<PAGE> 1
As filed with the Securities and Exchange Commission on June 2, 1998
Registration Statement No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
AMERICAN RESTAURANT GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 5812 33-0193602
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
450 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
(949) 721-8000
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
WILLIAM J. MCCAFFREY, JR.
CHIEF FINANCIAL OFFICER
AMERICAN RESTAURANT GROUP, INC.
(949) 721-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy To:
Philip T. Ruegger III, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Approximate date of commencement of proposed sale to the public: As
promptly as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH PROPOSED AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY (1) PRICE (1) FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 1/2% Series B Senior Secured Notes due 2003 $158,600,000 100 % $158,600,000 $ 46,787
12% Series B Senior Pay-in-Kind Exchangeable
Preferred Stock .............................. 35,000 Shares $ 1,000 $ 35,000,000 $ 10,325
12% Subordinated Debentures Due 2003.......... $35,000,000 None(2) None(2) None(2)
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
(2) No separate consideration will be received for the 12% Subordinated
Debentures due 2003 issuable upon exchange of the 12% Series B Senior
Pay-in-Kind Exchangeable Preferred Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION
8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Subject to Completion Dated,
_______ __, 1998
PRELIMINARY PROSPECTUS
AMERICAN RESTAURANT GROUP, INC.
OFFER TO EXCHANGE ITS 11 1/2% SERIES B SENIOR SECURED NOTES
DUE 2003, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY
AND ALL OF ITS OUTSTANDING 11 1/2% SERIES A SENIOR SECURED NOTES DUE 2003.
AND
OFFER TO EXCHANGE ITS 12% SERIES B SENIOR PAY-IN-KIND EXCHANGEABLE PREFERRED
STOCK, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND
ALL OF ITS OUTSTANDING 12% SERIES A
SENIOR PAY-IN-KIND EXCHANGEABLE PREFERRED STOCK.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
American Restaurant Group, Inc. (the "Company") hereby offers upon the
terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal to exchange (the "Exchange Offer") up to (i)
$158,600,000 in aggregate principal amount of its 11 1/2% Series B Senior
Secured Notes due 2003 (the "Exchange Notes"), for up to $158,600,000 in
aggregate principal amount of its outstanding 11 1/2% Series A Senior Secured
Notes due 2003 (the "Notes"), issued pursuant to the Indenture, dated as of
February 25, 1998 (the "Indenture") between the Company and United States Trust
Company of California, N.A., as trustee; and (ii) 35,000 shares of its 12%
Series B Senior Pay-in-Kind Exchangeable Preferred Stock, par value $0.01 per
share (the "Exchange Preferred Stock" and, together with the Exchange Notes, the
"Exchange Securities"), for up to 35,000 shares of its issued and outstanding
12% Senior Pay-in-Kind Exchangeable Preferred Stock, par value $0.01 per share
(the "Preferred Stock" and, together with the Notes, the "Securities"), issued
pursuant to the Certificate of Designation filed with the Secretary of State of
Delaware on February 24, 1998, (as amended on February 25, 1998 and on March 6,
1998, the "Certificate of Designation"). The Notes constitute Series A Notes
under and as defined in the Indenture and the Exchange Notes constitute Series B
Notes under and as defined in the Indenture. The Preferred Stock constitutes
Series A Senior Preferred Stock under and as defined in the Certificate of
Designation and the Exchange Preferred Stock constitutes Series B Senior
Preferred Stock under and as defined in the Certificate of Designation.
The terms of the Exchange Notes and the Exchange Preferred Stock are
substantially identical in all respects to the terms of the Notes and Preferred
Stock, respectively, except that the Exchange Securities are freely transferable
by holders thereof, except as provided below. For a complete description of the
terms of the Exchange Notes, see "Description of the Exchange Notes." For a
complete description of the terms of the Exchange Preferred Stock, see
"Description of the Exchange Preferred Stock." The Company will not receive any
proceeds from the Exchange Offer.
The Notes and the Preferred Stock were originally issued and sold on
February 25, 1998 in transactions not registered under the Securities Act of
1933, as amended (the "Act"), in reliance upon the exemption provided in Section
4(2) of the Act. Accordingly, the Notes and the Preferred Stock may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Act is available. The Exchange Securities are
being offered hereunder in order to satisfy the obligations of the Company under
a registration rights agreement relating to the Notes and the Preferred Stock.
See "The Exchange Offer--Purpose of the Exchange Offer." The Exchange Securities
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by holders thereof without compliance with the
registration and prospectus delivery provisions of the Act, provided that (i)
such Exchange Notes or such Exchange Preferred Stock is acquired in the ordinary
course of business of such holders or any beneficial owner, (ii) such holders
have no arrangement or understanding with any person to participate
<PAGE> 3
in the distribution of such Exchange Notes or such Exchange Preferred Shares,
and (iii) neither the holder nor any such beneficial owner is an "affiliate" of
the Company within the meaning of Rule 405 under the Act. Each holder of the
Securities who wishes to exchange Notes or Preferred Stock for Exchange Notes or
Exchange Preferred Stock, respectively, in the Exchange Offer will be required
to represent that (i) neither it nor any beneficial owner is an "affiliate" of
the Company (within the meaning of Rule 405 under the Act), (ii) any Exchange
Notes or any Exchange Preferred Stock to be received by such holder or any
beneficial owner is being acquired in the ordinary course of business of such
holder or such beneficial owner, (iii) it has no arrangement or understanding
with any person to participate in a distribution (within the meaning of the Act)
of such Exchange Notes or such Exchange Preferred Stock, and (iv) if such holder
is not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Act) of such Exchange Notes
or Exchange Preferred Stock. Each broker-dealer that receives Exchange Notes or
Exchange Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes or such Exchange Preferred Stock. The Letter of Transmittal
relating to the Exchange Offer states that by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Act. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes or Exchange Preferred Stock received
in exchange for Notes or Preferred Stock, respectively, where such Notes or such
Preferred Stock were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company will, for a period of 180
days after the Exchange Date (as defined herein), make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Interest on the Exchange Notes will be payable semi-annually on February
15 and August 15, commencing on August 15, 1998, to holders of record on the
immediately preceding February 1 and August 1. Interest on the Exchange Notes
began accruing on February 24, 1998. The Exchange Notes will be redeemable at
the option of the Company in whole or in part, on or after February 15, 2001, at
the redemption prices set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. Notwithstanding the foregoing, at any time or
from time to time on or prior to February 15, 2000, the Company may redeem up to
one-third of the aggregate principal amount of the Exchange Notes at the
redemption price of 111.5% of the principal amount thereof, plus accrued and
unpaid interest, if any, through the date of redemption, with the net cash
proceeds of one or more Qualified Equity Offerings (as defined); provided, that
at least two-thirds of the aggregate original principal amount of the Exchange
Notes remains outstanding immediately thereafter. Upon a Change of Control (as
defined), the Company will be required to offer to repurchase all of the
outstanding Exchange Notes at 101% of the principal amount thereof together with
accrued and unpaid interest, if any, to the date of repurchase.
The Exchange Notes are senior secured obligations of the Company and will
rank senior in right of payment to all subordinated indebtedness of the Company,
and pari passu in right of payment with all senior indebtedness of the Company.
The Exchange Notes will be unconditionally guaranteed (the "Guarantees") by each
Restricted Subsidiary (as defined) of the Company. The Exchange Notes and the
Guarantees, together with the New Credit Facility (as defined) will be secured,
subject to the terms of an Intercreditor Agreement (as defined), by a
first-priority security interest in a portion of the owned or leased real
property, a substantial portion of the owned personal property and substantially
all of the accounts receivable of the Company and its Restricted Subsidiaries,
and a pledge of all of the capital stock of the Company's Restricted
Subsidiaries, and proceeds of the foregoing (collectively, the "Collateral").
Pursuant to the Intercreditor Agreement, proceeds from the sale of Collateral
will be used first to satisfy the obligations under the New Credit Facility, and
thereafter the Exchange Notes. In addition, the Exchange Notes will be
effectively subordinated to all other secured indebtedness of the Company to the
extent of the assets that secure such indebtedness. As of March 30, 1998, the
Company and its Subsidiaries had $10.0 million of secured indebtedness other
than the Exchange Notes and the New Credit Facility, consisting of capital
leases and other debt.
Dividends on the Exchange Preferred Stock will accrue in each period
ending on February 15 and August 15 of each year at a rate of 12% per annum of
the liquidation preference. Dividends on the Exchange Preferred Stock began
accruing on February 24, 1998. The Company may, at its option, pay dividends in
cash or in additional fully paid and non-assessable shares of Exchange Preferred
Stock having an aggregate liquidation preference equal to the amount of such
dividends. The Company intends to pay dividends by issuing additional shares of
Exchange Preferred Stock.
The Exchange Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at any time, at an amount in cash equal to 110% of
the liquidation preference (the "Liquidation Preference") of the Exchange
Preferred Stock, plus an amount equal to all accrued and unpaid dividends to the
date of redemption. The Exchange Preferred Stock will be mandatorily redeemable
(subject to the legal availability of funds therefor) on August 15, 2003 for
cash at a price per share
ii
<PAGE> 4
equal to 110% of the then applicable Liquidation Preference plus accrued and
unpaid dividends.
Subject to certain limitations, the Company may on any February 15 or
August 15, commencing on February 15, 1999, exchange the Exchange Preferred
Stock, in whole but not in part, for its 12% Subordinated Debentures due 2003
(the "Exchange Debentures") in an aggregate principal amount equal to the then
applicable Liquidation Preference, plus accrued and unpaid dividends. In such
event, shares of Exchange Preferred Stock will be exchanged for Exchange
Debentures with an aggregate principal amount equal to the then aggregate
Liquidation Preference plus accrued and unpaid dividends of the Exchange
Preferred Stock. Exchange Debentures may be issued in denominations of $1,000
and integral multiples of $1,000 (or at the option of the Company, in
denominations of $100 and integral multiples of $100). The Exchange Debentures
will be due on August 15, 2003. At maturity, the Company shall pay a premium of
10% of the principal amount. The Exchange Debentures will bear interest from the
Exchange Debenture Date (as defined) at a rate per annum equal to 12%. Interest
on the Exchange Debentures will be payable semi-annually on February 15 and
August 15 in each year to holders of record at the close of business on the
first day of the calendar month in which such interest payment date occurs,
commencing on the first interest payment date after issuance. Alternatively, the
Company may, at its option, issue new Exchange Debentures having an aggregate
principal amount equal to the amount of such interest payments.
Holders of Securities whose Securities are not tendered and accepted in
the Exchange Offer will continue to hold such Securities and will be entitled to
all the rights and preferences and will be subject to the limitations applicable
thereto under the Indenture governing the Notes and the Exchange Notes or the
Certificate of Designation governing the Preferred Stock and the Exchange
Preferred Stock, as the case may be. Following consummation of the Exchange
Offer, the holders of Notes or Preferred Stock will continue to be subject to
the existing restrictions upon transfer thereof and the Company will have no
further obligation to such holders to provide for the registration under the Act
of the Notes or the Preferred Stock held by them.
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Notes or any minimum number of shares of Preferred Stock
being tendered for exchange. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless extended (the "Expiration
Date"). The Company's obligation to consummate the Exchange Offer is subject to
certain conditions. See "The Exchange Offer" and "Registration Rights
Agreement." The Company reserves the right to terminate or amend the Exchange
Offer at any time prior to the Expiration Date upon the occurrence of any such
condition. The date of acceptance for exchange of the Exchange Securities (the
"Exchange Date") will be the first business day following the Expiration Date.
Exchange Securities tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date; otherwise such tenders will be
irrevocable. The Company will pay all expenses incident to the Exchange Offer.
No assurance can be given that an active public or private market for the
Exchange Securities will develop. The Company does not intend to list the
Exchange Notes or the Exchange Preferred Stock on any securities exchange. To
the extent that Securities are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Securities could be
adversely affected.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
iii
<PAGE> 5
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference certain documents relating to
the Company that are not presented herein or delivered herewith. These documents
(other than the exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents) are available
without charge, on request by any person to whom this Prospectus is delivered,
from American Restaurant Group, Inc., 450 Newport Center Drive, Newport Beach,
California 92660, Attention: Chief Financial Officer.
The following documents are incorporated by reference herein:
1. Annual Report of the Company on Form 10-K for the fiscal year
ended December 29, 1997;
2. Quarterly Report of the Company on Form 10-Q for the fiscal
quarter ended March 30, 1998; and
3. Current Reports of the Company on Form 8-K dated January 30, 1998
and March 3, 1998.
All documents and reports subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), prior to the date hereof shall be deemed to be
incorporated by reference herein and shall be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein, or contained in this Prospectus,
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any subsequently filed
document that also is deemed to be incorporated herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus, except as so modified or superseded.
iv
<PAGE> 6
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Exchange Notes and the
Exchange Preferred Stock offered hereby (together with all amendments and
exhibits, referred to as the "Registration Statement") under the Act. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description
thereof, and each such statement shall be deemed qualified in its entirety by
such reference.
The Company is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Commission. The Registration Statement and the exhibits and schedules thereto,
as well as such reports and other information filed by the Company with the
Commission, may be inspected without charge and copied at prescribed rates at
the Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports
and other documents may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. In addition, so long as any Securities or any
Exchange Securities are outstanding, the Company will furnish to the holders
thereof the quarterly and annual financial reports that the Company is required
to file with the Commission under the Exchange Act (or similar reports in the
event the Company is not at the time required to file such reports with the
Commission).
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE SECURITIES 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 SALE 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 THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
v
<PAGE> 7
TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 1
Risk Factors............................................................... 11
Use of Proceeds............................................................ 19
Business................................................................... 28
Management................................................................. 35
Security Ownership of Certain Beneficial Owners and Management............. 39
American Restaurant Group Holdings, Inc.................................... 40
Description of Certain Indebtedness........................................ 41
The Exchange Offer......................................................... 42
Registration Rights Agreement.............................................. 49
Description of the Exchange Notes.......................................... 51
Description of the Exchange Preferred Stock................................ 68
Description of the Exchange Debentures..................................... 71
Description of the Notes................................................... 82
Description of the Preferred Stock......................................... 82
Description of Capital Stock............................................... 82
Description of the Warrants................................................ 82
Certain United States Federal Income Tax Considerations ................... 84
Plan of Distribution....................................................... 84
Legal Matters.............................................................. 85
Experts.................................................................... 85
Index to Consolidated Financial Statements................................. F-1
Unaudited Selected Consolidated Pro Forma Condensed Financial Data.........PF-1
vi
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Holders of Notes and Preferred Stock are urged to read this Prospectus in its
entirety. References herein to the Company's business and pro forma information
give effect to the Recapitalization Plan (as defined), unless the context
indicates otherwise. The unaudited condensed pro forma information appearing
herein does not purport to represent what the Company's results of operations or
financial position would have been had such transactions in fact occurred at the
beginning of the period or on the date indicated or to project the financial
position or results of operations of the Company for the present year or any
future period. See "Unaudited Selected Consolidated Pro Forma Condensed
Financial Data." The Company is a majority-owned operating subsidiary of
American Restaurant Group Holdings, Inc. ("Holdings"). Unless otherwise
indicated or the context otherwise requires, references in this Prospectus to
the "Company" are to American Restaurant Group, Inc. and its subsidiaries,
including their respective predecessors. The Company's financial information is
reported on a fiscal year basis which for each of the years had 52 weeks, except
for the fiscal year ended December 30, 1996 which had 53 weeks. EBITDA is
defined as operating profit before impairment charges plus depreciation and
amortization and net losses on sale of properties. EBITDAR is defined as EBITDA
plus rent expense. EBITDA and EBITDAR should not be considered as an alternative
to, or more meaningful than, earnings from operations or other traditional
indicators of operating performance and cash flow from operating activities. See
the notes to the Summary Historical and Pro Forma Consolidated Financial Data.
