS. Information reporting will apply to payments of interest on
or the proceeds of the sale or other disposition of the Exchange Notes made by
us with respect to certain non-corporate U.S. Holders. A U.S. Holder will
further be subject to backup withholding at the rate of 31% with respect to
interest, principal and premium, if any, we pay on an Exchange Note, unless the
holder (1) is an entity (including corporations, tax-exempt organizations and
certain qualified nominees) that is exempt from withholding and, when required,
demonstrates this fact; or (2) provides us with a correct taxpayer
identification number, certifies that the taxpayer identification number is
correct and that the holder has not been notified by the IRS that it is subject
to backup withholding due to underreporting of interest or dividends, and
otherwise complies with applicable requirements of the backup withholding rules.
Any amount withheld under the backup withholding rules is allowable as a credit
against the U.S. Holder's United States federal income tax liability, provided
that the required information is furnished to the IRS.
NON-U.S. HOLDERS. We will, when required, report to the IRS and to each
Non-U.S. Holder the amount of any interest paid to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld on
such payments. Copies of these information returns may also be made available to
the tax authorities of the country in which the Non-U.S. Holder resides under
the provisions of a specific treaty or agreement.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments of interest on or principal of the Exchange
Notes by us or our agent to a Non-U.S. Holder if the Non-U.S. Holder certifies
as to its Non-U.S. Holder status under penalties of perjury or otherwise
establishes an exemption (provided that neither we nor our agent have actual
knowledge that the holder is a U.S. person or that the conditions of any other
exemptions are not in fact satisfied). The payment of the proceeds on the
disposition of Exchange Notes to or through the United States office of a United
States or foreign broker will be subject to information reporting and backup
withholding unless the owner provides the certification described above or
otherwise establishes an exemption. The proceeds of the disposition by a
Non-U.S. Holder of Exchange Notes to or through a foreign office of a broker
generally will not be subject to backup withholding or information reporting.
However, if such broker is a U.S. person, a controlled foreign corporation or a
foreign person deriving 50% or more of its gross income from all sources for
certain periods from activities that are effectively connected with the conduct
of a United States trade or business, information reporting requirements will
apply unless such broker has documentary evidence in its files of the holder's
status as a Non-U.S. Holder and has no actual knowledge to the contrary or
unless the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-U.S.
Holder's United States federal income tax liability provided that the required
information is furnished to the IRS.
New Treasury Regulations relating to withholding tax on income paid to
Non-U.S. Holders will generally be effective for payments made after December
31, 2000, subject to certain transition rules. In general, these new regulations
do not significantly alter the substantive withholding and information
114
<PAGE>
reporting requirements, but rather unify current certification procedures and
forms, and clarify reliance standards. The new regulations also alter the
procedures for claiming benefits of an income tax treaty and permit the shifting
of primary responsibility for withholding to certain financial intermediaries
acting on behalf of beneficial owners under some circumstances. On January 15,
1999, the IRS issued Notice 99-8, proposing certain changes to these new
withholding regulations for non-resident aliens and foreign corporations and
providing a model "qualified intermediary" withholding agreement to be entered
into with the IRS to allow certain institutions to certify on behalf of their
non-U.S. customers or account holders who invest in U.S. securities. We strongly
urge prospective Non-U.S. Holders to consult their own tax advisors for
information on the impact, if any, of these new withholding regulations.
115
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, we believe that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Outstanding Notes may be offered
for resale, resold and otherwise transferred by holders thereof (other than any
holder which is (i) an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act, (ii) a broker-dealer who acquired Outstanding Notes directly
from us or (iii) broker-dealers who acquired Outstanding Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business, and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes; PROVIDED that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
such Exchange Notes. To date, the staff of the Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Outstanding Notes to the Initial
Purchasers) with the Prospectus contained in the Exchange Offer Registration
Statement. Pursuant to the Registration Rights Agreement, we have agreed to
permit Participating Broker-Dealers and other persons, if any, subject to
similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such Exchange Notes. We and the Guarantors have agreed to
make this Prospectus, and any amendment or supplement to this Prospectus,
available to any broker-dealer that requests such documents for a period of 180
days after the Expiration Date in the Letter of Transmittal.
Each holder of the Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to us as set forth in "The Exchange Offer--Purpose and Effect of
the Exchange Offer." In addition, each holder who is a broker-dealer and who
receives Exchange Notes for its own account in exchange for Outstanding Notes
that were acquired by it as a result of market-making activities or other
trading activities, will be required to acknowledge that it will deliver a
prospectus in connection with any resale by it of such Exchange Notes.
We will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the Exchange Offer other
than commissions and concessions of any brokers or dealers and will indemnify
holders of the Outstanding Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
116
<PAGE>
LEGAL MATTERS
Kilpatrick Stockton LLP of Atlanta, Georgia will issue opinions about
certain legal matters with respect to Avado Brands, Inc., the issuance of the
Exchange Notes, and with respect to the validity of the Exchange Notes.
Attorneys at Kilpatrick Stockton LLP who participated in the preparation of this
Prospectus own a total of 2,830 shares of our common stock.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Avado Brands, Inc. as of December
28, 1997 and January 3, 1999, and for each of the years in the three-year period
ended January 3, 1999, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG LLP, covering the January
3, 1999 consolidated financial statements refers to a change in reporting the
cost of start-up activities.
117
<PAGE>
AVADO BRANDS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Earnings for the Fiscal Years Ended December 29, 1996, December 28, 1997 and
January 3, 1999 and for the Thirteen-Week Periods Ended March 29, 1998 and April 4, 1999 (unaudited)..... F-3
Consolidated Balance Sheets as of December 28, 1997 and January 3, 1999 and April 4, 1999 (unaudited)...... F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Fiscal Years Ended
December 29, 1996, December 28, 1997 and January 3, 1999 and for the Thirteen Weeks Ended April 4, 1999
(unaudited).............................................................................................. F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 1996, December 28, 1997 and
January 3, 1999 and for the Thirteen-Week Periods Ended March 29, 1998 and April 4, 1999 (unaudited)..... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
AVADO BRANDS, INC.
We have audited the accompanying consolidated balance sheets of Avado Brands,
Inc. as of December 28, 1997 and January 3, 1999, and the related consolidated
statements of earnings, shareholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended January 3, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avado Brands, Inc.
at December 28, 1997 and January 3, 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended
January 3, 1999, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company adopted the provisions of AICPA Statement of Position 98-5, "Reporting
the Cost of Start-Up Activities."