THE COMPANY
OVERVIEW
The Company operates five restaurant concepts, consisting of Stuart
Anderson's Black Angus ("Black Angus") (101 restaurants), Grandy's (89
restaurants), Spoons (18 restaurants), Spectrum (15 restaurants) and National
Sports Grill (6 restaurants). Each of the Company's restaurant concepts, except
Grandy's, has had an increase in EBITDAR from 1993 to 1997. The Company's
largest division, Black Angus, is the largest steakhouse chain west of the
Mississippi River and has been ranked the first or second best steakhouse chain
in the United States by Restaurants & Institutions magazine's "Choice in Chains"
annual survey in each of the last ten years. Black Angus restaurants are
full-service restaurants featuring steak and prime rib, and also serve chicken
and seafood entrees. Through its high-quality food offerings, friendly service
and familiar, rustic Western decor, Black Angus has developed a loyal customer
base since its inception in 1964. Black Angus generated 60% of the Company's
revenues and increased its EBITDAR (excluding late-night entertainment, which
has been phased out at most of its restaurants) from $27.3 million in 1993 to
$44.5 million in 1997.
The Company's other three restaurant concepts that had EBITDAR increases
are: (i) Spoons, a casual-style restaurant concept featuring fajitas, salads and
hamburgers; (ii) Spectrum, consisting of upscale Northern Italian, American and
Mexican restaurants; and (iii) National Sports Grill, consisting of sports-theme
restaurants featuring generous portions and microbrewery beers. These concepts
generated in the aggregate 22% of the Company's revenues and increased their
aggregate EBITDAR from $10.2 million in 1993 to $14.6 million in 1997.
Grandy's, the Company's second largest division, is a family-oriented,
quick-service, country-kitchen style restaurant, which provides its customers
with quality, "home-cooked" food at value prices with conveniences such as
drive-thru service. Grandy's experienced a decline in its performance during the
last several years. In the fourth quarter of 1996, the Company restructured the
management team at Grandy's in an effort to return the division to its
historical image. Grandy's, which generated 18% of the Company's revenues,
experienced a decline in its EBITDAR from $19.5 million in 1993 to $8.1 million
in 1996 and had EBITDAR of $11.0 million in 1997. To position Grandy's for
improved performance, the Company has (i) closed 21 unprofitable restaurants,
(ii) reduced its advertising expenses, (iii) reduced division overhead, (iv)
modified its pricing strategy and (v) developed a new advertising campaign.
The Company operates a total of 229 restaurants, including 101 Black
Angus restaurants, located primarily in the Western and Southwestern regions of
the United States. The Company's revenues, EBITDA and EBITDAR for the period
ending December 29, 1997 are $440.0 million, $30.7 million and $61.4 million,
respectively.
<PAGE> 9
BACKGROUND
Since its formation in 1987, the Company has been highly leveraged, which
has resulted in dedication of significant cash flow to service its debt, and has
operated under restrictive covenants and significant liquidity constraints, all
of which have limited the Company's operating flexibility and its ability to
significantly expand its core Black Angus division. In addition, the Company's
growth and profitability have declined as a result of: (i) the strategic
decision in 1992 to gradually limit and phase out the Black Angus late-night
entertainment operations, (ii) the decline of the Grandy's operations due, in
part, to the failure of Grandy's prior management to properly position Grandy's
in its markets and (iii) the economic conditions in 1995 in the Company's
principal markets. Notwithstanding these factors, the EBITDAR for each of the
Company's concepts, except Grandy's, increased from 1993 to 1997. However, the
Company's consolidated EBITDAR, which increased from $55.8 million in 1993 to
$66.0 million in 1994, declined to $61.4 million in 1997.
As of December 28, 1992, Black Angus operated 66 in-restaurant lounges
which offered disc jockeys, dancing and a focus on the sale of alcoholic
beverages during the after-dinner and late-night time periods. While the
late-night entertainment business in isolation generated favorable profit
margins, management was concerned that this business was negatively affecting
the positive, family image of the restaurants and negatively affecting visits by
its core customer base of middle-income families and that liability and other
expenses associated with the late-night entertainment business were increasing.
Black Angus began limiting its late-night entertainment business in 1992 and
subsequently, between 1994 and 1997, phased out its late-night entertainment
business in 9 to 19 restaurants per year. It currently operates 12 restaurants
with late-night entertainment. Management may discontinue the late-night
entertainment at some or all of the remaining 12 locations based on an
evaluation of their ongoing operations. Management estimates that the late-night
entertainment operations generated approximately $9.6 million in annual EBITDA
in 1992. The remaining late-night entertainment accounted for approximately $1.8
million of EBITDA in 1997.
In 1993, Grandy's generated $111.2 million of annual revenues and $19.5
million of annual EBITDAR in the highly competitive quick-service segment. In
1994, Grandy's management adopted a strategy to compete primarily on the basis
of price. This strategy positioned Grandy's as a bargain, quick-service
restaurant but resulted in significantly lower customer counts and
same-store-sales. In the fourth quarter of 1996, the Company restructured
Grandy's management team. In connection with the restructuring, Grandy's has
closed 21 restaurants, reduced overhead, and revised the pricing, menu and
marketing strategies. The Company intends to restore Grandy's to its image of a
quick-service, family-dining restaurant concept focused on quality,
"home-cooked" meals.
BUSINESS STRATEGY
The Company has implemented a business strategy designed to enhance the
growth of its core Black Angus division, reduce corporate overhead and improve
the performance of the Grandy's division. In addition, the Company plans to
selectively expand its other divisions.
Enhance Growth of Black Angus. Black Angus' restaurant operations
generated 60% of the Company's revenues in 1997 and realized an increase in
EBITDAR (excluding late-night entertainment), from $27.3 million in 1993 to
$44.5 million in 1997. This growth has been driven by an increase in average
same-store-sales, improving EBITDAR margins and strategically opening additional
restaurants. The Company's strategy is to continue same-store-sales growth
through its successful television advertising campaigns, suggestive sales
through on-table promotions, its reputation for high-quality food and service
and leveraging its 34-year-old Black Angus name. Black Angus (excluding
late-night entertainment) had a 1.4% same-store-sales increase from 1996 to
1997. The Company also intends to expand the Black Angus division through the
opening of new restaurants. The Company intends to open four additional Black
Angus restaurants in 1998 and ten new restaurants per year thereafter for the
next several years. The Company plans to open these restaurants where it can
leverage the well-known Black Angus name and its strong advertising base
(approximately 5% of Black Angus' revenues per year).
Reduce Overhead. The Company has implemented a strategy designed to
reduce overhead. In 1997, the Company reduced certain corporate salaries,
eliminated certain redundant corporate functions and relocated and consolidated
certain administrative and financial support functions from the corporate office
to the headquarters of Grandy's. In 1998, the Company transferred accounting
activities for certain of its restaurants from those restaurants to the Grandy's
headquarters,
2
<PAGE> 10
similar to the accounting transition from Black Angus restaurants to the Black
Angus headquarters that was completed in 1996. These efforts, most of which have
been completed, are expected to result in an aggregate of $3.4 million of
overhead cost savings per year.
Improve Grandy's Performance. The plan of Grandy's restructured
management team is to (i) identify and close unprofitable stores, (ii) reduce
overhead, (iii) restore Grandy's image from a price-point competitor to a
quality quick-service/family-dining restaurant and (iv) improve customer counts.
Since mid-1996, Grandy's has closed 21 unprofitable restaurants which in the
aggregate lost $1.7 million of annual EBITDAR. In addition, Grandy's reduced its
division overhead by $1.7 million for the year ended December 29, 1997 as
compared to 1996. Most recently, the new management team reconfigured the menu
to focus on increasing its average check through the sale of whole meals and
reduced single-item discounting in its marketing strategy. Management believes
that, as a result of Grandy's new strategy, Grandy's has increased its revenue
per customer 5.0% from $3.79 for the year ended December 30, 1996 to $3.98 for
the year ended December 29, 1997. In furtherance of the plan, the Company has
successfully tested a new advertising campaign in Grandy's markets and intends
to introduce a full-scale campaign in all Grandy's markets in 1998.
Other. The Company's Spoons, Spectrum and National Sports Grill concepts
are smaller divisions representing 39 of the Company's 229 restaurants. The
Company may selectively expand each of these concepts by one or two restaurants
per year.
Although the Company has no current arrangements to sell any restaurants
or divisions, the Company will review opportunities to sell restaurants in its
smaller divisions from time to time. In addition, the Company may convert
certain Company-operated Grandy's restaurants to franchised operations through
the sale of these restaurants to franchisees. No assurances can be given as to
whether the Company will sell any restaurants or if it elects to sell
restaurants the amount of consideration it will receive in such sales.
RECAPITALIZATION PLAN
On February 25, 1998, the Company completed a recapitalization plan
intended to reduce the Company's aggregate cash interest expense, provide more
operational liquidity and permit the Company to expand the Company's restaurant
concepts in its core markets in the western United States (the "Recapitalization
Plan").
The principal elements of the Recapitalization Plan were the following:
(i) The issuance of the Notes;
(ii) The issuance of 35,000 units (the "Units"), each Unit consisting of
$1,000 initial liquidation preference of Preferred Stock and one Common
Stock Purchase Warrant (each a "Warrant," and collectively, the
"Warrants"), initially to purchase 2.66143 shares of the Common Stock,
par value $.01 per share, of the Company at an initial exercise price of
$.01 per share (the "Common Stock");
(iii) The redemption of $126.4 million aggregate principal amount of the
Company's existing Senior Secured Notes due 1998 (the "Old Senior Secured
Notes") at par plus accrued and penalty interest thereon and the
repayment of certain other interest-bearing short-term liabilities;
(iv) The repurchase of $45.0 million aggregate principal amount of the
Company's existing 10.25% Subordinated Notes (the "Subordinated Notes")
at a price equal to 65% of the aggregate principal amount of the
Subordinated Notes, plus accrued and penalty interest thereon, and the
cancellation of the related warrants (the "Old Warrants") to purchase
common stock of Holdings.
(v) The extension of the accretion period on Holdings' Senior Discount
Debentures due 2005 (the "Holdings Debentures"), with an accreted value
on May 4, 1998 of approximately $86.1 million, from June 15, 1999 to
maturity on December 15, 2005 and the amendment of certain provisions of
the Holdings Debentures (as so amended, the "Amended Debentures"). Such
Amended Debentures accrete at a rate of 14.25%, compounded semi-annually
(as opposed
3
<PAGE> 11
to 14% for the Holdings Debentures). In addition, holders of Holdings
Debentures with an accreted value on February 24, 1998 of approximately
$10.8 million surrendered such Debentures for cancellation and received
$3.6 million principal amount of the Notes; and
(vi) The establishment of a $15.0 million credit facility (the "New
Credit Facility").
For a description of the Company's indebtedness, and the consolidated
capitalization of the Company after giving effect to the Exchange Offer and the
Recapitalization Plan, see "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," "Description of Certain Indebtedness" and
"Capitalization."
THE EXCHANGE OFFER
Securities Offered ............. $158,600,000 aggregate principal amount of 11
1/2% Series B Senior Secured Notes due 2003
(the "Exchange Notes") and 35,000 shares of
12% Series B Senior Pay-in-Kind Exchangeable
Preferred Stock (the "Exchange Preferred
Stock").
The Exchange Notes will be issued under the
Indenture, dated as of February 25, 1998 (the
"Indenture"), between the Company and United
States Trust Company of California, N.A., as
trustee, pursuant to which the Notes were
issued. The terms of the Exchange Notes will
be substantially identical in all respects
(including interest rate and maturity) to the
terms of the Notes that are to be exchanged
therefor, except that the Exchange Notes will
be freely transferable by holders thereof
(except as provided herein), and will not be
issued subject to any covenant regarding
registration under the Act. See "Description
of the Exchange Notes."
The Exchange Preferred Stock will be issued
under the Certificate of Designation filed
with the Secretary of State of Delaware on
February 24, 1998 (as amended on February 25,
1998 and on March 6, 1998, the "Certificate of
Designation"). Upon consummation of the
Exchange Offer, the Exchange Preferred Stock
will be separately tradeable from the Warrants
with which the Preferred Stock was originally
issued as a Unit. The form and terms of the
Exchange Preferred Stock will be substantially
identical in all respects to the form and
terms of the Preferred Stock that are to be
exchanged therefor, except that the Exchange
Preferred Stock will be freely transferable by
holders thereof (except as provided herein),
and will not be issued subject to any covenant
regarding registration under the Act. See
"Description of the Exchange Preferred Stock."
The Warrants are not being exchanged pursuant
to the Exchange Offer.
Exchange Offer.................. The Exchange Notes are being offered in
exchange for a like principal amount of the
Notes, and the shares of Exchange Preferred
Stock are being offered for a like number of
shares of Preferred Stock. Notes may be
exchanged only in integral multiples of
$1,000, and the Preferred Stock may be
exchanged only in whole share increments. The
Company has agreed to make the Exchange Offer
in order to satisfy its obligations under a
registration rights agreement (the
"Registration Rights Agreement"), dated as of
February 25, 1998, relating to the Notes and
the Preferred Stock. For a description of the
procedures for tendering, see "The Exchange
Offer--Tender Procedure."
Expiration Date; Withdrawal...... The Exchange Offer will expire at 5:00 P.M.,
New York City time, on , 1998 or
such later date and time to which it may be
extended in the sole discretion of the Company
(the "Expiration Date"). The date of
acceptance for exchange of the Securities (the
"Exchange Date") will be the first business
day following the Expiration Date. Securities
tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. Any Securities not accepted for exchange
for any reason will be returned without
expense to the tendering holders thereof as
promptly as practicable after the expiration
or termination of the Exchange Offer.
Conditions to the Exchange Offer..The Exchange Offer is subject to certain
conditions. See "The Exchange
Offer--Conditions of the Exchange Offer." The
Exchange Offer is not conditioned upon any
minimum aggregate
4
<PAGE> 12
principal amount of Notes or any minimum
number of shares of Preferred Stock being
tendered for exchange.
Certain United States Federal
Income Tax Considerations.......Simpson Thacher & Bartlett, New York, New
York, special tax counsel to the Company ("Tax
Counsel"), is of the opinion that the exchange
of the Notes or the Preferred Stock for the
Exchange Notes or the Exchange Preferred
Stock, respectively, will not be a taxable
event to holders, and holders will not
recognize any taxable gain or loss or any
interest income as a result of such exchange.
Tax Counsel has also advised the Company that
the holding period of the Exchange Securities
will include the holding period of the
Securities and that the basis of the Exchange
Securities will be the same as the basis of
the Securities immediately before the
exchange. See "Certain United States Federal
Income Tax Considerations Relating to the
Exchange of Securities."
Untendered Securities.............Upon consummation of the Exchange Offer, the
holders of Securities, if any, will have no
further registration or other rights under the
Registration Rights Agreement. Holders of
Notes or Preferred Stock who do not tender
their Notes or Preferred Stock in the Exchange
Offer or whose Notes or Preferred Stock are
not accepted for exchange will continue to
hold such Notes or Preferred Stock, as the
case may be, and will be entitled to all the
rights and preferences and will be subject to
the limitations applicable thereto under the
Indenture and Certificate of Designation,
respectively, except for any such rights or
limitations which, by their terms, terminate
or cease to be effective as a result of this
Exchange Offer. All untendered and tendered
but unaccepted Securities will continue to be
subject to the restrictions on transfer
provided therein. To the extent that
Securities are tendered and accepted in the
Exchange Offer, the trading market for
untendered and tendered but unaccepted
Securities could be adversely affected. See
"Risk Factors--Exchange Offer Procedures;
Effects of Failure to Tender or Properly
Tender."
Resales..........................Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Securities issued pursuant to
the Exchange Offer in exchange for Securities
may be offered for resale, resold and
otherwise transferred by holders thereof
without compliance with the registration and
prospectus delivery provisions of the Act,
provided that (i) such Exchange Securities are
acquired in the ordinary course of business of
such holder or any beneficial owner, (ii) such
holders have no arrangement or understanding
with any person to participate in the
distribution of such Exchange Securities and
(iii) neither the holder nor any such
beneficial owner is an "affiliate" of the
Company within the meaning of Rule 405 under
the Act. See "Morgan Stanley & Co. Inc.," SEC
No-Action Letter (available June 5, 1991) and
"Exxon Capital Holdings Corporation," SEC
No-Action Letter (available May 13, 1988).
Each holder of Securities who wishes to
exchange Securities for Exchange Securities in
the Exchange Offer will be required to
represent that (i) it is not an "affiliate" of
the Company (within the meaning of Rule 405
under the Act), (ii) any Exchange Securities
to be received by it are being acquired in the
ordinary course of its business, (iii) it has
no arrangement or understanding with any
person to participate in a distribution
(within the meaning of the Act) of such
Exchange Securities, and (iv) if such holder
is not a broker-dealer, such holder is not
engaged in, and does not intend to engage in,
a distribution (within the meaning of the Act)
of such Exchange Securities. Each broker or
dealer that receives Exchange Securities for
its own account in exchange for Securities,
where such Securities were acquired by such
broker or dealer as a result of market-making
or other activities, must acknowledge that it
will deliver a Prospectus in connection with
any sale of such Exchange Securities. See
"Plan of Distribution."
DESCRIPTION OF THE EXCHANGE NOTES
Maturity Date.................... February 15, 2003.
Interest Rate and Payment Dates...The Exchange Notes will bear interest at a
rate of 11 1/2% per annum. Interest on the
Exchange Notes will be payable semi-annually
in cash in arrears on February 15 and August
15 of each
5
<PAGE> 13
year, commencing August 15, 1998, to holders
of record on the immediately preceding
February 1 and August 1. Interest on the
Exchange Notes began accruing on February 24,
1998.
Guarantees........................The Exchange Notes will be fully and
unconditionally guaranteed by each of the
current and future Restricted Subsidiaries (as
defined) of the Company (collectively, the
"Guarantors"), jointly and severally (subject
to insolvency and fraudulent conveyance
limitations). See "Description of the Exchange
Notes--Guarantors."
Security..........................The Exchange Notes and the Guarantees,
together with the New Credit Facility, will be
secured, subject to the Intercreditor
Agreement, by a first-priority security
interest in a portion of the owned or leased
real property, a substantial portion of the
owned personal property and substantially all
of the accounts receivable of the Company and
its Restricted Subsidiaries, a pledge of all
of the capital stock of the Company's
Restricted Subsidiaries, and proceeds of the
foregoing (the "Collateral"). See "Risk
Factors--Collateral; Other Secured
Indebtedness," "Description of the Exchange
Notes--Collateral" and "Description of Certain
Indebtedness--Intercreditor Agreement and
Collateral Documents."
Ranking...........................The Exchange Notes will be senior secured
obligations of the Company and rank senior in
right of payment to all subordinated
indebtedness of the Company, and pari passu in
right of payment with all senior indebtedness
of the Company. Pursuant to the Intercreditor
Agreement, proceeds from the sale of
Collateral will be used first to satisfy the
obligations under the New Credit Facility, and
thereafter, the Exchange Notes. In addition,
the Exchange Notes will be effectively
subordinated to all other secured indebtedness
of the Company to the extent of the assets
that secure such indebtedness. The Indenture
limits, among other things, the incurrence of
indebtedness or the existence of liens on the
assets of the Company, subject to certain
exceptions. See "Description of the Exchange
Notes--Collateral" and "Description of the
Exchange Notes--Certain Covenants" and
"Description of Certain
Indebtedness--Intercreditor Agreement and
Collateral Documents."
Optional Redemption...............The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, on
or after February 15, 2001, at the redemption
prices set forth herein, plus accrued
interest, if any, to the date of redemption.
Notwithstanding the foregoing, at any time or
from time to time prior to February 15, 2000,
the Company may redeem up to one-third of the
original aggregate principal amount of the
Exchange Notes at the redemption price of
111.5% of the principal amount thereof, plus
accrued and unpaid interest, if any, through
the date of redemption with the net cash
proceeds of one or more Qualified Equity
Offerings, provided that (a) such redemption
shall occur within 60 days of the date of the
closing of such offering and (b) at least
two-thirds of the original aggregate principal
amount of the Exchange Notes remains
outstanding immediately thereafter. See
"Description of the Exchange
Notes--Redemption."
Mandatory Redemption............. None.
Change of Control.................Upon a Change of Control, the Company will be
required to offer to repurchase all of the
outstanding Exchange Notes at a price equal to
101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to
the date of repurchase. See "Description of
the Exchange Notes--Change of Control" and
"--Certain Covenants."
Certain Covenants.................The Indenture contains certain covenants that
limit the ability of the Company and its
Restricted Subsidiaries, if any, to, among
other things, (i) incur additional
indebtedness, (ii) make restricted payments,
(iii) issue and sell capital stock of
subsidiaries, (iv) enter into certain
transactions with affiliates, (v) create
certain liens, (vi) sell certain assets and
(vii) merge, consolidate or sell substantially
all of the Company's assets. See "Description
of the Exchange Notes--Certain Covenants."
For a more detailed description of the
Exchange Notes see "Description of the
Exchange Notes."
6
<PAGE> 14
DESCRIPTION OF THE EXCHANGE PREFERRED STOCK
Dividends.........................Dividends on the Exchange Preferred Stock will
accrue at a rate of 12% per annum of the
liquidation preference. Dividends will be
payable semiannually on February 15 and August
15 of each year. Dividends on the Exchange
Preferred Stock began accruing on February 24,
1998. The Company may, at its option, pay
dividends in cash or in additional fully paid
and non-assessable shares of Exchange
Preferred Stock having an aggregate
liquidation preference equal to the amount of
such dividends. The Company currently intends
to pay dividends by issuing additional shares
of Exchange Preferred Stock.
Liquidation Preference............$1,000 per share.
Ranking...........................The Exchange Preferred Stock will rank senior
in right of payment with respect to all Junior
Securities (as defined herein).
Optional Redemption...............The Exchange Preferred Stock will be
redeemable at the option of the Company, in
whole or in part, at any time, at 110% of the
Liquidation Preference plus accrued and unpaid
dividends to the date of redemption.
Mandatory Redemption..............The Exchange Preferred Stock will be
mandatorily redeemable on August 15, 2003 for
cash (subject to the legal availability of
funds therefor) at a price per share equal to
110% of the then applicable Liquidation
Preference plus accrued and unpaid dividends
to the date of redemption.
Voting Rights.....................The Exchange Preferred Stock will not have any
voting rights, except as set forth herein or
as otherwise required by law.
Certain Covenants.................The Certificate of Designation contains
covenants that limit the ability of the
Company to redeem or repurchase Junior
Securities (as defined) and pay dividends
thereon, to exceed the Maintenance Test Ratio
(as defined), to merge or consolidate with any
other entity, to sell certain assets, to sell
all or substantially all of the assets and to
enter into transactions with affiliates. The
Certificate of Designation also requires the
Company to deliver certain reports and
information to the holders of the Exchange
Preferred Stock.
Exchange..........................Subject to certain limitations, the Company
may, on any February 15 or August 15,
commencing February 15, 1999, exchange the
Exchange Preferred Stock in whole but not in
part for Exchange Debentures with an aggregate
principal amount equal to the then applicable
Liquidation Preference plus accrued and unpaid
dividends to the date of exchange.
For a more detailed description of the
Exchange Preferred Stock, see "Description of
the Exchange Preferred Stock."
DESCRIPTION OF EXCHANGE DEBENTURES
Interest Rate and Payment Dates...The Exchange Debentures will bear interest at
the rate of 12% per annum. Interest on the
Exchange Debentures will be payable
semi-annually in arrears on February 15 and
August 15 of each year, commencing on the
first interest payment date after issuance.
The Company may at its option pay interest in
cash or in additional Exchange Debentures
having an aggregate principal amount equal to
the amount of such interest.
Maturity Date.....................August 15, 2003. At maturity, the Company will
pay a premium of 10% of the principal amount.
Optional Redemption...............The Exchange Debentures will be redeemable at
the option of the Company, in whole or in
part, at a redemption price equal to 110% of
the principal amount, plus accrued and unpaid
interest, if any, to and including the date of
redemption.
Mandatory Redemption..............None.
7
<PAGE> 15
Ranking...........................The Exchange Debentures will be subordinated
obligations of the Company and will be
subordinated in right of payment to all
existing and future Senior Debt (as defined)
of the Company. See "Description of the
Exchange Debentures--Subordination."
Certain Covenants.................The Exchange Debenture Indenture (as defined)
will contain certain covenants, including
covenants relating to (i) restricted payments,
(ii) transactions with affiliates, (iii)
certain asset sales, (iv) the Company's
ability to exceed the Maintenance Test Ratio
(as defined) and (v) mergers, consolidations
and sales of substantially all assets. See
"Description of the Exchange
Debentures--Covenants."
For a more detailed description of the
Exchange Debentures, see "Description of the
Exchange Debentures."
USE OF PROCEEDS
The Company will not receive any proceeds for the exchange pursuant to
the Exchange Offer.
RISK FACTORS
HOLDERS OF THE SECURITIES SHOULD CONSIDER CAREFULLY THE INFORMATION
SET FORTH UNDER "RISK FACTORS," AS WELL AS THE OTHER INFORMATION SET FORTH IN
THIS PROSPECTUS BEFORE TENDERING SECURITIES IN EXCHANGE FOR THE EXCHANGE
SECURITIES.
American Restaurant Group, Inc. is a Delaware corporation. Its principal
office is located at 450 Newport Center Drive, 6th Floor, Newport Beach,
California 92660 and its telephone number is (949) 721-8000.
8
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for each
of the last three years ended December 25, 1995, December 30, 1996 and December
29, 1997 has been derived from the consolidated financial statements of the
Company which have been audited by Arthur Andersen LLP, independent accountants.
The financial data for the thirteen weeks ended March 31, 1997 and March 30,
1998 have been derived from the Company's unaudited financial statements, which
in the opinion of management include all adjustments necessary for a fair
presentation of the data for interim periods. The Company's pro forma financial
data for the thirteen-week period ended March 30, 1998 and for the fifty-two
week period ended December 29, 1997, respectively, are for informational
purposes only and give effect to the Recapitalization Plan as if the
Recapitalization Plan had been consummated on December 30, 1997 for the
thirteen-week period ended March 30, 1998 and on December 30, 1996 for the
fifty-two week period ended December 29, 1997. The unaudited condensed pro forma
information appearing herein does not purport to represent what the Company's
results of operations or financial position would have been had such
transactions in fact occurred at the beginning of the periods or on the date
indicated or to project the financial position or results of operations of the
Company for the present year or any future period. See "Unaudited Selected
Consolidated Pro Forma Condensed Financial Data." The results of operations for
the thirteen weeks ended March 30, 1998 are not necessarily indicative of the
results that may be expected for the full fiscal year. This Selected Historical
Financial Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL THIRTEEN
HISTORICAL YEAR ENDED WEEKS ENDED
-------------------------------------- -----------------------
DEC. 25, DEC. 30, DEC. 29, MAR. 31, MAR. 30,
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(dollars in thousands)
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ 445,966 $ 445,424 $ 440,039 $ 114,110 $ 112,122
Gross Profit(2) ................................... 62,765 52,699 55,790 14,760 16,081
Operating Profit before
Impairment Charges(3) ............................ 8,586 4,227 6,803 3,800 7,023
Interest Expense, Net ............................. 28,004 27,714 23,985 5,925 5,521
Net Income/(Loss) ................................. (39,662) (38,461) (20,292) (2,128) 11,060(4)
Ratio of Earnings to Fixed
Charges(5) ....................................... -- -- -- -- 1.2x
Deficiency in Earnings to
cover Fixed Charges(5) ........................... (39,596) (36,692) (20,229) (2,125) --
Ratio of Earnings to Fixed
Charges and Preferred Stock
Dividends(6) ..................................... -- -- -- -- 1.1x
Deficiency in Earnings to
cover Fixed Charges and
Preferred Stock
Dividends(6) ..................................... (39,596) (36,692) (20,229) (2,125) --
RESTAURANT DATA:
Restaurants (end of period) ....................... 248 247 231 244 230
Increase/(Decrease) in
Same-store-sales:
Consolidated(7)(8) ................................ (5.8)% (2.9)% (2.3)% (4.8)% 0.5%
Black Angus (excluding
late-night
entertainment)(7)(9) ............................. (5.1)% 1.0% 1.4% (3.3)% 4.0%
OTHER DATA:
EBITDA(10) ...................................... $ 32,089 $ 26,100 $ 30,713 $ 8,513 $ 10,675
EBITDAR(11) ....................................... 54,952 50,913 61,389 16,271 17,951
Depreciation and Amortization ..................... 22,819 20,386 19,627 4,823 3,749
Capital Expenditures .............................. 16,277 13,279 4,650 2,272 2,256
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(1)
--------------------------
THIRTEEN
YEAR ENDED WEEKS ENDED
----------- -----------
DEC. 29, MAR. 30,
1997 1998
--------- ---------
OPERATING DATA:
<S> <C> <C>
Revenues ................................... $ 428,513 $ 111,568
Gross Profit(2) ............................ 56,538 16,131
Operating Profit before
Impairment Charges(3) ..................... 11,553 7,156
Interest Expense, Net ...................... 19,506 4,871
Net Income/(Loss) .......................... (11,064) 11,843(4)
Ratio of Earnings to Fixed
Charges(5) ................................ -- 1.3x
Deficiency in Earnings to
cover Fixed Charges(5) .................... (11,001) --
Ratio of Earnings to Fixed
Charges and Preferred Stock
Dividends(6) .............................. -- 1.1x
Deficiency in Earnings to
cover Fixed Charges and
Preferred Stock
Dividends(6) .............................. (16,507) --
RESTAURANT DATA:
Restaurants (end of period) ................ 229 229
Increase/(Decrease) in
Same-store-sales:
Consolidated(7)(8) ......................... (2.3)% 0.5%
Black Angus (excluding
late-night
entertainment)(7)(9) ...................... 1.4% 4.0%
OTHER DATA:
EBITDA(10) ................................. $ 32,236 $ 10,725
EBITDAR(11) ................................ 60,498 17,600
Depreciation and Amortization .............. 16,400 3,666
Capital Expenditures ....................... 4,650 2,256
EBITDA/Pro Forma Net Interest Expense(12) .. ..... 1.7x 2.2x
EBITDAR/Pro Forma Net Interest Expense and Rent(12) ..1.3x 1.5x
</TABLE>
9
<PAGE> 17
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MAR. 30, 1998
-------------------
(dollars in thousands)
<S> <C>
Cash.......................................................... $ 6,209
Property, Plant & Equipment, Net.............................. 91,972
Total Assets.................................................. 155,715
Long-term Debt................................................ 160,353
Cumulative Preferred Stock, Mandatorily Redeemable............ 33,239
Common Stockholders' Equity (Deficit)......................... (104,697)
</TABLE>
(1) Gives effect to the issuance of the Notes and the Units and the use of
proceeds therefrom and the Recapitalization Plan as if these activities
had occurred on December 30, 1997 for the thirteen-week period ended
March 30, 1998 and on December 30, 1996 for the fifty-two week period
ended December 29, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Unaudited Selected Consolidated Pro Forma Condensed
Financial Statements, included elsewhere herein.