KPMG LLP
Atlanta, Georgia
January 29, 1999
F-2
<PAGE>
AVADO BRANDS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN-WEEK
PERIODS ENDED
FOR THE FISCAL YEARS ENDED ----------------------
------------------------------- MARCH 29, APRIL 4,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Restaurant sales:
Don Pablo's................................................ $ 133,261 $ 196,457 $ 270,399 $ 59,263 $ 74,372
Hops....................................................... - 49,511 106,329 23,327 32,532
McCormick & Schmick's...................................... - 67,373 102,489 21,342 27,805
Canyon Cafe................................................ - 18,577 48,187 11,981 11,899
Applebee's................................................. 379,042 454,127 335,288 125,763 17,467
Other...................................................... 33,719 22,275 - - -
--------- --------- --------- ----------- ---------
Total restaurant sales................................... 546,022 808,320 862,692 241,676 164,075
--------- --------- --------- ----------- ---------
Restaurant operating expenses:
Food and beverage.......................................... 150,090 225,302 241,689 67,317 45,644
Payroll and benefits....................................... 162,017 249,356 279,274 78,648 51,187
Depreciation and amortization.............................. 22,509 31,441 17,014 4,204 4,892
Other operating expenses................................... 125,781 187,781 202,994 56,458 36,702
--------- --------- --------- ----------- ---------
Total restaurant operating expenses...................... 460,397 693,880 740,971 206,627 138,425
--------- --------- --------- ----------- ---------
General and administrative expenses.......................... 26,329 39,617 46,150 12,915 9,840
Asset revaluation and other special charges.................. 27,700 - 2,940 -- --
--------- --------- --------- ----------- ---------
Operating income............................................. 31,596 74,823 72,631 22,134 15,810
--------- --------- --------- ----------- ---------
Other income (expense):
Interest expense, net...................................... (11,348) (20,504) (25,313) (7,139) (4,941)
Distributions on preferred securities...................... - (6,412) (8,205) (2,012) (2,012)
Gain on disposal of assets................................. - - 72,547 49,000 1,350
Income (loss) from investments carried at equity........... - - 1,025 703 (133)
Other, primarily goodwill amortization..................... (2,024) (5,834) (5,641) (1,322) (972)
--------- --------- --------- ----------- ---------
Total other income (expense)............................. (13,372) (32,750) 34,413 39,230 (6,708)
--------- --------- --------- ----------- ---------
Earnings before income taxes and cumulative effect of change
in accounting principle.................................... 18,224 42,073 107,044 61,364 9,102
Income taxes................................................. 6,550 13,625 39,300 22,825 3,150
--------- --------- --------- ----------- ---------
Earnings before cumulative effect of change in accounting
principle.................................................. 11,674 28,448 67,744 38,539 5,952
Cumulative effect of change in accounting principle, net of
tax benefit................................................ - - 1,461 1,461 -
--------- --------- --------- ----------- ---------
Net earnings................................................. $ 11,674 $ 28,448 $ 66,283 $ 37,078 $ 5,952
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Basic earnings per common share:
Basic earnings before cumulative effect of change in
accounting principle..................................... $ 0.30 $ 0.74 $ 1.85 $ 0.99 $ 0.19
Cumulative effect of change in accounting principle........ - - (0.04) (0.04) -
--------- --------- --------- ----------- ---------
Basic earnings per common share.............................. $ 0.30 $ 0.74 $ 1.81 $ 0.95 $ 0.19
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Diluted earnings per common share:
Diluted earnings before cumulative effect of change in
accounting principle..................................... $ 0.30 $ 0.73 $ 1.65 $ 0.85 $ 0.19
Cumulative effect of change in accounting principle........ - - (0.03) (0.03) -
--------- --------- --------- ----------- ---------
Diluted earnings per common share............................ $ 0.30 $ 0.73 $ 1.62 $ 0.82 $ 0.19
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVADO BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR END
----------------------- APRIL 4,
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 2,503 $ 7,216 $ 794
Short-term investments................................................... 37 27 53
Accounts receivable...................................................... 8,983 9,124 8,049
Inventories.............................................................. 10,732 8,599 8,960
Prepaid expenses and other............................................... 9,047 3,205 6,740
Assets held for sale..................................................... 331,104 72,814 39,481
----------- ---------- -----------
Total current assets................................................... 362,406 100,985 64,077
----------- ---------- -----------
Premises and equipment, net................................................ 283,839 367,587 382,539
Goodwill, net.............................................................. 138,403 138,005 137,127
Investments carried at equity.............................................. - 16,106 17,095
Other assets............................................................... 19,641 47,914 41,311
----------- ---------- -----------
$ 804,289 $ 670,597 $ 642,149
----------- ---------- -----------
----------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 24,819 $ 28,474 $ 32,367
Accrued liabilities...................................................... 40,266 42,053 34,714
Current installments of long-term debt................................... 206 140,500 137,491
Income taxes............................................................. - 28,091 32,229
----------- ---------- -----------
Total current liabilities.............................................. 65,291 239,118 236,801
----------- ---------- -----------
Long-term debt............................................................. 381,843 116,978 116,957
Deferred income taxes...................................................... 14,231 8,200 8,200
Other long-term liabilities................................................ 7,142 8,177 8,509
----------- ---------- -----------
Total liabilities...................................................... 468,507 372,473 370,467
----------- ---------- -----------
Company-obligated mandatorily redeemable preferred securities of Avado
Financing I, a subsidiary holding solely Avado Brands, Inc. 7%
convertible subordinated debentures due March 1, 2027.................... 115,000 115,000 115,000
Temporary equity, net...................................................... - 71,095 39,849
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares; none
issued................................................................. - - -
Common stock, $0.01 par value. Authorized 75,000,000 shares; 40,478,760
issued in 1997 and 1998 and April 4, 1999.............................. 405 405 405
Additional paid-in capital............................................... 145,269 63,431 94,588
Retained earnings........................................................ 97,905 162,411 167,985
Accumulated other comprehensive income................................... - 24 (317)
Treasury stock at cost; 1,662,812 shares in 1997 and 8,910,174 shares in
1998 and 11,344,546 shares at April 4, 1998............................ (22,797) (114,242) (145,828)
----------- ---------- -----------
Total shareholders' equity............................................. 220,782 112,029 116,833
----------- ---------- -----------
$ 804,289 $ 670,597 $ 642,149
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVADO BRANDS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK EQUITY
------ ------ ---------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..................... 39,079 $391 $142,355 $60,475 $ - $ - $203,221
Net earnings..................................... - - - 11,674 - - 11,674
Purchase of common stock......................... - - - - - (30,048) (30,048)
Common stock issued to ESOP and ESPP............. - - 197 - - 487 684
Exercise of options.............................. 46 - (14,111) - - 16,642 2,531
Tax effect of exercise of options by employees... - - 4,535 - - - 4,535
Cash dividends ($0.030 per share)................ - - - (1,168 ) - - (1,168)
------ ------ ---------- -------- ------------- --------- -------------
Balance at December 29, 1996..................... 39,125 391 132,976 70,981 - (12,919) 191,429
------ ------ ---------- -------- ------------- --------- -------------
Net earnings..................................... - - - 28,448 - - 28,448
Purchase of common stock......................... - - - - - (22,995) (22,995)
Issuance of common stock for acquisitions........ 1,298 13 16,323 - - - 16,336
Issuance of treasury stock for acquisitions...... - - (922) - - 6,078 5,156
Common stock issued to ESOP and ESPP............. 46 1 688 - - - 689
Exercise of options.............................. 10 - (4,814) - - 7,039 2,225
Tax effect of exercise of options by employees... - - 1,018 - - - 1,018
Cash dividends ($0.038 per share)................ - - - (1,524 ) - - (1,524)
------ ------ ---------- -------- ------------- --------- -------------
Balance at December 28, 1997..................... 40,479 405 145,269 97,905 - (22,797) 220,782
------ ------ ---------- -------- ------------- --------- -------------
Comprehensive income:
Net earnings................................... - - - 66,283 - - 66,283
Foreign currency translation adjustment........ - - - - 24 - 24
------ ------ ---------- -------- ------------- --------- -------------
Total comprehensive income....................... - - - 66,283 24 - 66,307
------ ------ ---------- -------- ------------- --------- -------------
Purchase of common stock......................... - - - - - (92,028) (92,028)
Common stock issued to ESOP and ESPP............. - - 36 - - 370 406
Exercise of options.............................. - - (65) - - 213 148
Temporary equity................................. - - (81,809) - - - (81,809)
Cash dividends ($0.0475 per share)............... - - - (1,777 ) - - (1,777)
------ ------ ---------- -------- ------------- --------- -------------
Balance at January 3, 1999....................... 40,479 405 63,431 162,411 24 (114,242) 112,029
------ ------ ---------- -------- ------------- --------- -------------
Comprehensive income:
Net earnings (unaudited)....................... - - - 5,952 - - 5,952
Foreign currency translation adjustment
(unaudited).................................. - - - - (341) - (341)
------ ------ ---------- -------- ------------- --------- -------------
Total comprehensive income (unaudited)........... - - - 5,952 (341) - 5,611