(2) Gross Profit is defined as revenues less food and beverage, payroll and
direct operating costs.
(3) Operating Profit is stated before non-cash charges for impairment of
long-lived assets of $20.2 million in 1995, $13.2 million in 1996 and
$3.0 million in 1997.
(4) Includes a $9.6 million extraordinary gain on extinguishment of debt.
(5) For the purpose of determining the ratio or deficiency of earnings to
cover fixed charges, earnings consist of earnings before extraordinary
gain or loss, income taxes and fixed charges. Fixed charges consist of
interest on indebtedness, the amortization of debt issue costs and that
portion of operating rental expense representative of the interest
factor.
(6) The ratio or deficiency of earnings to fixed charges and preferred stock
dividends are the same as the ratio of earnings to fixed charges except
that preferred stock dividends are added to fixed charges even though the
Company intends to pay such dividends by issuing additional shares of
Preferred Stock or Exchange Preferred Stock, as the case may be.
(7) Same stores are defined as restaurants which have been in operation for
the entire prior year.
(8) Excludes Velvet Turtle restaurants. As of February 1997, the Company
closed the last Velvet Turtle restaurant.
(9) This presentation excludes all late-night entertainment operations of the
Black Angus restaurants and, in 1997, the lunch business in 14 Black
Angus restaurants where lunch was discontinued in 1997.
(10) EBITDA is defined as operating profit before impairment charges plus
depreciation and amortization and net losses on sale of properties. For
the years ended December 25, 1995, December 30, 1996 and December 29,
1997, the net losses on the sale of properties were $0.7 million, $1.5
million and $4.3 million, respectively. For the thirteen weeks ended
March 31, 1997 and March 30, 1998, the amortization of deferred gains,
which exceeded losses on the sale of properties, netted to $0.1 million
and $0.1 million respectively. EBITDA should not be considered an
alternative to, or more meaningful than, earnings from operations or
other traditional indicators of operating performance and cash flow from
operating activities. In connection with the closing of restaurants in
1997, the Company established a closed-unit reserve to which the Company
charges ongoing expenses relating to closed restaurants as incurred.
Approximately $1.0 million in cash charges is expected to be charged per
year to this reserve on an ongoing basis for the next several years.
(11) EBITDAR is defined as EBITDA plus rent expense. EBITDAR has been
presented for the purposes of providing information on the Company's
operations before giving effect to financing activities such as the
sale/leaseback transactions and to facilitate comparisons to prior
periods. In the second half of 1996, the Company completed $63.4 million
of sale/leaseback transactions with the proceeds used to repay $50.5
million of indebtedness at par and for general corporate purposes. As a
result of these transactions, annual rent expense increased by $8.0
million. EBITDAR should not be considered an alternative to, or more
meaningful than, earnings from operations or other traditional indicators
of operating performance and cash flow from operating activities.
(12) The ratio is not presented with respect to Preferred Stock dividends
because the Company intends to pay such dividends by issuing additional
shares of Preferred Stock.
10
<PAGE> 18
RISK FACTORS
Each holder of Notes or Preferred Stock should consider carefully the
following specific risk factors, as well as the other information set forth in
this Prospectus before tendering Notes or Preferred Stock in exchange for
Exchange Notes or Exchange Preferred Stock, respectively, offered hereby. This
Prospectus contains certain forward-looking statements, including statements
containing the words "believes," "anticipates," "expects," "intends" and words
of similar import. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors (collectively, "Factors") which may cause
the actual results or performance of the Company to be materially different from
any future results or performance expressed or implied by such forward-looking
statements. Such Factors include, among others, the following: adverse changes
in national or local economic conditions; competition from other restaurant
companies; changes in the availability, cost and terms of financing; changes in
cost of sales, including food costs, and in other operating expenses; the
ability to execute business strategies; and other Factors referenced in this
Prospectus. Certain of these Factors are discussed in more detail elsewhere in
this Prospectus, including without limitation, in "Prospectus Summary",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, holders of Notes or
Preferred Stock are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such Factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments. The risk factors set forth below are generally applicable to the
Notes and Preferred Stock as well as the Exchange Notes and the Exchange
Preferred Stock.
HIGH LEVERAGE; RENT EXPENSE; ABILITY TO SERVICE DEBT
The Company is a highly leveraged company and continues to be highly
leveraged after completion of the Recapitalization Plan. At March 30, 1998, the
Company's total consolidated long-term indebtedness was approximately $168.6
million and the Company had a stockholders' deficit of $104.7 million. Further,
the Company has $35 million of aggregate liquidation preference of Preferred
Stock and following consummation of the Exchange Offer will have $35 million
aggregate liquidation preference of Exchange Preferred Stock, which aggregate
liquidation preference amount will increase as dividends are paid in kind on the
Preferred Stock or the Exchange Preferred Stock, as the case may be. In
addition, the Preferred Stock is and the Exchange Preferred Stock will be
mandatorily redeemable in cash on August 15, 2003 (following the maturity of the
Notes or the Exchange Notes, as the case may be) at 110% of the aggregate
liquidation preference of the Preferred Stock or the Exchange Preferred Stock,
as the case may be. In addition, in certain circumstances, including upon
failure to comply with the Maintenance Test Ratio, the dividend rate on the
Preferred Stock or the Exchange Preferred Stock, as the case may be, will
increase to 15% (or 13.5% for the first two quarters of default under the
Maintenance Test Ratio). See "Description of Exchange Preferred
Stock--Covenants." Moreover, the Indenture permits, subject to compliance with
certain conditions, the incurrence by the Company and its subsidiaries of
additional indebtedness in the future. In addition, as is common in the
restaurant industry, the Company operates with a working capital deficit, which
as of March 30, 1998 was approximately $35.0 million. The Company has also
generally operated under significant liquidity constraints which have limited
its operational flexibility and ability to expand its core Black Angus division.
On February 25, 1998, pursuant to the Recapitalization Plan, the Company entered
into a $15.0 million revolving credit facility (the "New Credit Facility").
In addition to its leverage, the Company has had significant rent
expenses, which increased substantially in 1996. In the second half of 1996, the
Company completed sale/leaseback transactions for an aggregate sales price of
$63.4 million and simultaneously executed long-term leases with respect to the
sold property. The leases call for aggregate annual rent payments of $8.0
million, subject to certain escalation clauses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company's aggregate rent expense for the year ended December 29,
1997 was $28.3 million on a pro forma basis.
The degree to which the Company is leveraged, its liquidity constraints
and its debt service, rent expense and dividend and redemption obligations have
significantly affected the Company and could have important adverse consequences
to the Company and the holders of the Exchange Securities, including the
following, any of which could affect the Company's ability to make payments with
respect to the Exchange Securities: (i) the Company could be vulnerable to
changes in general economic conditions; (ii) the Company's ability to obtain
additional financing or acceptable terms from vendors for working capital, or
additional financing for capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired; (iii) the Company is more highly
leveraged than certain of its competitors, which places the Company at a
11
<PAGE> 19
competitive disadvantage; and (iv) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service, rent expense, and
redemption payments and will not be available for other purposes.
For 1997, the Company's earnings before extraordinary loss, income taxes
and fixed charges (which consist of interest on indebtedness, the amortization
of debt issue costs and that portion of operating rental expense representative
of the interest factor) were insufficient to cover fixed charges by the amount
of $20.2 million. On a pro forma basis, after giving effect to the
Recapitalization Plan, for 1997, the Company's earnings before extraordinary
loss, income taxes and fixed charges were insufficient to cover (i) fixed
charges by the amount of $11.0 million and (ii) fixed charges and preferred
stock dividends by $16.0 million. In addition, on a pro forma basis, the
Company's ratio of EBITDA to net interest expense would have been 1.7x for 1997.
There can be no assurance that the Company's earnings before income taxes and
fixed charges will not continue to be insufficient to cover fixed charges and
preferred stock dividends.
The Company's ability to meet its debt service obligations, pay the
Exchange Preferred Stock mandatory redemption price, satisfy the Maintenance
Test Ratio and to grow will depend upon its future performance, which will be
subject to general economic conditions, its ability to achieve cost savings and
other financial, business and other factors affecting the operations of the
Company, many of which are beyond its control. The Company does not expect that
it will be able to generate sufficient cash flow from future operations to pay
the Exchange Notes upon maturity or the mandatory redemption price of the
Exchange Preferred Stock and, accordingly, the Company will be required to
refinance all or a portion of such debt or Exchange Preferred Stock or obtain
additional financing or possibly sell assets. No assurance can be made that any
such refinancing or sale would be possible or would not contain terms and
conditions that could have a material adverse effect on the Company and its
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
RECENT LOSSES
The Company experienced net losses after extraordinary items of $39.7
million in 1995, $38.5 million in 1996 and $20.3 million in 1997. If the Company
continues to have net losses there could be a material adverse effect on the
business of the Company which could affect the Company's ability to repay the
Exchange Notes. See "--High Leverage; Rent Expense; Ability to Service Debt" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COLLATERAL; OTHER SECURED INDEBTEDNESS
The Collateral securing the Notes and which will secure the Exchange
Notes also secures the obligations under the New Credit Facility. Pursuant to an
agreement with the lenders under the New Credit Facility, proceeds from the sale
of the Collateral will be paid first to satisfy obligations under the New Credit
Facility and thereafter, Notes and the Exchange Notes. In addition, the Notes
are and Exchange Notes will be effectively subordinated to all other secured
indebtedness of the Company and its Subsidiaries (except the New Credit
Facility) to the extent of the assets that secure such other indebtedness. As of
March 30, 1998, the Company had $10.0 million of secured indebtedness other than
the Notes and the New Credit Facility. Moreover, if a bankruptcy proceeding were
to be commenced by or against the Company or a Guarantor, the Collateral Agent
(as defined) is authorized to subordinate its security interest in the
Collateral to other indebtedness which, when aggregated with the principal
amount then outstanding under the New Credit Facility, would not exceed $20
million. See "Description of Certain Indebtedness--Intercreditor Agreement and
Collateral Documents."
In the event of a default under the Notes or the Exchange Notes, the
proceeds from the sale of the Collateral may not be sufficient to satisfy in
full the Company's obligations under the New Credit Facility and the Notes and
the Exchange Notes. The amount to be received upon such a sale would depend upon
numerous factors, including the timing and manner of the sale. The book value of
the Collateral is less than the principal amount of the Notes and will be less
than the principal amount of the Exchange Notes offered hereby. By its nature,
the Collateral is illiquid and may have no readily ascertainable market value.
Accordingly, there can be no assurance that the Collateral can be sold in a
short period of time or that the proceeds obtained therefrom will be sufficient
to pay all amounts owing to the lenders under the New Credit Facility and the
holders of the Notes and the Exchange Notes. To the extent that third parties
(including the lenders under the New Credit Facility) enjoy Permitted Liens,
such third parties may have rights and remedies with respect to the property
subject to such Liens that, if exercised, could adversely affect the value of
the Collateral.
A significant portion of the Collateral, including the real property
portion thereof, includes tangible and intangible assets which may only be
usable as part of the existing operating businesses. Accordingly, any such sale
of the Collateral, including
12
<PAGE> 20
the real property portion thereof, separate from the sale of certain of the
Company's divisions as a whole may not be feasible or of any value.
A significant portion of the Collateral (other than the stock of
Subsidiaries) consists of leased land and improvements made thereto which are
owned by the Company. The security interest (which may be unperfected in certain
states as a result of recording costs and other taxes) in such Collateral
consists of deeds of trusts and mortgages, as applicable to each state,
encumbering the Company's leasehold estate in the land and fee (ownership)
interest in the improvements. However, in most if not all cases, the ownership
of the improvements remains with the Company only so long as the Company's
leasehold interest (as a tenant) in the real property remains in effect. Upon
the expiration or early termination of a real property lease, the Company's
ownership interest in the leasehold improvements also may be terminated.
Accordingly, a landlord's exercise of its rights under a lease may terminate or
significantly impair any portion of the Collateral which is an improvement on
such real property. In addition, any exercise by the Collateral Agent of its
rights to foreclose or otherwise acquire possession of portions of the
Collateral which are leasehold estates or owned improvements may be impaired or
terminated by landlords' rights, by rights of landlords' lenders, or by the
particular provisions of state law governing the sale of encumbered property by
a creditor with a real property security interest. Additionally, the inclusion
of the Company's fixtures as a portion of the Collateral will be limited to the
extent such fixtures are deemed to be personal property.
The right of the Collateral Agent, as a secured party under the
Collateral Documents for the benefit of the holders of the Notes and the
Exchange Notes, to foreclose upon and sell the Collateral upon the occurrence of
a payment default is likely to be significantly impaired by applicable
bankruptcy laws, including the automatic stay pursuant to Section 362 of the
Bankruptcy Code, if a bankruptcy proceeding were to be commenced by or against
the Company or a Guarantor (as defined) before or possibly even after the
Collateral Agent has foreclosed upon and sold the Collateral. Under applicable
federal bankruptcy laws, secured creditors are prohibited from repossessing
their security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such a debtor, without bankruptcy court approval. Moreover,
applicable federal bankruptcy laws generally permit the debtor to continue to
retain collateral even though the debtor is in default under the applicable debt
instruments. In view of the broad discretionary powers of a bankruptcy court,
the Company cannot predict whether payments under the Notes or Exchange Notes
would be made following commencement of and during a bankruptcy case, whether or
when the Collateral Agent could foreclose upon or sell the Collateral or whether
or to what extent holders of Notes or Exchange Notes would be compensated for
any delay in payment or loss of value of the Collateral. Furthermore, in the
event the bankruptcy court determines that the value of the Collateral is not
sufficient to repay all amounts due on the Notes or the Exchange Notes, holders
of Notes or Exchange Notes would hold "under-secured claims." Applicable federal
bankruptcy laws do not permit the payment and/or accrual of interest, costs and
attorney's fees for "under-secured claims" during a debtor's bankruptcy case.
Except upon and during the continuance of a Default or Event of Default,
the Collateral Agent is required under certain circumstances to release its
liens on Collateral proposed to be sold by the Company, further reducing the
sufficiency of the collateral securing the Notes and the Exchange Notes.
RANKING OF PREFERRED STOCK AND EXCHANGE PREFERRED STOCK; CONSEQUENCES OF HOLDING
COMPANY STRUCTURE
The Preferred Stock is and the Exchange Preferred Stock will be junior in
right of payment to all existing and future liabilities and obligations (whether
or not for borrowed money) of the Company (other than Common Stock and any
preferred stock which by its terms is on parity with or junior to the Preferred
Stock or the Exchange Preferred Stock). Accordingly, in the event of a
liquidation, dissolution or winding up of the Company, lenders to and other
creditors of the Company would be entitled to payment in full before the holders
of Preferred Stock or Exchange Preferred Stock. The Preferred Stock is and the
Exchange Preferred Stock will be also effectively subordinated to the
obligations of the Company's subsidiaries because the Company is a holding
company. In the event of an insolvency, liquidation or other reorganization of
any of the subsidiaries of the Company, the shareholders of the Company
(including the holders of Preferred Stock or Exchange Preferred Stock), will
have no right to proceed against the assets of such subsidiaries or to cause the
liquidation or bankruptcy of such subsidiaries under Federal bankruptcy laws.
Creditors of such subsidiaries would be entitled to payment in full from such
assets before the Company, as a shareholder, would be entitled to receive any
distribution therefrom.
In addition, the mandatory redemption obligation in respect of the
Exchange Preferred Stock is solely an obligation of the Company. Accordingly,
the ability of the Company to pay the mandatory redemption price will be
dependent upon the operating cash flow of its subsidiaries and the payment of
funds by such subsidiaries in the form of loans, dividends or
13
<PAGE> 21
otherwise. There can be no assurances that there will be sufficient cash flow or
payments from the Company's subsidiaries to pay the mandatory redemption price.
The Company intends to pay dividends on the Exchange Preferred Stock by
issuing additional shares of Exchange Preferred Stock. In addition, the
Indenture and the New Credit Facility limit the Company's ability to pay
dividends on the Preferred Stock or the Exchange Preferred Stock in cash. The
Company's ability to pay cash dividends on the Preferred Stock or the Exchange
Preferred Stock may also be restricted by future indebtedness or agreements.
SUCCESSFUL EXECUTION OF BUSINESS STRATEGY
The Company is currently in the process of implementing a new business
strategy, which consists of a number of cost-cutting and revenue-enhancing
initiatives. The Company's strategy includes opening new Black Angus restaurants
in markets where it can leverage the Black Angus name. There can be no assurance
that the Company will be able to open additional Black Angus restaurants as
currently planned or that the performance of the new restaurants will be
consistent with the performance of its existing restaurants. There can be no
assurance that the operating and other business strategies, including the
strategies with respect to Grandy's, implemented by the Company's management
team will be successful or that the Company will be able to increase revenue,
operate successfully with its reduced overhead, improve its operations and
improve its cash flow and results of operations. If the implementation of the
business strategy is not successful and the Company is unable to generate
sufficient operating funds to pay interest on, and principal of, the Notes or
the Exchange Notes and other indebtedness of the Company, including indebtedness
under the New Credit Facility, there can be no assurance that alternative
sources of financing would be available to the Company or, if available, that
such financing would be on commercially reasonable terms. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Business Strategy."
COVENANT COMPLIANCE
The Indenture relating to the Notes and the Exchange Notes and the New
Credit Facility contain certain financial and other covenants, including
covenants relating to limitations on the incurrence of debt; limitations on
dividends, investments and certain other payments; limitations on transactions
with affiliates; limitations on liens; limitations concerning the debt and
capital stock of the Company's Subsidiaries; and limitations on sales of assets
(including capital stock of Subsidiaries). See "Description of the Exchange
Notes."
The Company has on numerous occasions been in default or failed to comply
with certain covenants under certain agreements relating to its outstanding
indebtedness and the Company has accordingly been required to obtain amendments
and waivers from its lenders. Most recently, the Company was three weeks late,
but within the grace period, in paying the quarterly interest which was due
September 15, 1997 on its Old Senior Secured Notes and four weeks late, but
within the grace period, in paying the quarterly interest which was due December
15, 1997. In addition, prior to the consummation of the Recapitalization Plan,
the Company was in default under its Old Senior Secured Notes for the failure to
meet certain financial covenants and for the failure to make the $40.9 million
sinking fund payment that was due on September 15, 1997 under the sinking fund
provisions of its Old Senior Secured Notes. As a result, the Company was
restricted from paying the quarterly interest payments of $1.2 million each on
its Subordinated Notes which were due on September 15, 1997 and December 15,
1997. On February 24, 1998, the Company redeemed its Old Senior Secured Notes at
par plus accrued and penalty interest thereon.
The ability of the Company to comply with financial and other covenants
will be dependent on the future financial performance of the Company, which will
be subject to prevailing economic conditions and other factors, including
factors beyond the control of the Company. A failure to comply with any of these
covenants could result in a default or event of default under the Indenture or
the New Credit Facility and the acceleration of the indebtedness thereunder. In
addition, there can be no assurance that such restrictions will not adversely
affect the Company's ability to conduct its operations or finance its capital
needs or impair the Company's ability to pursue attractive business and
investment opportunities if such opportunities arise. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of the Exchange
Notes."
14
<PAGE> 22
HOLDINGS INDEBTEDNESS
Holdings owns approximately 73% of the Common Stock of the Company (40%
assuming exercise of all the Warrants). Holdings currently has outstanding the
Holdings Debentures, which, as of May 4, 1998 had an accreted value of
approximately $86.1 million and will accrete to approximately $245.7 million at
maturity on December 15, 2005. Neither the Company nor any of its Subsidiaries
is a guarantor of the Holdings Debentures. The indenture pursuant to which the
Holdings Debentures were issued contains certain covenants which restrict the
operations of the Company and its subsidiaries. These covenants were amended,
pursuant to the Recapitalization Plan, to be less restrictive.
INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
to offer to purchase all outstanding Notes and Exchange Notes, at a price equal
to 101% of the principal amount of the Notes or Exchange Notes, as the case may
be, together with accrued and unpaid interest, if any, to the date of
repurchase. The New Credit Facility provides that the occurrence of certain
change of control events with respect to the Company constitutes a default under
the New Credit Facility. Therefore, in the event of such a change of control,
the Company may be required to repay or refinance all borrowings under the New
Credit Facility. In addition, even if a Change of Control does not constitute a
default under the New Credit Facility, the offer to purchase the Notes or the
Exchange Notes would constitute a default thereunder. If a Change of Control
were to occur, it is unlikely that the Company will have the financial ability
or resources to purchase the Notes or the Exchange Notes or repay the New Credit
Facility. See "Description of the Exchange Notes--Repurchase Upon Change of
Control" and "Description of Certain Indebtedness--New Credit Facility."
The holders of Notes have and holders of the Exchange Notes will have
limited rights to require the Company to purchase or redeem the Notes or
Exchange Notes, as the case may be, in the event of a takeover, recapitalization
or similar restructuring, including an issuer recapitalization or similar
transaction with management. Consequently, the Change of Control provisions will
not afford holders of Notes or Exchange Notes any protection in a highly
leveraged or other type of transaction, including any such transaction initiated
by the Company, management of the Company or an affiliate of the Company, if
such transaction does not result in a Change of Control. Accordingly, the Change
of Control provisions are likely to be of limited usefulness in such situations.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent on the
abilities and experience of its senior management team. The loss of services of
one or more of these senior executives could adversely affect the Company's
ability to effectively manage the overall operations of the Company or
successfully execute current or future business strategies, either of which
could have a material adverse effect on the Company and its results of
operations. In addition, the Company believes that its success will depend upon
its ongoing ability to attract and retain qualified management and employees.
See "Management."
CONCENTRATION OF OWNERSHIP AND CONTROL OF THE COMPANY
After taking into account the Recapitalization Plan, Holdings owns
approximately 73% (40% upon exercise of the Warrants) of the Company's common
stock and certain members of the Company's management own approximately 27% (15%
upon exercise of the Warrants). Anwar S. Soliman and certain other members of
the Company's management own approximately 82% of the outstanding shares of
Holdings' common stock. All of Holdings' management stockholders have entered
into a voting trust agreement (the "Voting Trust Agreement") in accordance with
which Anwar S. Soliman, Chairman and Chief Executive Officer of the Company and
Holdings, exercises, as voting trustee, all voting and substantially all other
rights to which such shareholders would otherwise be entitled until the earlier
of August 15, 2005 or the earlier termination of the Voting Trust Agreement. As
a result of Holdings' ownership of the Company, Mr. Soliman's effective control
of Holdings pursuant to the Voting Trust Agreement, Mr. Soliman's designation as
voting trustee under the New Voting Trust Agreement (as defined herein), and Mr.
Soliman's direct ownership in the Company, Mr. Soliman effectively controls the
Company, subject to the terms of the Voting Trust Agreement, the New Voting
Trust Agreement and the Securityholders Agreement (as defined herein). In
addition, all of the directors of Holdings are management personnel and there
are no independent directors. Accordingly, the Company's management may have the
ability to determine whether a Change of Control would occur.
15
<PAGE> 23
The TCW Investors (as defined herein), which purchased more than 50% of
the Units, entered into a securityholders agreement (the "Securityholders
Agreement") with holders of the Common Stock relating to the election of
directors which, subject to the terms and conditions thereof, provides that the
Company's Board of Directors will consist of five members, two of whom will be
management nominees, two of whom will be nominees of the TCW Investors and one
of whom (the "Remaining Director") will be a nominee of Jefferies & Company,
Inc. (the "Initial Purchaser"), provided that after the Public Company Date,
such purchasers and the management will mutually choose the Remaining Director
and the Initial Purchaser will no longer have any right to designate a director.
As a result of the Securityholders Agreement and the TCW Investors' ownership of
the Exchange Preferred Stock or the Preferred Stock, as the case may be, in
certain circumstances the TCW Investors could have the ability to elect a
majority of the Board of Directors of the Company. The Securityholders Agreement
also provides the TCW Investors with certain tag-along rights, rights of first
refusal and the right to approve certain major corporate transactions concerning
the Company. The TCW Investors may also have the ability, as a result of their
ownership of the Preferred Stock or the Exchange Preferred Stock, as the case
may be, to approve (without the vote of any other holder of Preferred Stock or
the Exchange Preferred Stock, as the case may be) waivers or amendments to the
terms of the Preferred Stock or the Exchange Preferred Stock, as the case may
be. See "Description of the Exchange Notes--Repurchase Upon Change of Control",
"Security Ownership of Certain Beneficial Owners and Management" and
"Description of Exchange Preferred Stock--Voting Rights."
REGIONAL CONCENTRATION OF OPERATIONS
A majority of Company restaurants are located in California and Texas.
Such restaurants account for a significant percentage of the Company's net
sales. Accordingly, the Company is susceptible to adverse developments in the
economy, weather conditions, competition, consumer preferences or demographics
in either of these areas. For example, severe weather conditions in any of the
Company's principal markets may have a material negative effect on customer
traffic and sales, especially if such weather occurs during one of the Company's
peak selling periods. Due to the Company's susceptibility to such adverse
developments, there can be no assurance that the current geographic
concentration of the Company's business will not have a material adverse effect
on the Company and its results of operations.
COMPETITION AND MARKETS
All aspects of the restaurant business are highly competitive. Price,
restaurant location, food quality, service and attractiveness of facilities are
important aspects of competition. The competitive environment is often affected
by factors beyond a particular restaurant management's control, including
changes in the public's taste and eating habits, population and traffic patterns
and economic conditions. The Company's restaurants compete with a wide variety
of restaurants, ranging from national and regional restaurant chains to locally
owned restaurants. Competition from other restaurant chains typically represents
the more important competitive influence, principally because of their
significant marketing and financial resources. Many of the Company's competitors
have substantially greater financial, marketing, personnel and other resources
than the Company. In addition, competition is not limited to a particular
segment of the restaurant industry because fast-food restaurants, steakhouses
and casual-dining restaurants are all competing for the same consumer's dining
dollars. Further, the Company is more highly leveraged than certain of its
competitors, which places the Company at a competitive disadvantage. See "--High
Leverage; Rent Expense; Ability to Service Debt." There can be no assurance that
the Company will be able to compete successfully against its competitors in the
future. In addition, there can be no assurance that competition will not have a
material adverse effect on the Company's results of operations.
GOVERNMENT REGULATIONS
Each of the restaurants operated by the Company is subject to licensing
and regulation by the health, sanitation, safety, building and fire agencies of
the respective states and municipalities in which such restaurants are located.
A failure to comply with one or more regulations could result in the imposition
of sanctions, including the closing of facilities for an indeterminate period of
time, or third-party litigation, any of which could have a material adverse
effect on the Company and its results of operations.
In addition, each restaurant (except for Grandy's restaurants) is subject
to licensing with respect to the sale of alcoholic beverages. The loss of
licenses or permits by the Company's restaurants to sell alcohol would interrupt
or terminate the Company's ability to serve alcoholic beverages at those
restaurants and, if a significant number of restaurants were affected,
16
<PAGE> 24
could have a material adverse effect on the Company. The Company believes it has
good relations with the various alcoholic beverage authorities.
The Company also is subject to laws and regulations governing its
relationships with employees, including minimum wage requirements, overtime,
reporting of tip income, work and safety conditions and citizenship
requirements. Because a significant number of the Company's employees are paid
at rates related to the federal minimum wage, an increase in the minimum wage
would increase the Company's labor costs. An increase in the minimum-wage rate
or employee benefits costs could have a material adverse effect on the Company
and its results of operations.
Under various federal, state and local laws, an owner or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances on or in such property. Such liability may be
imposed without regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. Although
the Company is not aware of any environmental conditions that require
remediation by the Company under federal, state or local law at its properties,
the Company has not conducted a comprehensive environmental review of its
properties or operations and no assurance can be given that the Company has
identified all of the potential environmental liabilities at its properties or
that such liabilities would not have a material adverse effect on the financial
condition of the Company.
FRAUDULENT TRANSFER CONSIDERATIONS
Under federal fraudulent transfer and similar laws, if a court were to
find, in a lawsuit by an unpaid creditor or representative of creditors of the
Company or any Guarantor of the Notes or the Exchange Notes (such as a trustee
in bankruptcy or any such person as debtor in possession), that the Company or
such Guarantor received less than fair consideration or reasonable equivalent
value for incurring the indebtedness represented by the Notes or Exchange Notes
or such Guarantor's guarantee, and, at the time of such incurrence, the Company
or such Guarantor, as the case may be, (i) was insolvent or was rendered
insolvent by reason of such incurrence, (ii) was engaged or about to engage in a
business or transaction for which its remaining property constituted
unreasonably small capital or (iii) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts mature, such court could,
among other things, (a) void all or a portion of the Company's or such
Guarantor's obligations to holders of the Notes or Exchange Notes and/or the
liens securing the Notes or Exchange Notes or such Guarantor's guarantee and/or
(b) subordinate the Company's obligations to holders of the Notes or Exchange
Notes or such Guarantor's guarantee to other existing and future indebtedness of
the Company or such Guarantor and/or subordinate the liens securing the Notes or
Exchange Notes or such Guarantor's guarantee to other existing or future liens,
the effect of which would be to entitle such other creditors to be paid in full
before any payment could be made on the Notes or the Exchange Notes. The
Guarantors' guarantees are subject to insolvency and fraudulent conveyance
limitations. See "Description of the Exchange Notes--Guarantors." The Company's
ability to make payment on its Notes or Exchange Notes will be dependent upon
the operating cash flow of its subsidiaries and the payment of funds by such
subsidiaries in the form of loans, dividends or otherwise. In addition, if a
court were to find at the time of the Company's payment of dividends on, or
redemption of, the Preferred Stock or the Exchange Preferred Stock that it (i)
was insolvent or was rendered insolvent by reason of such action, (ii) was
engaged or about to engage in a business or transaction for which its remaining
property constituted unreasonably small capital or (iii) intended to incur, or
believed it would incur, debts beyond its ability to pay as such debts mature,
then the relevant distribution to holders of the Preferred Stock or the Exchange
Preferred Stock could be voided in whole or in part as a fraudulent conveyance
and such holders could be required to return the same or equivalent amounts to
or for the benefit of existing or future creditors of the Company. The measure
of insolvency for purposes of determining whether a transfer is voidable as a
fraudulent transfer varies depending upon the law of the jurisdiction which is
being applied. Generally, however, a debtor would be considered insolvent if the
sum of all of its liabilities was greater than the value of all of its property
at a fair valuation, or if the present fair saleable value of the debtor's
assets was less than the amount required to repay its probable liability on its
debts as they become absolute and mature. There can be no assurance as to what
standard a court would apply in order to determine solvency.