------ ------ ---------- -------- ------------- --------- -------------
Purchase of common stock (unaudited)............. - - - - - (32,435) (32,435)
Common stock issued to ESOP and ESPP
(unaudited).................................... - - (264) - - 849 585
Temporary equity (unaudited)..................... - - 31,421 - - - 31,421
Cash dividends ($0.0125 per share) (unaudited)... - - - (378 ) - - (378)
------ ------ ---------- -------- ------------- --------- -------------
Balance at April 4, 1999 (unaudited)............. 40,479 $405 $ 94,588 $167,985 $ (317) $(145,828) $116,833
------ ------ ---------- -------- ------------- --------- -------------
------ ------ ---------- -------- ------------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AVADO BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN-WEEK
PERIODS ENDED
FOR THE FISCAL YEARS ENDED ----------------------
------------------------------- MARCH 29, APRIL 4,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................... $ 11,674 $ 28,448 $ 66,283 $ 37,078 $ 5,952
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................. 26,250 39,972 23,221 5,665 6,332
Deferred income taxes......................................... 300 3,905 (6,031) 1,769 -
(Gain) loss on disposal of assets............................. 107 54 (72,547) (49,000) (1,350)
(Income) loss from investments carried at equity.............. - - (1,025) (703) 133
Asset revaluation charges..................................... 27,700 - - - -
(Increase) decrease in assets:
Accounts receivable......................................... (1,062) (2,441) (141) (3,012) 1,071
Inventories................................................. (1,488) (2,592) (2,260) (883) (772)
Prepaid expenses and other.................................. (1,837) (1,980) 4,187 (2,233) (2,043)
Increase (decrease) in liabilities:
Accounts payable............................................ 3,199 703 3,655 (3,080) 3,893
Accrued liabilities......................................... (4,958) (1,447) (4,725) 8,690 (8,861)
Income taxes................................................ 4,668 (2,050) 28,091 18,049 4,138
Other long-term liabilities................................. - 164 2,309 1,106 332
--------- --------- --------- ----------- ---------
Net cash provided by operating activities................. 64,553 62,736 41,017 13,446 8,825
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ (124,623) (172,963) (142,841) (40,088) (22,173)
Acquisition of businesses, net of cash acquired................. - (146,444) (2,658) - -
Proceeds from disposal of assets, net........................... 429 5,798 373,814 414 45,643
Decrease in short-term investments.............................. 325 15 10 10 (26)
Additions to investments carried at equity...................... - - (15,057) (6,079) (1,463)
Additions to other assets....................................... (4,690) (5,676) (21,975) (370) (1,560)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) investing activities....... (128,559) (319,270) 191,293 (46,113) 20,421
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) revolving credit agreements.... (11,000) 165,500 (114,726) 32,966 (3,009)
Proceeds from issuance of preferred securities, net of issue
costs......................................................... - 111,261 - - -
Proceeds from issuance of long-term debt........................ 121,880 823 - - -
Principal payments on long-term debt............................ (19,756) (865) (8,500) (53) (21)
Proceeds from issuance of common stock.......................... 3,215 2,914 148 - -
Dividends declared and paid..................................... (1,168) (1,524) (1,777) (405) (378)
Purchase of treasury stock...................................... (30,048) (22,995) (92,028) (113) (32,435)
Collateral payments on equity forward contracts, net............ - - (10,714) - 175
--------- --------- --------- ----------- ---------
Net cash (used in) provided by financing activities....... 63,123 255,114 (227,597) 32,395 (35,668)
--------- --------- --------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (883) (1,420) 4,713 (272) (6,422)
Cash and cash equivalents at the beginning of the period.......... 4,806 3,923 2,503 2,503 7,216
--------- --------- --------- ----------- ---------
Cash and cash equivalents at the end of the period................ $ 3,923 $ 2,503 $ 7,216 $ 2,231 $ 794
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Avado Brands, Inc. (formerly Apple South, Inc.), including its wholly owned
subsidiaries (the "Company"), is a multi-concept restaurant company operating
restaurants in 29 states plus the District of Columbia. At January 3, 1999, the
Company operated 123 Don Pablo's Mexican Kitchen restaurants, 47 Hops Restaurant
Bar and Brewery restaurants, 23 McCormick & Schmick's seafood dinner houses, 19
Canyon Cafe restaurants as well as 44 Applebee's Neighborhood Grill & Bar
restaurants which were held for sale. The Company owns all of its brands on a
proprietary basis except Applebee's, which is franchised. Avado Brands also owns
a 20% equity interest in Belgo Group PLC, a ten-unit United Kingdom restaurant
company, and a 25% equity interest in 11 Harrigans Grill and Bar restaurants.
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of Avado Brands, Inc. and its wholly owned subsidiaries. Investments in
20% to 50% owned affiliates and partnerships are accounted for on the equity
method. All significant intercompany accounts and transactions are eliminated in
consolidation.
The accompanying consolidated financial statements as of April 4, 1999 and
for the thirteen-week periods ended March 29, 1998 and April 4, 1999 are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X promulgated by the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
reporting purposes. In the opinion of management, all adjustments, consisting
only of normal recurring accruals, considered necessary for a fair presentation
have been included.
USE OF ESTIMATES--Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions related to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results may ultimately
differ from estimates.
FISCAL YEAR--The Company's fiscal year is a 52- or 53-week year ending on
the Sunday closest to December 31. Accordingly, the accompanying consolidated
financial statements are as of and for the 52 week periods ended December 29,
1996 ("fiscal 1996") and December 28, 1997 ("fiscal 1997") and the 53-week
period ended January 3, 1999 ("fiscal 1998"). All general references to years
relate to fiscal years unless otherwise noted.
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.
ASSETS HELD FOR SALE--Assets held for sale are stated at the lower of cost
or estimated net realizable value and include certain premises and equipment,
franchise costs and goodwill related primarily to the Company's Applebee's brand
(Note 2). In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of," the Company does not recognize
depreciation or amortization expense during the period in which the assets are
being held for sale.
F-7
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
30 years for buildings and seven years for equipment. Leasehold improvements are
depreciated using the straight-line method over the shorter of the lease term,
including renewal periods, or the estimated useful life of the asset.
FRANCHISE COSTS--In 1996 and 1997, the costs related to acquisition of
Applebee's franchises were amortized over their estimated useful lives,
principally 20 years, using the straight-line method. At December 28, 1997 and
January 3, 1999, franchise costs are included as a component of assets held for
sale in the consolidated balance sheets (Note 2). The franchise agreements for
the Applebee's restaurants require royalty fees equal to 4% of sales and
advertising fees equal to 1 1/2% of sales. Such fees are expensed as incurred.
Total royalty and advertising fees paid under franchise agreements were $21.4
million in 1996, $25.0 million in 1997 and $18.4 million in 1998.
GOODWILL--Goodwill represents the excess of purchase price over fair value
of net assets acquired and is amortized over the expected period to be
benefitted, typically 40 years, using the straight-line method. Recoverability
of this intangible asset is determined by assessing 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 $2.9 million at
December 28, 1997 and $5.9 million at January 3, 1999.
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: $4.0 million in 1996, $4.7 million in 1997 and $5.0 million in 1998.
PREOPENING COSTS--Preopening costs 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. AICPA Statement of Position
98-5, "Reporting the Cost of Start-Up Activities," was adopted at the beginning
of 1998. This statement requires entities to expense the costs of start-up
activities as incurred. As a result of the adoption of this change in accounting
policy, from expensing preopening costs in the first full month of a
restaurant's operations to expensing them as incurred, a cumulative effect
charge from the change in accounting principle of $2.2 million ($1.5 million net
of tax benefit) was recorded in the thirteen weeks ended March 29, 1998.
ADVERTISING--Advertising is expensed over the period covered by the related
promotions. Total advertising expense included in other operating expenses was
$15.0 million in 1996, $29.0 million in 1997 and $32.6 million in 1998, in
addition to amounts paid to the franchisor of Applebee's.
FOREIGN CURRENCY TRANSLATION--Investments in foreign affiliates are
translated into U.S. dollars at the period-end exchange rate, while net earnings
are translated at the average exchange rate during the period. The resulting
translation adjustments are recorded as a separate component of shareholders'
equity and comprehensive income.
STOCK-BASED COMPENSATION--Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured
F-8
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock
(Note 14).
INTEREST RATE CONTRACTS--Interest rate contracts are used principally for
the management of interest rate exposures. Differentials to be received or paid
under contracts designated as hedges are recognized in income over the life of
the contracts as adjustments to interest expense.
Certain interest rate swap contracts are used for trading purposes. These
contracts are carried at fair value. Fair value for interest rate swap contracts
is based on pricing models intended to approximate the amounts that would be
received from or paid to a third party in settlement of the contracts. Factors
taken into consideration include credit spreads, market liquidity,
concentrations, and funding and administrative costs incurred over the life of
the instruments. At January 3, 1999, no interest rate swap contracts were
classified as trading instruments.
Counterparties to interest rate contracts are major financial institutions
with which the Company also has other financial relationships. Exposure to
credit loss exists in the event of nonperformance by these counterparties.