POTENTIAL LIMITATION IMPOSED UPON NET OPERATING LOSSES
As of December 29, 1997, the Company had available net operating loss
carryforwards for federal income tax purposes of $135.0 million, expiring in
2003 to 2011. Generally, a cumulative change of greater than 50% in the stock
ownership of a corporation within a three-year period (an "ownership change")
will, for Federal income tax purposes, limit the amount of pre-ownership change
net operating losses that the corporation may use during the post-ownership
change period. Whether an ownership change has in fact occurred in any
particular case generally entails the resolution of both legal and factual
issues
17
<PAGE> 25
which may not be readily determinable. The Company has taken the position that
the consummation of the Recapitalization Plan did not result in an ownership
change. If such position were to be challenged by the Internal Revenue Service,
no assurance may be given as to whether the Internal Revenue Service would
ultimately prevail on an assertion that the Recapitalization Plan resulted in an
ownership change. In addition, future equity issuances by the Company or
Holdings and certain transfers by shareholders of the Company or Holdings, which
transfers would not be within the control of the Company, in each case that
occur within three years of the consummation of the Recapitalization Plan, could
trigger an ownership change when taken together with the change in the stock
ownership resulting from the Recapitalization Plan.
LACK OF MARKET
The Company does not intend to list the Exchange Securities on any
national securities exchange or to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System. The
Initial Purchaser has advised the Company that it currently intends to make a
market in the Exchange Securities. However, the Initial Purchaser is not
obligated to make a market in the Exchange Securities and any market making may
be discontinued at any time without notice. See "Exchange Offer."
YEAR 2000 COMPLIANCE
The Company utilizes certain programs and operating systems in its
organization, including applications used in sales, financial business systems
and various administrative functions. To the extent that the Company's software
applications or the software applications of its suppliers contain source code
that is unable to appropriately interpret the upcoming calendar year 2000 and
beyond, some level of modification or replacement of such applications will be
necessary. Management does not expect year 2000 compliance costs to have any
material adverse impact on the Company. No assurance can be given, however, that
all of the Company's systems or systems of its suppliers will be year 2000
compliant or that compliance costs or the impact of the Company's failure to
achieve substantial year 2000 compliance will not have a material adverse effect
on the Company.
EXCHANGE OFFER PROCEDURES; EFFECTS OF FAILURE TO TENDER OR PROPERLY TENDER
Issuance of the Exchange Securities in exchange for Securities pursuant
to the Exchange Offer will be made only after a timely receipt by the Company of
such Securities, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of Securities desiring to
tender such Securities in exchange for Exchange Securities should allow
sufficient time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of
Securities for Exchange Securities. Securities that are not tendered or are
tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer thereof
and the Company will have no further obligation to provide for the registration
under the Act of such Securities. In addition, any holder of Securities who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the Exchange Securities 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 Act in connection with any resale transaction. To
the extent that Securities are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Securities could be
adversely affected. See "The Exchange Offer." Each broker-dealer that receives
Exchange Securities for its own account in exchange for Securities, where such
Securities 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 Securities. See "Plan
of Distribution".
18
<PAGE> 26
USE OF PROCEEDS
The Company will not receive any proceeds for the exchange pursuant to
the Exchange Offer. The gross proceeds from the offering of the Notes and the
Units pursuant to the Recapitalization Plan (before deducting fees and expenses)
was approximately $190.0 million, and was used to repay indebtedness and certain
short-term liabilities, to pay fees and expenses of the Recapitalization Plan
and for general corporate purposes.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 30, 1998. The table should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 30, 1998
--------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Short-term debt:
Working capital facility ............................... $--
Current portion of capitalized lease obligations 929
Current portion of other debt .......................... 1,109
---------
Total short-term debt ................................ 2,038
---------
Long-term debt:
Capitalized lease obligations .......................... 7,280
Other debt ............................................. 644
Senior Secured Notes ................................... 158,600
---------
Total long-term debt ................................. 166,524
---------
Cumulative preferred stock, mandatorily redeemable 33,239
Common stockholders' equity:
Common stockholders' deficit ......................... (104,697
---------
Total capitalization ................................. $ 97,104
=========
</TABLE>
19
<PAGE> 27
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for each of
the last five years ended December 27, 1993, December 26, 1994, December 25,
1995, December 30, 1996 and December 29, 1997 has been derived from the
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent accountants. The financial data for the
thirteen weeks ended March 31, 1997 and March 30, 1998 have been derived from
the Company's unaudited financial statements, which in the opinion of management
include all adjustments necessary for a fair presentation of the data for
interim periods. The results of operations for the thirteen weeks ended March
30, 1998 are not necessarily indicative of the results that may be expected for
the full fiscal year. This Selected Historical Consolidated Financial Data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------
DEC. 27, DEC. 26, DEC. 25, DEC. 30 DEC. 29,
1993 1994 1995 1996(1) 1997
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Black Angus ........................................... $ 235,345 $ 253,634 $ 243,624 $ 254,946 $ 264,175
Grandy's .............................................. 111,166 109,301 101,839 90,962 78,832
Other Concepts ........................................ 91,398 97,471 100,503 99,516 97,032
--------- --------- --------- --------- ---------
Total Revenues ...................................... 437,909 460,406 445,966 445,424 440,039
RESTAURANT COSTS:
Food and Beverage ..................................... 136,255 142,828 138,270 141,032 140,015
Payroll ............................................... 132,292 136,151 134,532 137,104 133,732
Direct Operating ...................................... 109,462 108,382 110,399 114,589 110,502
Depreciation and Amortization ......................... 25,682 26,400 22,819 20,386 19,627
--------- --------- --------- --------- ---------
Total Restaurant Costs .............................. 403,691 413,761 406,020 413,111 403,876
General and Administrative Expenses .................... 29,895 31,027 31,360 28,086 29,360(2)
Operating Profit before Impairment Charges(3) .......... 4,323 15,618 8,586 4,227 6,803
Interest Expense, Net .................................. 23,741 27,691 28,004 27,714 23,985
Net Income (Loss) ...................................... $ (30,006) $ (12,130) $ (39,662) $ (38,461) $ (20,292)
Ratio of Earnings to Fixed Charges(5) .................. -- -- -- -- --
Deficiency in Earnings to cover Fixed Charges(5)........ (19,418) (12,073) (39,596) (36,692) (20,229)
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends(6) .................................... -- -- -- --
Deficiency in Earnings to cover Fixed Charges and
Preferred Stock Dividends(6) .......................... (19,418) (12,073) (39,596) (36,692) (20,229)
Other Data:
Restaurants (end of period) ............................ 242 246 248 247 231
Increase (Decrease) in Same-store-sales:
Consolidated (7)(8) .................................... 2.1% 3.2% (5.8)% (2.9)% (2.3)%
Black Angus (excluding late-night
entertainment)(7)(9) ................................ (5.1)% 1.0% 1.4% 2.3% 1.4%
EBITDA(10) ............................................. 35,161 44,201 32,089 26,100 30,713
EBITDAR(11) ............................................ 55,766 66,024 54,952 50,913 61,389
Capital Expenditures ................................... 11,666 22,178 16,277 13,279 4,650
BALANCE SHEET DATA:
Cash ................................................... $ 20,992 $ 15,032 $ 10,385 $ 7,493 $ 5,737
Property and Equipment, Net ............................ 181,889 181,496 171,030 101,169 92,322
Total Assets ........................................... 291,989 282,438 249,053 172,129 152,011
</TABLE>
<TABLE>
<CAPTION>
THIRTEEN
WEEKS ENDED
-------------------------------
MARCH 31, MARCH 30,
1997 1998
--------- ---------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Black Angus ........................................... $ 69,681 $ 70,828
Grandy's .............................................. 20,385 18,475
Other Concepts ........................................ 24,044 22,819
--------- ---------
Total Revenues ...................................... 114,110 112,122
RESTAURANT COSTS:
Food and Beverage ..................................... 36,350 35,605
Payroll ............................................... 34,694 33,202
Direct Operating ...................................... 28,306 27,234
Depreciation and Amortization ......................... 4,823 3,749
--------- ---------
Total Restaurant Costs .............................. 104,173 99,790
General and Administrative Expenses .................... 6,137 5,309
Operating Profit before Impairment Charges(3) .......... 3,800 7,023
Interest Expense, Net .................................. 5,925 5,521
Net Income (Loss) ...................................... (2,128) 11,060(4)
Ratio of Earnings to Fixed Charges(5) .................. -- 1.2x
Deficiency in Earnings to cover Fixed Charges(5)........ (2,125) --
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends(6) .................................... -- 1.1x
Deficiency in Earnings to cover Fixed Charges and
Preferred Stock Dividends(6) .......................... (2,125) --
Other Data:
Restaurants (end of period) ............................ 244 230
Increase (Decrease) in Same-store-sales:
Consolidated (7)(8) .................................... (4.8)% 0.5%
Black Angus (excluding late-night
entertainment)(7)(9) ................................ (3.3)% 4.0%
EBITDA(10) ............................................. 8,513 10,675
EBITDAR(11) ............................................ 16,390 17,951
Capital Expenditures ................................... 2,272 2,256
BALANCE SHEET DATA:
Cash ................................................... $ 3,377 $ 6,209
Property and Equipment, Net ............................ 100,610 91,972
Total Assets ........................................... 165,869 155,715
</TABLE>
20
<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt, including current portion 228,612 226,394 233,011 182,137 181,399 183,045 168,562
Cumulative Preferred Stock, Mandatorily
Redeemable ............................. -- -- -- -- -- -- 33,239
Common Stockholders' Equity (Deficit) ... (8,307) (20,437) (60,099) (91,446) (111,738) (93,574) (104,697)
</TABLE>
- ---------------------
(1) The year ended December 30, 1996 includes 53 weeks.
(2) Includes a $4.1 million non-cash charge for costs associated with closed
restaurants, a $0.5 million restructuring charge and a $0.3 million
write-off of expenses associated with a sale/leaseback transaction which
was not completed, all of which are non-recurring expenses.
(3) Operating profit is stated before non-cash charges for impairment of
long-lived assets of $20.2 million in 1995, $13.2 million in 1996 and
$3.0 million in 1997.
(4) Includes a $9.6 million extraordinary gain of extinguishment of debt.
(5) For the purpose of determining the ratio or deficiency of earnings to
cover fixed charges, earnings consist of earnings before extraordinary
gain or loss, income taxes and fixed charges. Fixed charges consist of
interest on indebtedness, the amortization of debt issue costs and that
portion of operating rental expense representative of the interest
factor.
(6) The ratio or deficiency of earnings to fixed charges and preferred stock
dividends are the same as the ratio of earnings to fixed charges except
that preferred stock dividends are added to fixed charges even though the
Company intends to pay such dividends by issuing additional shares of
Preferred Stock or Exchange Preferred Stock, as the case may be.
(7) Same store sales are defined as restaurants which have been in operation
for the entire prior year.
(8) Excludes Velvet Turtle restaurants. As of February 1997, the Company
closed the last Velvet Turtle restaurant.
(9) This presentation excludes results of operations of the Black Angus
in-restaurant late-night entertainment and, in 1997, the lunch business
in 14 Black Angus restaurants where lunch was discontinued in 1997.
(10) EBITDA is defined as operating profit plus depreciation and amortization
and net losses on sale of properties. For the years ended December 27,
1993, December 26, 1994, December 25, 1995, December 30, 1996 and
December 29,1997, the net losses on the sale of properties were $5.2
million, $2.2 million, $0.7 million, $1.5 million and $4.3 million
respectively. For the thirteen weeks ended March 31, 1997 and March 30,
1998, the amortization of deferred gains, which exceeded losses on the
sale of properties, netted to $0.1 million and $0.1 million,
respectively. EBITDA should not be considered an alternative to, or more
meaningful than, earnings from operations or other traditional indicators
of operating performance and cash flow from operating activities. In
connection with the closing of restaurants in 1997, the Company
established a closed-unit reserve to which the Company charges ongoing
expenses relating to closed restaurants as incurred. Approximately $1.0
million in cash charges is expected to be charged per year to this
reserve on an ongoing basis for the next several years.
(11) EBITDAR is defined as EBITDA plus rent expense. EBITDAR has been
presented for the purposes of providing information on the Company's
operations before giving effect to financing activities such as
sale/leaseback transactions and to facilitate comparisons to prior
periods. In the second half of 1996, the Company completed $63.4 million
of sale/leaseback transactions with the proceeds used to repay $50.5
million of indebtedness at par and for general corporate purposes. As a
result of these transactions, annual rent expense increased by $8.0
million. EBITDAR should not be considered an alternative to, or more
meaningful than, earnings from operations or other traditional indicators
of operating performance and cash flow from operating activities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and notes included elsewhere in this Prospectus. The
following discussion should also be read in conjunction with the "Selected
Historical Consolidated Financial Data," "The Company" and "Business"
discussions included elsewhere in this Prospectus.
OVERVIEW
Since the Company's formation in 1987, the Company has been highly
leveraged, which has resulted in dedication of significant cash flow to service
its debt, and has operated under restrictive covenants and significant liquidity
constraints, all of which have limited the Company's operating flexibility and
its ability to significantly expand its core Black Angus division. In addition,
the Company's growth and profitability have declined as a result of: (i) the
strategic decision in 1992 to gradually limit and phase out the Black Angus
late-night entertainment operations, (ii) the decline of the Grandy's operations
due, in part, to the failure of Grandy's prior management to properly position
Grandy's in its markets and (iii) the economic conditions in 1995 in the
Company's principal markets. Notwithstanding these factors, the EBITDAR for each
of the Company's concepts, except Grandy's, increased from 1993 to 1997.
However, the Company's consolidated EBITDAR, which increased from $55.8 million
in 1993 to $66.0 million in 1994, declined to $61.4 million in 1997.
21
<PAGE> 29
As of December 28, 1992, Black Angus operated 66 in-restaurant
lounges which offered disc jockeys, dancing and a focus on the sale of alcoholic
beverages during the after-dinner and late-night time periods. While the
late-night entertainment business in isolation generated favorable profit
margins, management was concerned that this business was negatively affecting
the positive, family image of the restaurants and negatively affecting visits by
its core customer base of middle-income families and that liability and other
expenses associated with the late-night entertainment business were increasing.
Black Angus began limiting its late-night entertainment business in 1992 and
subsequently, between 1994 and 1997, phased out its late-night entertainment
business in 9 to 19 restaurants per year. It currently operates 12 restaurants
with late-night entertainment. Management may discontinue the late-night
entertainment at some or all of the remaining 12 locations based on an
evaluation of their ongoing operations. Management estimates that the late-night
entertainment operations generated approximately $9.6 million in annual EBITDA
in 1992. The remaining late-night entertainment accounted for approximately $1.8
million of EBITDA in 1997.
In 1993, Grandy's generated $111.2 million of annual revenues and
$19.5 million of annual EBITDAR in the highly competitive quick-service segment.
In 1994, Grandy's management adopted a strategy to compete primarily on the
basis of price. This strategy positioned Grandy's as a bargain, quick-service
restaurant but resulted in significantly lower customer counts and
same-store-sales. In the fourth quarter of 1996, the Company restructured
Grandy's management team. In connection with the restructuring, Grandy's has
closed 21 restaurants, reduced overhead, and revised the pricing, menu and
marketing strategies. The Company intends to restore Grandy's to its image of a
quick-service, family-dining restaurant concept focused on quality,
"home-cooked" meals.
The Company generates revenues primarily through the sale of food and
beverage items at its restaurants. All of the restaurant concepts serve
alcoholic beverages except for Grandy's. In addition to food and beverage
revenues, Grandy's generates franchise income through the franchising of
approximately 60 restaurants. Franchise income has no significant direct costs
associated with it. In 1997, the Company generated $2.6 million of franchise
income, which is included in the revenues described above.
The Company's revenues from period to period are affected by the
increase or decrease in same-store-sales and the opening of new restaurants or
closing of existing restaurants. While the Company's same-store-sales have
declined annually by an average of 0.8% per annum for the past five years, the
same-store-sales have increased for Black Angus (excluding late-night
entertainment) by an average of 1.3% per annum for this period. The Company
currently intends to open four additional Black Angus restaurants in 1998 and
ten Black Angus restaurants per year thereafter for the next several years. In
1996 and 1997, the Company opened nine new Black Angus restaurants which have
generated averaged annualized revenues of $2.8 million per restaurant. There can
be no assurances that the Company will generate same-store-sales growth at Black
Angus or that the Company will be able to open additional Black Angus
restaurants as currently planned or that the performance of new restaurants will
be consistent with the performance of the Company's existing restaurants.