However, the Company does not anticipate nonperformance by the other parties,
and no material loss would be expected from their nonperformance.
INCOME TAXES--Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
RECLASSIFICATIONS--Certain accounts have been reclassified in the 1996 and
1997 financial statements to conform with the 1998 classifications.
NOTE 2--APPLEBEE'S DIVESTITURE
In December 1997, the Company announced the decision to sell its franchised
Applebee's restaurants in order to focus on the development of proprietary
restaurant concepts. During 1998, the divestiture was substantially completed
with the sale of 233 of 279 Applebee's locations and the closing of two
additional locations. Gross proceeds in 1998 totaled $434.8 million including
$6.8 million in notes and other amounts due. The notes, net of a $2.6 million
allowance, are included in "Other assets" in the accompanying 1998 consolidated
balance sheet.
"Gain on disposal of assets" in the accompanying 1998 consolidated statement
of earnings primarily reflects the gain recognized on the Applebee's
divestiture. The unsold premises and equipment and franchise cost related to the
brand are included in "Assets held for sale" in the accompanying consolidated
balance sheets. Depreciation and amortization on these long-lived assets were
suspended in December 1997, when management finalized the decision to dispose of
the brand. Sale of the remaining restaurants is expected to be completed in
early 1999.
F-9
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ASSET REVALUATION AND OTHER SPECIAL CHARGES
In the fourth quarter of 1998, programs were initiated at Don Pablo's,
Canyon Cafe and the Company's corporate headquarters to reorganize management
and reduce overhead costs. A pre-tax charge of $2.9 million was recorded, the
components of which related primarily to employee termination and severance
costs. At January 3, 1999, the unpaid portion of these charges ($1.8 million)
was included in "Accrued liabilities" in the accompanying 1998 consolidated
balance sheet.
In 1996, the Tomato Rumba's operating brand was dissolved and efforts to
sell Hardee's were accelerated. These decisions, combined with the
implementation of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," resulted in an asset revaluation charge of $27.7 million. Assets
related to these brands, included as a component of assets held for sale in the
consolidated balance sheets, were $1.7 million and $0.5 million at December 28,
1997 and January 3, 1999, respectively. During 1997 and 1998, Hardee's and
several Tomato Rumba's locations were sold, several additional locations were
converted to other company brands, and the remaining assets were redeployed.
NOTE 4--INVESTMENTS AND ACQUISITIONS
In January 1998, the Company acquired, for $6.1 million, a 20% interest in
Belgo Group PLC ("Belgo"), a public restaurant company based in the United
Kingdom that owned two Belgo restaurants in London. In 1998, Belgo completed two
transactions for the acquisition of five additional restaurants. In connection
with these acquisitions, the Company invested an additional $8.8 million to
maintain its 20% equity interest. At January 3, 1999, the fair value of the
Company's investment in Belgo was approximately $31.0 million. Also in 1998, the
Company and Belgo entered into two 50/50 joint ventures: one to develop one of
the Company's proprietary brands in Europe and the other to develop Belgo
restaurants in the Western Hemisphere. In January 1999, the first Belgo
restaurant in the United States was opened in New York City.
In April 1998, the Company sold its Harrigans brand, receiving $3.0 million
in cash plus a $4.0 million note and retaining a 25% equity interest in the
ongoing business. The transaction resulted in a $0.6 million gain with an
additional $4.0 million gain, related to the note, being deferred. The
investment is accounted for using the equity method of accounting.
In July 1997, the Company acquired Canyon Cafes, Inc. ("Canyon Cafe") for
$46.3 million, including $33.6 million in cash, the issuance of 357,600 shares
of common stock and the assumption of approximately $7.5 million in debt.
In March 1997, the Company acquired Hops Restaurant Bar & Brewery ("Hops")
for $58.4 million, which included $16.3 million in cash, the issuance of 1.05
million shares of common stock and the assumption of approximately $28.9 million
in debt.
In March 1997, the Company acquired McCormick & Schmick Holding Corp.
("McCormick & Schmick's") for $68.3 million, including $50.1 million in cash,
the issuance of 248,139 shares of common stock and the assumption of
approximately $15.0 million in debt.
All three 1997 acquisitions were accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase consideration was allocated
to the net assets acquired based on their estimated fair values. The aggregate
fair value of identifiable assets acquired and liabilities assumed was $68.0
million and $37.5 million, respectively. The remaining estimated excess of
purchase
F-10
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INVESTMENTS AND ACQUISITIONS (CONTINUED)
price over net assets acquired of $142.5 million was recorded as goodwill and is
being amortized on a straight-line basis over 40 years.
The following unaudited pro forma financial information gives effect to all
of the three foregoing acquisitions as if the acquisitions had occurred as of
the beginning of the periods presented. This pro forma financial information
reflects certain adjustments such as: expensing, rather than capitalizing and
amortizing preopening expenses, amortization of goodwill, interest expense on
the proceeds of the Convertible Preferred Securities (Note 7), elimination of
interest on a portion of the acquisition debt assumed, and the related income
tax effects (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED
------------------------
<S> <C> <C>
1996 1997
----------- -----------
(UNAUDITED)
Total restaurant sales.............................................. $ 672,927 $ 842,785
Net earnings........................................................ $ 6,536 $ 26,759
Basic earnings per common share..................................... $ 0.16 $ 0.67
Diluted earnings per common share................................... $ 0.16 $ 0.67
</TABLE>
These pro forma results are not necessarily indicative of what actually
would have occurred if the acquisitions had taken place as of the beginning of
the periods presented, nor do they reflect the purchase price that might have
been negotiated at these earlier periods.
NOTE 5--PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
FOR FISCAL YEAR END
------------------------
1997 1998
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Land................................................................ $ 42,166 $ 69,154
Buildings........................................................... 123,901 161,501
Equipment........................................................... 87,043 79,371
Leasehold improvements.............................................. 59,584 88,270
Construction in progress............................................ 19,234 23,628
----------- -----------
Total premises and equipment........................................ 331,928 421,924
Less accumulated depreciation and amortization...................... 48,089 54,337
----------- -----------
Premises and equipment, net......................................... $ 283,839 $ 367,587
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LONG-TERM DEBT
<TABLE>
<CAPTION>
FOR FISCAL YEAR END
------------------------
1997 1998
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revolving credit agreements, unsecured, with variable rate interest
(7.3% at January 3, 1999)......................................... $ 255,000 $ 140,500
Senior notes, unsecured............................................. 125,000 116,500
Other............................................................... 2,049 478
----------- -----------
Total long-term debt................................................ 382,049 257,478
Less current maturities............................................. 206 140,500
----------- -----------
Long-term debt, excluding current maturities........................ $ 381,843 $ 116,978
----------- -----------
----------- -----------
</TABLE>
At January 3, 1999, revolving credit agreements aggregated $162.0 million of
which $21.5 million was unused and available. The agreements expire in March
through July of 1999, and as such, the $140.5 million of revolving obligations
have been classified as current maturities. The Company anticipates reducing
these obligations with proceeds received from Applebee's divestiture
transactions expected to be completed in 1999. Remaining revolving obligations
are expected to be replaced prior to their expiration with the renewal and
expansion of long-term revolving credit agreements.
In 1996, $125.0 million of 9.75% senior notes were issued under a $200.0
million shelf registration. The notes are due March 2006 with interest payable
semi-annually. In 1998, the Company repurchased $8.5 million of these notes.
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of revolving credit
agreements and other long-term debt approximates the book value recorded. Fair
value of the senior notes at January 3, 1999 was estimated as $109.8 million,
based on quoted market prices of the notes.
The aggregate annual maturities of long-term debt for the years subsequent
to January 3, 1999 are as follows: 1999-$140.5 million and 2001-$0.5 million.
The $116.5 million senior notes are due in 2006.
Terms of the senior notes and revolving credit agreements 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 or encumbrances in excess of defined amounts and (iii) maintain defined
leverage ratios. As amended, the Company was in compliance with the loan
provisions.
During 1997 and 1998, the Company was party to various interest rate swap
agreements with notional amounts ranging from $75.0 million to $115.0 million.
At January 3, 1999, two interest rate swap agreements with $100.0 million and
$115.0 million notional amounts were in place. The first agreement is a hedge of
U.S. LIBOR obligations relating to revolving credit facilities. Under the terms
of the agreement, the Company pays an average of certain foreign LIBOR-based
variable rates (6.0% at January 3, 1999) and receives a U.S. LIBOR-based
variable rate (5.2% at January 3, 1999). At January 3, 1999, the Company
estimates that it would have paid approximately $1.0 million to terminate this
swap agreement. The other swap agreement relates to the 7.0% fixed interest
obligation on the Convertible Preferred Securities (Note 7). Under the
agreement, the Company pays an average of certain foreign LIBOR-based variable
rates (5.9% at January 3, 1999) and receives a 7.0% fixed rate. At January 3,
1999, the Company estimates that it would have paid approximately $2.8 million
to
F-12
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LONG-TERM DEBT (CONTINUED)
terminate this swap agreement. Under the terms of the agreement, however, the
swap terminates upon conversion of the Convertible Preferred Securities with no
amounts due from either party. Amounts received on interest rate swap agreements
accounted for as hedges totaled $1.9 million in 1997 and $0.1 million in 1998.
NOTE 7--CONVERTIBLE PREFERRED SECURITIES
In 1997, Avado Financing I (formerly Apple South Financing I) (the "Trust")
issued 2,300,000, $3.50 term convertible securities, Series A (the "Convertible
Preferred Securities"), having a liquidation preference of $50 per security. The
Trust, a statutory business trust, is a wholly owned, consolidated subsidiary of
the Company with its sole asset being $115.0 million aggregate principal amount
of 7% convertible subordinated debentures due March 1, 2027 of Avado Brands,
Inc. (the "Convertible Debentures").
The Convertible Preferred Securities are convertible until 2027 at an
initial rate of 3.3801 shares of Avado Brands common stock for each security
(equivalent to a conversion price of $14.793 per share). A guarantee has been
executed with regard to the Convertible Preferred Securities. The guarantee,
when taken together with the obligations under the Convertible Debentures, the
indenture pursuant to which the Convertible Debentures were issued, and the
declaration of trust of Avado Financing I, provides a full and unconditional
guarantee of amounts due under the Convertible Preferred Securities.
Proceeds, after deducting underwriters' fees and other offering expenses of
approximately $3.7 million, of $111.3 million were used to repay revolving loan
advances used for the acquisition of McCormick & Schmick's and to finance the
acquisition of Hops Restaurant Bar & Brewery, including in each case, retirement
of acquired company debt.
NOTE 8--LEASES
Various leases are utilized for restaurant land, buildings, equipment and
office facilities. Land and building lease terms typically range from 10 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.
Future minimum lease payments do not include amounts payable 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 1997, the Company entered into a $70.0 million (amended to $30.0 million
in 1998) master equipment lease agreement. The agreement provides for the rental
of restaurant equipment for a five-year period, subject to renewal at the
Company's option. Pursuant to terms of the agreement, the Company acts as
purchasing agent for the lessor. Equipment is procured for new restaurants, with
payment coming from the lessor. This agreement has been accounted for as an
operating lease for financial reporting purposes. At January 3, 1999, $3.7
million of the $30.0 million commitment was unused and available.
F-13
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases at
January 3, 1999 are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 20,192
2000.............................................................. 21,036
2001.............................................................. 20,854
2002.............................................................. 20,621
2003.............................................................. 20,436
Later years....................................................... 105,169
---------
Total minimum payments............................................ $ 208,308
---------
---------
</TABLE>
Total rental expense related to cancelable and noncancelable operating
leases was $15.6 million in 1996, $24.3 million in 1997 and $27.5 million in
1998. Rental expense included contingent rentals of $0.9 million in 1996, $1.0
million in 1997 and $2.3 million in 1998.
NOTE 9--ACCRUED LIABILITIES
<TABLE>
<CAPTION>
FOR FISCAL YEAR END
------------------------
1997 1998
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Payroll and related benefits........................................ $ 15,060 $ 13,584
Insurance........................................................... 4,219 6,615
Gift certificates................................................... 3,926 4,797
Applebee's divestiture.............................................. - 2,948
Acquisition costs................................................... 5,327 2,830
Property taxes...................................................... 4,293 2,659
Other............................................................... 7,441 8,620
----------- -----------
$ 40,266 $ 42,053
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION
The following supplements the consolidated statements of cash flows (amounts
in thousands):
<TABLE>
<CAPTION>
THIRTEEN-WEEK
PERIODS ENDED
FOR FISCAL YEARS ENDED ----------------------
-------------------------------- MARCH 29, APRIL 4,
1996 1997 1998 1998 1999
--------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest paid......................... $ 10,728 $ 20,452 $ 25,739 $ 3,977 $ 2,171
--------- ---------- --------- ----------- ---------
Distributions on preferred
securities.......................... - 5,944 8,050 2,012 2,012
--------- ---------- --------- ----------- ---------
Income taxes paid (refunded).......... 1,415 9,022 14,487 2,254 (988)
--------- ---------- --------- ----------- ---------
Business acquisitions, net of cash
acquired:
Fair value of assets acquired, other
than cash......................... $ - $ 64,861 $ - $ - $ -
Liabilities assumed................. - (37,504) 1,274 - -
Merger consideration payable........ - (1,890) - - -
Stock issued........................ - (21,492) - - -
Purchase price in excess of the net
assets acquired................... - 142,469 1,384 - -
--------- ---------- --------- ----------- ---------
Net cash used for acquisitions........ $ - $ 146,444 $ 2,658 $ - $ -
--------- ---------- --------- ----------- ---------
--------- ---------- --------- ----------- ---------
</TABLE>
The 1998 business acquisition reflects the buyout of several of Hops' joint
venture partners. As discussed in Note 2, in 1998 the Company sold 233
Applebee's restaurants. The accompanying consolidated balance sheets reflect
changes in asset and liability accounts related to the divestiture of these
restaurants as follows: decrease in assets held for sale of $281.3 million,
decreases in assets not classified as held for sale of $5.5 million and
increases in accrued liabilities of $2.9 million.