The Company's restaurant costs consist of food and beverage costs,
payroll costs, direct operating costs and depreciation and amortization. Direct
operating costs include advertising and promotion costs, rent, utilities,
operating supplies, repair and maintenance expenses and other restaurant costs.
Depreciation and amortization consist of depreciation of fixed assets and
amortization of intangibles, including amortization of debt issuance costs, and
other assets. While approximately 35% of the Company's restaurant costs are
fixed, the Company's food and beverage costs generally remain stable as a
percentage of revenues. Payroll costs remain relatively stable as a percentage
of revenues but may increase as a result of minimum wage increases. Direct
operating costs increase as the Company opens additional restaurants and
decrease as equipment leases reach their maturities. As the Company completely
exits markets by closing restaurants, advertising expenses in such markets for
the departed concept cease, and as the Company opens additional restaurants of
the same concept in its existing markets, advertising expense as a percentage of
revenues generally declines.
General and administrative costs include overhead expenses associated
with Black Angus' business offices in Los Altos, California, Grandy's offices in
Lewisville, Texas and the Company's corporate headquarters in Newport Beach,
California. The Black Angus division is generally managed separately from the
other divisions and is organized functionally with separate operations,
marketing, finance, real estate and human resources departments. Grandy's and
the three smaller divisions are each operated independently but share among them
certain support functions such as finance, administration and human resources.
In addition, at its corporate headquarters, the Grandy's headquarters, and the
Company's law department in Los Altos, California, the Company generally
provides purchasing, cash management, insurance and other treasury functions,
and accounting and legal services, all on a centralized basis. The Company's
corporate headquarters provides strategic direction and approves major capital
expenditures, annual budgets and all salaries above a specified level.
22
<PAGE> 30
In accordance with its business strategy, the Company has
implemented a series of cost reduction measures. Since mid-1996, Grandy's closed
21 unprofitable restaurants. In addition, in the fourth quarter of 1996, the
Grandy's management team significantly reduced its division overhead. In June
1997, the Company reduced certain corporate salaries and, in the fourth quarter
of 1997, relocated and consolidated certain administrative and financial support
functions from the corporate offices in Newport Beach, California to the
headquarters of Grandy's. This transition was largely completed by December
1997. In 1998, the Company transferred bookkeeping functions for certain of the
restaurants to Grandy's headquarters. There can be no assurances that the
Company will be able to operate successfully with its reduced overhead.
The Company's fiscal year ends on the last Monday of each
year. As a result, the fiscal years ended December 27, 1993, December 26, 1994,
December 25, 1995 and December 29, 1997 had 52 weeks and the fiscal year ended
December 30, 1996 had 53 weeks.
RESULTS OF OPERATIONS
The table below sets forth selected operations data expressed
as a percentage of revenues.
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED WEEKS ENDED
-------------------------------- ---------------------
DEC. 25, DEC. 30, DEC. 29, MAR. 31, MAR. 30,
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Food and Beverage Costs...................... 31.0 31.7 31.8 31.9 31.8
Payroll Costs................................ 30.2 30.8 30.4 30.4 29.6
Direct Operating Costs....................... 24.8 25.7 25.1 24.8 24.3
Depreciation and Amortization................ 5.1 4.6 4.5 4.2 3.3
General and Administrative Expenses.......... 7.0 6.3 6.7 5.4 4.7
Operating Profit before Impairment
Charges (1)................................ 1.9 0.9 1.5 3.3 6.3
</TABLE>
- ------------
(1) Operating Profit is stated before non-cash charges for impairment of
long-lived assets.
COMPARISON OF THIRTEEN WEEKS ENDED MARCH 31, 1997 AND MARCH 30, 1998:
Revenues. Total revenues decreased from $114.1 million in the
first quarter of 1997 to $112.1 million in the first quarter of 1998.
Same-store-sales increased 0.6%. During the thirteen weeks ended March 30, 1998,
the Company closed one restaurant. There were 244 restaurants operating as of
March 31, 1997 and 230 operating as of March 30, 1998.
Black Angus revenues increased 1.6% to $70.8 million in the first quarter of
1998 as compared to the same period in 1997. The increase was due to a $2.6
million increase in same-store-sales (excluding late-night entertainment and
discontinued lunch)and a $1.0 million increase related to three new stores
opened in the first quarter of 1997 partially offset by a $1.6 million decrease
from two closed restaurants, a $0.8 million decrease due to the closure of
late-night entertainment at 13 restaurants, and a $0.1 million decrease due to
discontinued lunch at one restaurant. The Company closed one restaurant during
the thirteen weeks ended March 30, 1998. Same-store-sales increased 4.0% (2.5%
including late-night entertainment and discontinued lunch) in 1998.
Grandy's revenues decreased 9.4% to $18.5 million in the first quarter of 1998
as compared to the same period in 1997. The decrease resulted from a $1.2
million decline due to the closure of 14 poorly performing restaurants during
1997 and a $0.7 million, or a 3.9%, decline in same-store-sales. Franchise
revenues were constant.
Revenues from other concepts (Spoons, Spectrum and National Sports Grill)
decreased 5.1% to $22.8 million in the first quarter of 1998 compared to the
same quarter in 1997. The decrease resulted from a $0.9 million decline due to
the closure of three restaurants during 1997 and $0.3 million, or 1.4%, decline
in same-store-sales.
Food and Beverage Costs. As a percentage of revenues, food and
beverage costs decreased slightly from 31.9% in the first quarter of 1997 to
31.8% in the first quarter of 1998.
23
<PAGE> 31
Payroll Costs. As a percentage of revenues, labor costs
decreased from 30.4% in the first quarter of 1997 to 29.6% in the first quarter
of 1998. The decrease was primarily due to lower unit staff payroll costs at
Grandy's as a result of closing 14 poorly performing restaurants during 1997.
Direct Operating Costs. Direct operating costs consist of
occupancy, advertising and other expenses incurred by individual restaurants. As
a percentage of revenues, these costs decreased from 24.8% in the first quarter
of 1997 to 24.3% in the first quarter of 1998. The decrease was primarily due to
lower general liability expense and occupancy costs partially offset by higher
advertising expenses.
Depreciation and Amortization. Depreciation and amortization
consists of depreciation of fixed assets used by individual restaurants,
divisions and corporate offices, as well as amortization of intangible assets.
As a percentage of revenues, depreciation and amortization decreased from 4.2%
in the first quarter of 1997 to 3.3% in the first quarter of 1998. The decrease
was primarily due to the reduction in amortization of deferred debt costs
related to the refinancing of the Company's debt in the first quarter of 1998.
General and Administrative Expenses. General and
administrative expenses decreased from $6.1 million in the first quarter of 1997
to $5.3 million in the first quarter of 1998. The decrease was primarily due to
a reduction in corporate overhead expenses. General and administrative expenses
as a percentage of revenues decreased from 5.4% to 4.7%.
Operating Profit. Due to the above items, operating profit
increased from $3.8 million in the first quarter of 1997 to $7.0 million in the
first quarter of 1998. As a percentage of revenues, operating profit increased
from 3.3% to 6.3%.
Interest Expense - Net. Interest expense decreased from $5.9
million in the first quarter of 1997 to $5.5 million in the first quarter of
1998. The decrease was primarily due to the refinancing of the Company's debt in
February 1998. The Company's average stated interest rate increased slightly
from 12.3% in the first quarter of 1997 to 12.5% in the first quarter of 1998.
The weighted average debt balance (excluding capitalized lease obligations)
decreased from $171.1 million in the first quarter of 1997 to $166.6 million in
the first quarter of 1998.
Extraordinary Gain. The company recognized an extraordinary
gain of $9.6 million on the extinguishment of debt in the first quarter of 1998.
This gain resulted from the refinancing of the Company's debt in February 1998.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 25, 1995, DECEMBER 30, 1996 AND
DECEMBER 29, 1997:
Revenues. Total revenues decreased slightly from $446.0
million in 1995 to $445.4 million in 1996 followed by a 1.2% decrease to $440.0
million in 1997. The year ended December 30, 1996 included a 53rd week which
added $6.9 million to total revenues. Same-store-sales for 1997 decreased 2.3%
from 1996, excluding the 53rd week. Three new restaurants opened during 1997
were offset by the closure of 19 restaurants. There were 248, 247 and 231
restaurants operating at the end of 1995, 1996 and 1997, respectively.
Black Angus revenues increased 4.6% from $243.6 million in
1995 to $254.9 million in 1996 and then increased 3.6% to $264.2 million in
1997. The increase in 1996 was primarily due to $4.2 million resulting from the
53rd week in 1996, $6.7 million from the addition of three new restaurants in
1995 and six new restaurants in the second half of 1996 and $2.2 million
resulting from a 1.0% increase in same-store-sales (excluding late-night
entertainment) from dining operations. These increases were offset in part by
$1.8 million from the closure of late-night entertainment operations at 11
restaurants in 1996. The increase in 1997 was primarily due to $20.0 million
resulting from the addition of nine new restaurants in the second half of 1996
and the first quarter of 1997 and a $3.2 million increase in same-store-sales
(excluding late-night entertainment and discontinued lunch). This increase was
partially offset by a $5.4 million decrease due to the closure of late-night
entertainment operations at 11 restaurants, a $4.2 million decrease from the
53rd week in 1996, a $2.6 million decrease due to discontinued lunch at 14
restaurants and a $1.7 million decrease from two closed restaurants.
Same-store-sales increased 1.4% (decreased 2.0% including late-night
entertainment and discontinued lunch) in 1997.
Grandy's revenues decreased 10.7% from $101.8 million in 1995
to $91.0 million in 1996 followed by a 13.3% decrease to $78.8 million in 1997.
The decrease in 1996 was due to a $10.3 million decline representing an 11.2%
decrease in same-store-sales, a $1.6 million decline from the closure of seven
unprofitable restaurants in the second half of 1996 and a $0.2 million decline
in franchise income. These decreases were offset in part by $1.3 million of
additional revenues in the 53rd week in 1996. The decrease in 1997 resulted from
a $6.1 million decline due to the closure of 21 restaurants in the second half
of 1996 and, in 1997, a $5.4 million, or a 7.1%, decline in same-store-sales
from de-emphasizing discounted sales
24
<PAGE> 32
and $1.3 million from the 53rd week in 1996. These decreases were partially
offset by a $0.6 million increase in franchise income. Franchise revenues were
$2.2 million, $2.0 million and $2.6 million in 1995, 1996 and 1997,
respectively.
Revenues from other concepts (Spoons, Spectrum and National
Sports Grill) decreased 1.0% from $100.5 million in 1995 to $99.5 million in
1996 and then decreased 2.5% to $97.0 million in 1997. The decrease in 1996 was
due to a 1.9% decrease in same-store-sales of $1.9 million and $0.6 million from
the closure of one Velvet Turtle restaurant in 1995. This decrease was offset in
part by $1.4 million in additional revenues from the 53rd week in 1996 and $0.1
million from the addition of two new restaurants in 1995. Revenues declined $2.3
million due to the closure of three restaurants in 1997 and $1.4 million due to
the 53rd week in 1996 partially offset by a $1.2 million increase in
same-store-sales.
Food and Beverage Costs. As a percentage of revenues, food and
beverage costs increased from 31.0% in 1995 to 31.7% in 1996 and then to 31.8%
in 1997. The increase in 1996 was primarily a result of higher grocery expenses.
Payroll Costs. As a percentage of revenues, labor costs
increased from 30.2% in 1995 to 30.8% in 1996 and then decreased to 30.4% in
1997. The increase in 1996 was primarily a result of higher restaurant
management costs. The decrease in 1997 was primarily due to lower beverage labor
costs at Black Angus as a result of de-emphasizing late-night entertainment
operations.
Direct Operating Costs. Direct operating costs consist of
occupancy, advertising and other expenses incurred by individual restaurants. As
a percentage of revenues, these costs increased from 24.8% in 1995 to 25.7% in
1996 and then decreased to 25.1% in 1997. The increase in 1996 was due primarily
to $3.6 million from increased advertising expenses and $1.8 million from
increased occupancy expenses related to the sale/leaseback transactions in the
second half of 1996, partially offset by a $1.2 million decrease in general
liability insurance expense and other operating costs. The decrease in 1997 was
a result of decreased advertising and promotion expenses partially offset by
higher occupancy costs.
Depreciation and Amortization. Depreciation and amortization
consists of depreciation of fixed assets used by individual restaurants,
division and corporate offices, as well as amortization of intangible assets. As
a percentage of revenues, depreciation and amortization decreased from 5.1% in
1995 to 4.6% in 1996 and then decreased to 4.5% in 1997. The decrease in 1996
was primarily due to the non-cash reduction of the historical costs of certain
long-lived assets in December 1995 and the sale of certain properties pursuant
to sale/leaseback transactions, both of which reduced depreciation and
amortization expenses for the assets in 1996. The decrease in 1997 was primarily
due to the non-cash reduction of the historical costs of certain long-lived
assets and sale/leaseback transactions in 1996.
General and Administrative Expenses. General and
administrative expenses as a percentage of revenues were 7.0% in 1995, 6.3% in
1996 and 6.7% in 1997. The decrease in 1996 was primarily due to decreased
division overhead payroll expenses resulting from centralizing the Black Angus
bookkeeping functions. The increase in 1997 was primarily due to a $2.8 million
increase in non-cash charges for costs associated with closed restaurants and a
legal settlement of $0.9 million. This increase was partially offset by
reductions of $2.6 million in division and corporate overhead.
Non-Cash Charge for Impairment of Long-Lived Assets. In
December 1997 certain assets, including fixed assets and certain related
intangible assets, were valued at less than their historic costs and resulted in
a non-cash charge of $3.0 million. This non-cash charge was 0.7% of revenues.
Similar non-cash charges of $13.2 million and $20.2 million were recorded in
1996 and 1995, respectively.
Operating Profit. As a result of the items discussed above,
operating profit improved from an operating loss of $11.6 million in 1995 to an
operating loss of $9.0 million in 1996 and then improved to an operating profit
of $3.8 million in 1997 (an operating profit of $8.6 million, $4.2 million and
$6.8 million in 1995, 1996 and 1997, respectively, before the non-cash charge
for impairment of long-lived assets). The Company's divisions are not uniform in
revenues, size or profitability. For example, for the fiscal year ended 1997,
Black Angus had an operating profit of $21.2 million while Grandy's had an
operating loss of $2.4 million. The other concepts had a net operating profit of
$4.4 million. These amounts exclude corporate general and administrative
expenses not allocated to the divisions.
Interest Expense - Net. Interest expense decreased from $28.0
million in 1995 to $27.7 million in 1996 and then decreased to $24.0 million in
1997. The average interest rate on Company borrowings was 11.5%, 11.7% and 12.3%
for 1995, 1996 and 1997, respectively. Average borrowings (excluding capitalized
lease obligations) decreased from $217.7 million in 1995 to $208.2 million in
1996 and then decreased to $171.7 million in 1997. Average borrowings declined
in 1997 due to the payment of $44.1 million in principal on the Old Senior
Secured Notes in the second half of 1996.
25
<PAGE> 33
Income Taxes. Income taxes increased from a provision of
$66,000 in 1995 to $81,000 in 1996 and then decreased to $63,000 in 1997. The
provisions represent amounts provided for certain minimum state income taxes.