F-15
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE INFORMATION
Effective for fiscal year ending December 28, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS 128 requires all entities to provide dual disclosure of earnings
per share, basic and diluted. Basic earnings per share equals net earnings
divided by the weighted average number of common shares outstanding and does not
include the dilutive effects of stock options. Diluted earnings per share is
computed by giving effect to dilutive stock options and by adjusting both net
earnings and shares outstanding as if the Convertible Preferred Securities (Note
7) had been converted at the date of issuance. In accordance with SFAS 128, all
prior-period earnings per share have been restated. The following table presents
a reconciliation of weighted average shares and earnings per share amounts
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Average number of common shares used in basic calculation.... 38,731 38,620 36,612
Additional shares issuable pursuant to employee stock option
plans at period-end market price........................... 686 206 9
Shares issuable on assumed conversion of Convertible
Preferred Securities....................................... - 6,101 7,774
--------- --------- ---------
Average number of common shares used in diluted
calculation................................................ 39,417 44,927 44,395
--------- --------- ---------
--------- --------- ---------
Earnings before cumulative effect of change in accounting
principle.................................................. $ 11,674 $ 28,448 $ 67,744
Cumulative effect of change in accounting principle, net of
tax........................................................ - - 1,461
--------- --------- ---------
Net earnings................................................. 11,674 28,448 66,283
Distribution savings on assumed conversion of Convertible
Preferred Securities, net of income taxes.................. - 4,336 5,415
--------- --------- ---------
Net earnings for computation of diluted earnings per common
share...................................................... $ 11,674 $ 32,784 $ 71,698
--------- --------- ---------
--------- --------- ---------
Basic earnings before cumulative effect of change in
accounting principle....................................... $ 0.30 $ 0.74 $ 1.85
Cumulative effect of change in accounting principle.......... - - (0.04)
--------- --------- ---------
Basic earnings per common share.............................. $ 0.30 $ 0.74 $ 1.81
--------- --------- ---------
--------- --------- ---------
Diluted earnings before cumulative effect of change in
accounting principle....................................... $ 0.30 $ 0.73 $ 1.65
Cumulative effect of change in accounting principle.......... - - (0.03)
--------- --------- ---------
Diluted earnings per common share............................ $ 0.30 $ 0.73 $ 1.62
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--INCOME TAXES
The components of the provision for income taxes for the years ended
December 29, 1996, December 28, 1997 and January 3, 1999 before change in
accounting principle are as follows (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
1996:
Federal...................................................... $ 5,200 250 5,450
State........................................................ 1,050 50 1,100
--------- ----------- ---------
Total...................................................... $ 6,250 300 6,550
--------- ----------- ---------
--------- ----------- ---------
1997:
Federal...................................................... $ 8,090 3,850 11,940
State........................................................ 1,630 55 1,685
--------- ----------- ---------
Total...................................................... $ 9,720 3,905 13,625
--------- ----------- ---------
--------- ----------- ---------
1998:
Federal...................................................... $ 36,035 (3,861) 32,174
State........................................................ 9,296 (2,170) 7,126
--------- ----------- ---------
Total...................................................... $ 45,331 (6,031) 39,300
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate applied to earnings before income taxes in the accompanying
consolidated statements of earnings for the years ended December 29, 1996,
December 28, 1997 and January 3, 1999 follows:
<TABLE>
<CAPTION>
FOR FISCAL YEARS ENDED
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax at federal statutory rate......................................... 35.0% 35.0% 35.0%
Increase (decrease) in taxes due to:
Rate differential................................................... (0.7) - -
State income tax, net of federal benefit............................ 3.9 4.0 4.1
FICA tip and targeted jobs tax credits.............................. (2.2) (10.1) (3.4)
Nondeductible goodwill................................................ - 2.0 1.0
Other, net............................................................ (0.1) 1.5 -
--------- --------- ---------
Effective tax rate.................................................... 35.9% 32.4% 36.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 28,
1997 and January 3, 1999 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
FOR FISCAL YEAR END
----------------------
1997 1998
---------- ----------
<S> <C> <C>
FICA tip credits not yet taken for federal tax purposes............... $ 5,772 $ 2,392
Asset impairment and other charges recorded for financial statement
purposes but not yet taken for tax purposes......................... 6,618 10,311
Other................................................................. 589 7,092
---------- ----------
Total deferred tax assets............................................. 12,979 19,795
---------- ----------
Depreciation and amortization taken for tax purposes in excess of
amounts taken for financial reporting purposes...................... (25,713) (25,499)
Other................................................................. (1,497) (2,496)
---------- ----------
Deferred tax liability................................................ $ (14,231) $ (8,200)
---------- ----------
---------- ----------
</TABLE>
A valuation allowance for deferred tax assets has not been recorded as of
December 28, 1997 or January 3, 1999. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon these factors, management believes it is more
likely than not the Company will realize the benefits of the deductible
differences.
NOTE 13--INTEREST EXPENSE
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>
FOR FISCAL YEARS ENDED
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Interest cost capitalized.................................... $ 1,572 $ 2,509 $ 1,426
Interest cost expensed....................................... 11,348 20,504 25,313
--------- --------- ---------
Total interest incurred...................................... $ 12,920 $ 23,013 $ 26,739
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 14--STOCK OPTION PLANS
The 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 3,600,000 shares, respectively, of common stock of the Company to key
officers, directors and employees. Generally, options awarded under the Stock
Option Plan and Stock Incentive Plans are granted at prices which equate to fair
market value on the date of the grant, are exercisable over three to ten years,
and expire ten years subsequent to award.
F-18
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--STOCK OPTION PLANS (CONTINUED)
The 1992 DF&R Stock Option Plan (the "DF&R Option Plan") provides for the
granting of 1,000,000 shares of common stock to key officers, directors and
employees. Options awarded under the DF&R Option Plan prior to the merger were
adjusted based on the exchange ratio of 1.5 shares of the Company's common stock
for each share of DF&R common stock. Options awarded under the DF&R Option Plan
are generally granted at prices which equate 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. Management does not anticipate
granting any additional options under the DF&R Option Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value methodology
prescribed under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
diluted earnings per share would have been reduced by $2.1 million or $0.05 per
share in 1996, $2.3 million or $0.05 per share in 1997 and $0.6 million or $0.01
per share in 1998. The effects of either recognizing or disclosing compensation
cost under SFAS 123 may not be representative of the effects on reported net
earnings for future years. The fair value of the options granted during 1998 is
estimated as $7.37 on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield 0.33%, volatility of 50%,
risk-free interest rate of 5.0% and an expected life of 6.7 years. Further
information relating to total options is as follows:
<TABLE>
<CAPTION>
AVERAGE
SHARES PRICE
----------- ---------
<S> <C> <C>
Outstanding at December 31, 1995....................................... 2,790,673 $ 13.44
Granted in 1996........................................................ 726,587 19.72
Exercised in 1996...................................................... (779,198) 3.25
Canceled in 1996....................................................... (243,870) 21.48
----------- ---------
Outstanding at December 29, 1996....................................... 2,494,192 17.66
Granted in 1997........................................................ 1,412,694 14.46
Exercised in 1997...................................................... (334,296) 6.66
Canceled in 1997....................................................... (574,460) 19.15
----------- ---------
Outstanding at December 28, 1997....................................... 2,998,130 17.04
Granted in 1998........................................................ 183,425 13.15
Exercised in 1998...................................................... (15,885) 9.42
Canceled in 1998....................................................... (1,149,880) 17.10
----------- ---------
Outstanding at January 3, 1999......................................... 2,015,790 $ 16.60
----------- ---------
----------- ---------
</TABLE>
F-19
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
------------ ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 5.01-$10.00........................ 9,375 9.5 years $ 8.63 375 $ 8.33
$10.01-$15.00........................ 937,013 8.0 years 13.45 45,653 12.77
$15.01-$20.00........................ 694,390 5.6 years 18.23 116,300 17.26
$20.01-$25.00........................ 334,464 7.0 years 21.18 27,847 21.16
$25.01-$30.00........................ 40,548 7.0 years 25.48 900 25.25
---------- ---------- ----------- --------- -----------
Total................................ 2,015,790 7.0 years $ 16.60 191,075 $ 16.78
---------- ---------- ----------- --------- -----------
---------- ---------- ----------- --------- -----------
</TABLE>
NOTE 15--EMPLOYEE BENEFIT PLANS
A noncontributory Employee Stock Ownership Plan (the "Plan") covers
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. Contribution expense related to the Plan was $0.3 million in 1996, $0 in
1997 and $0.5 million in 1998.
The Avado Brands, Inc. Profit Sharing Plan and Trust, established in
accordance with Section 401(k) of the Internal Revenue Code, 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. Matching funds vest at the rate of 20% each year, beginning
after three years of service. Company contributions were $0.4 million in 1996,
$0.5 million in 1997 and $0.4 million in 1998.
NOTE 16--SHAREHOLDERS' EQUITY
The Board of Directors, from time to time and depending on market
conditions, authorizes the purchase of common shares. In 1998, the Company
purchased 7.3 million shares of its common stock for $92.0 million, including
one of the equity forward contracts discussed below.
In 1998, third parties purchased a total of 8.3 million shares of the
Company's common stock at an average price per share of $13.36 (or a total
acquisition cost of $110.9 million) pursuant to four equity forward contracts.
Upon expiration of the agreements, the Company has the option to (i) acquire the
shares at the third parties' average acquisition cost as described above or (ii)
instruct the third parties to sell the stock in the market and settle in cash
any appreciation or depreciation in the market value of the stock at the sale
date compared to the acquisition cost described above. Any such appreciation or
depreciation in the value of the shares will be reflected in equity and will not
impact net earnings. One of these contracts for 2.0 million shares was settled
in December 1998, and the Company exercised its option to acquire the related
shares for $29.9 million. At January 3, 1999, three equity forward contracts
covering 6.3 million shares were pending settlement. The third parties' total
acquisition price for these shares of $81.8 million, net of a $10.7 million
collateral deposit made by the Company with a
F-20
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SHAREHOLDERS' EQUITY (CONTINUED)
third party, is reflected as "Temporary equity, net" in the 1998 consolidated
balance sheet. The remaining contracts expire in March through July of 1999.
NOTE 17--COMMITMENTS AND CONTINGENCIES
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 on estimates of the aggregate liability for claims
incurred.
The Company is contingently liable for letters of credit aggregating
approximately $4.3 million and is co-guarantor of a $5.0 million revolving
credit facility relating to one of its joint ventures with Belgo. At January 3,
1999, $1.0 million was outstanding under this facility.
In connection with Applebee's divestiture transactions completed during
1998, the Company remains contingently liable for lease obligations relating to
67 restaurants. Assuming that each respective purchaser became insolvent, an
event management believes to be highly unlikely, the Company could be liable for
lease payments extending through 2035 with minimum lease payments totaling $48.0
million. In the event of default, the franchisor has the contractual right to
assume the obligations under the leases. In the event the Company becomes liable
for any such obligations, it may have certain rights to the leased properties.
Management believes that the ultimate disposition of these contingent
liabilities should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits was
dismissed. Although the ultimate outcome of the remaining lawsuit cannot be
determined at this time, the Company believes that the allegations therein are
without merit and intends to vigorously defend itself.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters should not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-21
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--RELATED PARTY TRANSACTIONS
In 1998, the Board of Directors approved loans to certain executive officers
of the Company. At January 3, 1999, the Company held notes receivable from the
Chief Executive Officer, totaling $7.9 million. The principal balances of the
notes are due in November and December of 2000 or earlier upon demand of the
Company and bear interest at 7.0% per annum with interest payment due at
maturity. The Company also holds notes receivable from two other executive
officers totaling $0.1 million. The notes are due in October and November of
1999 and bear interest at 5.06% per annum with interest payment due at maturity.
NOTE 19--GUARANTOR SUBSIDIARIES
The Company's senior notes and revolving credit facilities are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly-owned subsidiaries. The Company's indebtedness is not guaranteed by
its non-wholly owned subsidiaries. These non-guarantor subsidiaries primarily
include certain partnerships of which the Company is typically a 90% owner. At
January 3, 1999 and April 4, 1999 (unaudited), these partnerships in the
non-guarantor subsidiaries owned 36 and 40, respectively, of the Company's
restaurants. Accordingly, condensed consolidating balance sheets as of December
28, 1997, January 3, 1999 and April 4, 1999 (unaudited), and condensed
consolidating statements of earnings and cash flows for the fiscal years ended
December 28, 1997 and January 3, 1999 and the thirteen-week periods ended March
29, 1998 (unaudited) and April 4, 1999 (unaudited) are provided for such
guarantor and non-guarantor subsidiaries. For the fiscal year ended December 29,
1996, substantially all of the Company's subsidiaries were guarantors of its
indebtedness and, as such, condensed consolidated financial information related
to fiscal 1996 is not applicable. Separate financial statements and other
disclosures concerning the guarantor and non-guarantor subsidiaries are not
presented because management has determined that they are not material to
investors. There are no contractual restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FISCAL YEAR ENDED 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Restaurant sales........................................ $ 776,410 $ 31,910 $ - $ 808,320
Restaurant operating expenses........................... 665,347 28,533 - 693,880
General and administrative expenses..................... 38,136 1,481 - 39,617
----------- ------- ----- ------------
Operating income........................................ 72,927 1,896 - 74,823
----------- ------- ----- ------------
Other income (expense).................................. (32,085) (665) - (32,750)
Earnings before income taxes............................ 40,842 1,231 - 42,073
Income taxes............................................ 13,200 425 - 13,625
----------- ------- ----- ------------
Net earnings............................................ $ 27,642 $ 806 $ - $ 28,448
----------- ------- ----- ------------
----------- ------- ----- ------------
</TABLE>
F-22
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FISCAL YEAR ENDED 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Restaurant sales........................................ $ 785,300 $ 77,392 $ - $ 862,692
Restaurant operating expenses........................... 673,968 67,003 - 740,971
General and administrative expenses..................... 42,385 3,765 - 46,150
Asset revaluation and other special charges............. 2,940 - - 2,940
----------- ------- ------------- ------------
Operating income........................................ 66,007 6,624 - 72,631
----------- ------- ------------- ------------
Other income (expense).................................. 35,427 (1,014) - 34,413
Earnings before income taxes and cumulative effect of
change in accounting principle........................ 101,434 5,610 - 107,044
Income taxes............................................ 37,400 1,900 - 39,300
----------- ------- ------------- ------------
Earnings before cumulative effect of change in
accounting principle.................................. 64,034 3,710 - 67,744
Cumulative effect of change in accounting principle, net
of tax benefit........................................ 1,461 - - 1,461
----------- ------- ------------- ------------
Net earnings............................................ $ 62,573 $ 3,710 $ - $ 66,283
----------- ------- ------------- ------------
----------- ------- ------------- ------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
THIRTEEN WEEKS ENDED MARCH 29, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Restaurant sales........................................ $ 225,414 $ 16,262 $ - $ 241,676
Restaurant operating expenses........................... 192,759 13,868 - 206,627
General and administrative expenses..................... 12,218 697 - 12,915
----------- ------- ------------- ------------
Operating income........................................ 20,437 1,697 - 22,134
----------- ------- ------------- ------------
Other income (expense).................................. 39,615 (385) - 39,230
Earnings before income taxes and cumulative effect of
change in accounting principle........................ 60,052 1,312 - 61,364
Income taxes............................................ 22,375 450 - 22,825
----------- ------- ------------- ------------
Earnings before cumulative effect of change in
accounting principle.................................. 37,677 862 - 38,539
Cumulative effect of change in accounting principle, net
of tax benefit........................................ 1,461 - - 1,461
----------- ------- ------------- ------------
Net earnings............................................ $ 36,216 $ 862 $ -- $ 37,078
----------- ------- ------------- ------------
----------- ------- ------------- ------------
</TABLE>
F-23
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
THIRTEEN WEEKS ENDED APRIL 4, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Restaurant sales........................................ $ 140,188 $ 23,887 $ - $ 164,075
Restaurant operating expenses........................... 117,698 20,727 - 138,425
General and administrative expenses..................... 8,624 1,216 - 9,840
----------- ------- ----- ------------
Operating income........................................ 13,866 1,944 - 15,810
----------- ------- ----- ------------
Other income (expense).................................. (6,432) (276) - (6,708)
Earnings before income taxes............................ 7,434 1,668 - 9,102
Income taxes............................................ 2,575 575 - 3,150
----------- ------- ----- ------------
Net earnings............................................ $ 4,859 $ 1,093 $ - $ 5,952
----------- ------- ----- ------------
----------- ------- ----- ------------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET
FISCAL YEAR END 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets.......................................... $ 361,516 $ 890 $ - $ 362,406
Premises and equipment, net............................. 253,701 30,138 - 283,839
Goodwill, net........................................... 116,141 22,262 - 138,403
Other assets............................................ 18,826 815 - 19,641
Intercompany investments................................ 38,647 - (38,647) -
Intercompany advances................................... 12,299 - (12,299) -
----------- ------- ------------ ------------
$ 801,130 $ 54,105 $ (50,946) $ 804,289
----------- ------- ------------ ------------
----------- ------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................... $ 63,652 $ 1,639 $ - $ 65,291
Long-term liabilities................................... 401,696 1,520 - 403,216
Intercompany payables................................... - 12,299 (12,299) -
Convertible preferred securities........................ 115,000 - - 115,000
Shareholders' equity.................................... 220,782 38,647 (38,647) 220,782
----------- ------- ------------ ------------
$ 801,130 $ 54,105 $ (50,946) $ 804,289
----------- ------- ------------ ------------
----------- ------- ------------ ------------
</TABLE>
F-24
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET
FISCAL YEAR END 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets.......................................... $ 99,129 $ 1,856 $ - $ 100,985
Premises and equipment, net............................. 309,919 57,668 - 367,587
Goodwill, net........................................... 116,014 21,991 - 138,005
Investments carried at equity........................... 16,106 - - 16,106
Other assets............................................ 47,588 326 - 47,914
Intercompany investments................................ 44,699 - (44,699) -
Intercompany advances................................... 33,103 - (33,103) -
----------- ------- ------------ ------------
$ 666,558 $ 81,841 $ (77,802) $ 670,597
----------- ------- ------------ ------------
----------- ------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................... $ 235,497 $ 3,621 $ - $ 239,118
Long-term liabilities................................... 132,937 418 - 133,355
Intercompany payables................................... - 33,103 (33,103) -
Convertible preferred securities........................ 115,000 - - 115,000
Temporary equity, net................................... 71,095 - - 71,095
Shareholders' equity.................................... 112,029 44,699 (44,699) 112,029
----------- ------- ------------ ------------
$ 666,558 $ 81,841 $ (77,802) $ 670,597
----------- ------- ------------ ------------
----------- ------- ------------ ------------
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 4, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets.......................................... $ 62,448 $ 1,629 $ - $ 64,077
Premises and equipment, net............................. 319,311 63,228 - 382,539
Goodwill, net........................................... 115,277 21,850 - 137,127
Investments carried at equity........................... 17,095 - - 17,095
Other assets............................................ 39,882 1,429 - 41,311
Intercompany investments................................ 46,819 - (46,819) -
Intercompany advances................................... 37,841 - (37,841) -
----------- ------- ------------ ------------
$ 638,673 $ 88,136 $ (84,660) $ 642,149
----------- ------- ------------ ------------
----------- ------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................... $ 233,559 $ 3,242 $ - $ 236,801
Long-term liabilities................................... 133,432 234 - 133,666
Intercompany payables................................... - 37,841 (37,841) -
Convertible preferred securities........................ 115,000 - - 115,000
Temporary equity, net................................... 39,849 - - 39,849
Shareholders' equity.................................... 116,833 46,819 (46,819) 116,833
----------- ------- ------------ ------------
$ 638,673 $ 88,136 $ (84,660) $ 642,149
----------- ------- ------------ ------------
----------- ------- ------------ ------------
</TABLE>
F-25
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR END 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............... $ 61,345 $ 1,391 $ - $ 62,736
Cash flows from investing activities:
Capital expenditures.................................. (159,890) (13,073) - (172,963)
Proceeds from disposal of assets, net................. 5,798 - - 5,798
Other investing activities............................ (151,500) (605) - (152,105)
----------- --------------- ------------ ------------
Net cash used in investing activities................... (305,592) (13,678) - (319,270)
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit
agreements.......................................... 165,500 - - 165,500
Purchase of treasury stock............................ (22,995) - - (22,995)
Proceeds from (payment of) intercompany advances...... (12,299) 12,299 - -
Other financing activities............................ 112,609 - - 112,609
----------- --------------- ------------ ------------
Net cash provided by financing activities............... 242,815 12,299 - 255,114
----------- --------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.... (1,432) 12 - (1,420)
Cash and cash equivalents at the beginning of the
year.................................................. 3,903 20 - 3,923
----------- --------------- ------------ ------------
Cash and cash equivalents at the end of the year........ $ 2,471 $ 32 $ - $ 2,503
----------- --------------- ------------ ------------
----------- --------------- ------------ ------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............... $ 32,256 $ 8,761 $ - $ 41,017
Cash flows from investing activities:
Capital expenditures.................................. (113,166) (29,675) - (142,841)
Proceeds from disposal of assets, net................. 373,814 - - 373,814
Other investing activities............................ (39,680) - - (39,680)
----------- --------------- ------------ ------------
Net cash used in investing activities................... 220,968 (29,675) - 191,293
Cash flows from financing activities:
Net repayment of revolving credit agreements.......... (114,726) - - (114,726)
Purchase of treasury stock............................ (92,028) - - (92,028)
Proceeds from (payment of) intercompany advances...... (20,936) 20,936 - -
Other financing activities............................ (20,843) - - (20,843)
----------- --------------- ------------ ------------
Net cash provided by financing activities............... (248,533) 20,936 - (227,597)
----------- --------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.... 4,691 22 - 4,713
Cash and cash equivalents at the beginning of the
period................................................ 2,471 32 - 2,503
----------- --------------- ------------ ------------
Cash and cash equivalents at the end of the period...... $ 7,162 $ 54 $ - $ 7,216
----------- --------------- ------------ ------------
----------- --------------- ------------ ------------
</TABLE>
F-26
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED MARCH 29, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............... $ 12,264 $ 1,182 $ - $ 13,446
Cash flows from investing activities:
Capital expenditures.................................. (31,079) (9,009) - (40,088)
Proceeds from disposal of assets, net................. 414 - - 414
Other investing activities............................ (6,439) - - (6,439)
----------- ------- ------------- -------------
Net cash used in investing activities................... (37,104) (9,009) - (46,113)
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit
agreements.......................................... 32,966 - - 32,966
Purchase of treasury stock............................ (113) - - (113)
Proceeds from (payment of) intercompany advances...... (7,834) 7,834 - -
Other financing activities............................ (458) - - (458)
----------- ------- ------------- -------------
Net cash provided by financing activities............... 24,561 7,834 - 32,395
----------- ------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.... (279) 7 - (272)
Cash and cash equivalents at the beginning of the
period................................................ 2,471 32 - 2,503
----------- ------- ------------- -------------
Cash and cash equivalents at the end of the period...... $ 2,192 $ 39 $ - $ 2,231
----------- ------- ------------- -------------
----------- ------- ------------- -------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED APRIL 4, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............... $ 7,192 $ 1,633 $ - $ 8,825
Cash flows from investing activities:
Capital expenditures.................................. (15,808) (6,365) - (22,173)
Proceeds from disposal of assets, net................. 45,643 - - 45,643
Other investing activities............................ (3,049) - - (3,049)
----------- --------------- ------------ ------------
Net cash used in investing activities................... 26,786 (6,365) - 20,421
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit
agreements.......................................... (3,009) - - (3,009)
Purchase of treasury stock............................ (32,435) - - (32,435)
Proceeds from (payment of) intercompany advances...... (4,738) 4,738 - -
Other financing activities............................ (224) - - (224)
----------- --------------- ------------ ------------
Net cash provided by financing activities............... (40,406) 4,738 - (35,668)
----------- --------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.... (6,428) 6 - (6,422)
Cash and cash equivalents at the beginning of the
year.................................................. 7,162 54 - 7,216
----------- --------------- ------------ ------------
Cash and cash equivalents at the end of the year........ $ 734 $ 60 $ - $ 794
----------- --------------- ------------ ------------
----------- --------------- ------------ ------------
</TABLE>
F-27
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1997:
Restaurant sales............................................ $ 171,453 $ 202,889 $ 215,739 $ 218,239 $ 808,320
Gross profit(1)............................................. $ 71,269 $ 85,940 $ 90,549 $ 85,904 $ 333,662
Net earnings................................................ $ 7,268 $ 10,224 $ 10,660 $ 296 $ 28,448
Basic earnings per share.................................... $ 0.19 $ 0.27 $ 0.28 $ 0.01 $ 0.74
Diluted earnings per share.................................. $ 0.19 $ 0.25 $ 0.26 $ 0.01 $ 0.73
1998:
Restaurant sales............................................ $ 241,676 $ 239,843 $ 204,442 $ 176,731 $ 862,692
Gross profit(1)............................................. $ 95,711 $ 95,136 $ 79,965 $ 70,917 $ 341,729
Net earnings (loss)(2)...................................... $ 38,539 $ 6,325 $ 24,438 $ (1,558) $ 67,744
Basic earnings (loss) per share(2).......................... $ 0.99 $ 0.17 $ 0.67 $ (0.05) $ 1.85
Diluted earnings (loss) per share(2)........................ $ 0.85 $ 0.17 $ 0.58 $ (0.05) $ 1.65
</TABLE>
- ------------------------
(1) The Company defines gross profit as total restaurant sales less the cost of
food and beverage and payroll and benefits. These costs represent the
expenses associated directly with providing the Company's products and
services.
(2) Amounts are presented before the cumulative effect of change in accounting
principle related to preopening expenses.
NOTE 21--SUBSEQUENT EVENTS (UNAUDITED)
The Company had completed the divestiture of 254 of its 279 Applebee's
restaurants, including the divestiture of 21 restaurants for proceeds of $35.1
million during the thirteen weeks ended April 4, 1999. On May 3, 1999, the
divestiture of the Applebee's restaurants was completed.
F-28
<PAGE>
JULY 19, 1999
$100,000,000
AVADO BRANDS, INC.
11 3/4% SENIOR SUBORDINATED NOTES DUE 2009
---------------------
PROSPECTUS
---------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