Extraordinary Loss. An extraordinary loss of $1.7 million
occurred in 1996 with the extinguishment of a prior term loan. This
extraordinary loss resulted from a non-cash charge to expense for capitalized
debt costs associated with the debt repaid. There were no extraordinary losses
in 1995 or 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations and borrowings under its credit facilities. The Company requires
capital principally for the acquisition and construction of new restaurants, the
remodeling of existing restaurants and the purchase of new equipment and
leasehold improvements. As described above, the Company has operated under
significant liquidity constraints which have limited its operational flexibility
and ability to expand its core Black Angus division. As of March 30, 1998, the
Company had cash of approximately $6.2 million.
In general, restaurant businesses do not have significant
accounts receivable because sales are made for cash or by credit card vouchers
which are ordinarily paid within three to five days, and do not maintain
substantial inventory as a result of the relatively brief shelf life and
frequent turnover of food products. Additionally, restaurants generally are able
to obtain trade credit in purchasing food and restaurant supplies. As a result,
restaurants are frequently able to operate with working capital deficits, i.e.,
current liabilities exceed current assets. At March 30, 1998, the Company had a
working capital deficit of $35.0 million.
In addition to its leverage, the Company has had significant
rent expenses, which increased substantially in 1996 due to the completion of
the sale/leaseback transactions described below. The Company's aggregate rent
expense for 1997 was $30.7 million.
The Company estimates that capital expenditures of $6.0
million to $10.0 million are required annually to maintain and refurbish its
existing restaurants. In addition, the Company spends approximately $10.0
million to $13.0 million annually for repairs and maintenance which are expensed
as incurred. Other capital expenditures, which are generally discretionary, are
primarily for the construction of new restaurants and for expanding,
reformatting and increasing the capacity of existing restaurants and for general
corporate purposes. Total capital expenditures were $16.3 million in 1995, $13.3
million in 1996, and $4.6 million in 1997. New store capital expenditures
included in these amounts were $3.6 million, $4.8 million and $0.4 million for
1995, 1996 and 1997, respectively. The Company estimates that capital
expenditures in 1998 will be approximately $12.0 million. The Company intends to
open new restaurants with small capital outlays and to finance most of the
expenditures through operating leases.
On March 13, 1996, Holdings completed a private placement of
its Holdings Debentures with a face value of $17.0 million producing aggregate
proceeds of approximately $7.1 million. Substantially all of the net proceeds of
the offering were contributed by Holdings to the Company. The net proceeds were
used by the Company for general corporate purposes.
In the second half of 1996, the Company completed
sale/leaseback transactions, under which it sold certain land, buildings, and
other improvements relating to 24 Black Angus restaurants, 30 Grandy's
restaurants and two Spoons restaurants for an aggregate sale price of $63.4
million and simultaneously executed long-term leases under which it will
continue to operate the restaurants. The leases call for initial aggregate
annual rent payments of $8.0 million with scheduled future increases. The
proceeds of the transactions were used to redeem at par a portion of its Old
Senior Secured Notes in the amount of $45.4 million, representing principal and
interest thereon; to repay bank debt and interest thereon and to partially cash
collateralize outstanding letters of credit in a combined amount of $7.4
million; and for fees and expenses of such transactions as well as a consent
solicitation relating to the Old Senior Secured Notes, with the balance used by
the Company to make capital expenditures and to purchase other assets. The
Company recorded an extraordinary loss on extinguishment of debt relating to the
write-off of capitalized debt costs in the amount of $1.7 million and a $2.2
million loss on disposition of assets underlying certain leases. In addition, a
$5.9 million gain related to the Black Angus sale/leasebacks was deferred and
will be amortized over the initial term of the underlying leases.
The Company has on numerous occasions been in default or
failed to comply with certain covenants under certain agreements relating to its
outstanding indebtedness and accordingly the Company has been required to obtain
amendments and waivers from its lenders.
26
<PAGE> 34
In March 1997 holders of the Company's Old Senior Secured
Notes consented to an amendment which provided for an increase of $10 in the
stated principal amount for each $1,000 in stated principal amount of consenting
noteholders. This resulted in an increase of approximately $1.6 million in the
stated principal amount of the Old Senior Secured Notes and $1.2 million in the
actual outstanding principal amount of the Old Senior Secured Notes.
In September 1997, the Company failed to make the $40.5
million payment that was due under the sinking fund provisions of its Old Senior
Secured Notes. The Company was late, but within the grace period, in paying the
quarterly interest of $4.1 million on its Old Senior Secured Notes which was due
September 15, 1997. The Company was restricted from paying the quarterly
interest of $1.2 million on its Subordinated Notes which was due September 15,
1997 and December 15, 1997. In December 1997, the Company was late, but within
the grace period, in paying the quarterly interest of $4.1 million on its Old
Senior Secured Notes which was due December 15, 1997.
On February 25, 1998 the Company completed the
Recapitalization Plan which included, among other things, the issuance by the
Company of (a) $155.0 million of the Notes and (b) 35,000 Units, each Unit
consisting of $1,000 initial liquidation preference of Preferred Stock and one
common stock purchase warrant initially to purchase 2.66143 shares of the Common
Stock at an initial exercise price of one cent per share. Also as part of the
Recapitalization Plan, the Company concurrently (a) redeemed at par Old Senior
Secured Notes of $126.4 million together with accrued and penalty interest
thereon and repaid certain other interest-bearing short-term liabilities, (b)
repurchased its Subordinated Notes at 65% of the aggregate principal amount of
$45.0 million together with accrued and penalty interest thereon, and canceled
the related warrants to purchase common stock of Holdings, and (c) established a
$15.0 million New Credit Facility to include letters of credit. Letters of
credit outstanding after the Recapitalization Plan were $3.9 million. A
quarterly fee of 0.5% per annum is payable on the unused portion of the
revolving credit facility and a fee of 2.5% per annum is payable on outstanding
letters of credit.
As an additional component of the Recapitalization Plan,
Holdings extended the accretion period on its Holdings Debentures, from June 15,
1999 to maturity on December 15, 2005, and amended certain provisions of the
Holdings Debentures. The Holdings Debentures now accrete at a rate of 14.25%,
compounded semi-annually. Certain holders of the Holdings Debentures with an
accreted value of approximately $10.8 million surrendered such debentures for
cancellation and received $3.6 million principal amount of the Notes, in
addition to the $155.0 million of the Notes sold as mentioned above.
Substantially all assets of the Company are pledged to its
senior lenders. In addition, the subsidiaries have guaranteed the indebtedness
owed by the Company and such guarantee is secured by substantially all of the
assets of the subsidiaries. In connection with such indebtedness, contingent and
mandatory prepayments may be required under certain specified conditions and
events. There are no compensating balance requirements.
Although the Company is highly leveraged, based upon current
levels of operations and anticipated growth, the Company expects that cash flows
generated from operations together with its other available sources of liquidity
will be adequate to make required payments of principal and interest on its
indebtedness, to make anticipated capital expenditures and to finance working
capital requirements. The Company's ability to meet its debt service obligations
and to grow will depend upon its future performance, which will be subject to
general economic conditions, its ability to achieve cost savings and other
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. The Company does not expect to generate
sufficient cash flow from operations in the future to pay the Notes upon
maturity and, accordingly, it expects to refinance all or a portion of such
debt, obtain new financing or possibly sell assets. There can be no assurance
that any such refinancing or asset sales would be possible or would not contain
terms and conditions that could have a material adverse effect on the Company
and its results of operations. See "Risk Factors--High Leverage; Rent Expense;
Ability to Service Debt."
The Company's net operating loss carryforwards may be subject
to significant limitations on use or elimination under applicable provisions of
the Internal Revenue Code of 1986, as amended, as a result of changes in
ownership of the Company. See "Risk Factors--Potential Limitation Imposed Upon
Net Operating Losses."
YEAR 2000 COMPLIANCE
The Company utilizes certain programs and operating systems in
its organization, including applications used in sales, financial business
systems and various administrative functions. To the extent that the Company's
software applications or the software applications of its suppliers contain
source code that is unable to appropriately interpret the upcoming calendar year
2000 and beyond, some level of modification or replacement of such applications
will be necessary. Management does
27
<PAGE> 35
not expect year 2000 compliance costs to have any material adverse impact on the
Company. See "Risk Factors--Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130
Reporting Comprehensive Income and SFAS No. 131 Disclosures About Segments of an
Enterprise and Related Information were issued in 1997 and are effective for
periods ending after December 15, 1997. In 1998, the Company adopted SFAS No.
130 and there were no differences between the Company's net income (loss), as
reported, and comprehensive income. SFAS No. 131 was also adopted in 1998 and
the Company anticipates providing segment disclosures of its three restaurant
segments: "Black Angus", "Grandy's" and "Other Concepts", as of December 28,
1998. "Other Concepts" includes the Company's Spoons, Spectrum and National
Sports Grill divisions.
Statement of Position ("SOP") No. 98-5 Reporting on the Costs
of Start-Up Activities was issued in April 1998. SOP No. 98-5 requires costs of
start-up activities and organizational costs to be expensed as incurred. The
Company has historically accumulated costs incurred in connection with opening a
new restaurant and amortized these costs over the initial year of operations.
Any previously deferred preopening costs as of the beginning of fiscal year 1999
will be recognized as the cumulative effect of an accounting method change. New
restaurant openings are typically staggered throughout the year and, therefore,
the Company does not anticipate the adoption of SOP No. 98-5 to materially
affect the Company's financial statements. Deferred preopening costs were
immaterial as of March 30, 1998.
NET OPERATING LOSSES
As of December 29, 1997, the Company had available net
operating loss carryforwards for federal income tax purposes of $135.0 million,
expiring in 2003 to 2012. Generally, a cumulative change of greater than 50% in
the stock ownership of a corporation within a three-year period (an "ownership
change") will, for Federal income tax purposes, limit the amount of
pre-ownership change net operating losses that the corporation may use during
the post-ownership change period. Whether an ownership change has in fact
occurred in any particular case generally entails the resolution of both legal
and factual issues which may not be readily determinable. The Company presently
takes the position that the consummation of the Recapitalization Plan did not
result in an ownership change. If such position were to be challenged by the
Internal Revenue Service, no assurance may be given as to whether the Internal
Revenue Service would ultimately prevail on an assertion that the
Recapitalization Plan resulted in an ownership change. In addition, future
equity issuances by the Company or Holdings and certain transfers by
shareholders of the Company or Holdings, which transfers would not be within the
control of the Company, in each case that occur within three years of the
consummation of the Recapitalization Plan, could trigger an ownership change
when taken together with the change in the stock ownership resulting from the
Recapitalization Plan.
IMPACT OF INFLATION
Although inflationary increases in food, labor or operating
costs could adversely affect operations, the Company has generally been able to
offset increases in cost through price increases, labor scheduling and other
management actions.
BUSINESS
OVERVIEW
The Company operates five restaurant concepts, consisting of
Black Angus (101 restaurants), Grandy's (89 restaurants), Spoons (18
restaurants), Spectrum (15 restaurants) and National Sports Grill (6
restaurants). Each of the Company's restaurant concepts, except Grandy's, has
demonstrated an increase in EBITDAR from 1993 to 1997. The Company's largest
division, Black Angus, is the largest steakhouse chain west of the Mississippi
River and has been ranked the first or second best steakhouse chain in the
United States by Restaurants & Institutions magazine's "Choice in Chains" annual
survey in each of the last ten years. Black Angus restaurants are full-service
restaurants featuring steak and prime rib, and also serve chicken and seafood
entrees. Through its high-quality food offerings, friendly service and familiar,
rustic Western decor, Black Angus has developed a loyal customer base since its
inception in 1964. Black Angus generated 60% of the Company's revenues in 1997
and increased its EBITDAR (excluding late-night entertainment, which has been
phased out at most of its restaurants) from $27.3 million in 1993 to $44.5
million in 1997.
28
<PAGE> 36
The Company's other three restaurant concepts that had EBITDAR
increases are: (i) Spoons, a casual-style restaurant concept featuring fajitas,
salads and hamburgers; (ii) Spectrum, consisting of upscale Northern Italian,
American and Mexican restaurants; and (iii) National Sports Grill, consisting of
sports-theme restaurants featuring generous portions and microbrewery beers.
These concepts generated in the aggregate 22% of the Company's revenues in 1997
and increased their aggregate EBITDAR from $10.2 million in 1993 to $14.4
million in 1997.
Grandy's, the Company's second largest division, is a
family-oriented, quick-service, country-kitchen style restaurant, which provides
its customers with quality, "home-cooked" food at value prices with conveniences
such as drive-thru service. Grandy's experienced a decline in its performance
during the last several years. In the fourth quarter of 1996, the Company
restructured the management team at Grandy's in an effort to return the division
to its historical image. Grandy's, which generated 18% of the Company's
revenues, experienced a decline in its EBITDAR from $19.5 million in 1993 to
$8.1 million in 1996 and had an EBITDAR of $11.0 million in 1997. To position
itself for improved performance, Grandy's has (i) closed 21 unprofitable
restaurants, (ii) reduced its advertising expenses, (iii) reduced division
overhead, (iv) modified its pricing strategy and (v) developed a new advertising
campaign.
BUSINESS STRATEGY
The Company has implemented a business strategy designed to
enhance the growth of its core Black Angus division, reduce corporate overhead
and improve the performance of the Grandy's division. In addition, the Company
plans to selectively expand its other divisions.
Enhance Growth of Black Angus. Black Angus' restaurant
operations generated 60% of the Company's revenues in 1997 and realized an
increase in EBITDAR (excluding late-night entertainment, which has been phased
out at most of its restaurants), from $27.3 million in 1993 to $44.5 million in
1997. This growth has been driven by an increase in average same-store-sales,
improving EBITDAR margins and strategically opening additional restaurants. The
Company's strategy is to continue its same-store-sales growth through its
successful television advertising campaigns, suggestive sales through on-table
promotions, its reputation for high-quality food and service and leveraging its
33-year old Black Angus name. For the year ended December 29, 1997, Black Angus
(excluding late-night entertainment) had a 1.4% same-store-sales increase as
compared to the year ended December 30, 1996. The Company also intends to expand
the Black Angus division through the opening of new restaurants. The Company
currently intends to open four additional Black Angus restaurants in 1998 and
ten new restaurants per year thereafter for the next several years. The Company
plans to open these restaurants where it can leverage the well known Black Angus
name and the strong advertising base (approximately 5% of Black Angus' revenues
per year).
Reduce Overhead. The Company has implemented a strategy
designed to reduce overhead. In 1997, the Company reduced certain corporate
salaries, eliminated certain redundant corporate functions and relocated and
consolidated certain administrative and financial support functions from the
corporate office to the headquarters of Grandy's. In 1998, the Company plans to
transfer accounting activities for certain of its restaurants from the
restaurants to the Grandy's headquarters, similar to the accounting transition
from the Black Angus restaurants to the Black Angus headquarters that was
completed in 1996. These efforts, most of which have been completed, are
expected to result in an aggregate of $3.4 million of overhead cost savings per
year.
Improve Grandy's Performance. The plan of Grandy's
restructured management team is to (i) identify and close unprofitable stores,
(ii) reduce overhead, (iii) restore Grandy's image from a price-point competitor
to a quality quick-service/family-dining restaurant and (iv) improve customer
counts. Since mid-1996, Grandy's has closed 21 unprofitable restaurants which in
the aggregate lost $1.7 million of annual EBITDA. In addition, Grandy's reduced
its division overhead by $1.7 million for the year ended December 29, 1997 as
compared to 1996. Most recently, the new management team reconfigured the menu
to focus on increasing its average check through the sale of whole meals and
reduced single-item discounting in its marketing strategy. Management believes
that, as a result of Grandy's new strategy, Grandy's has increased its revenue
per customer 5.0% from $3.79 in 1996 to $3.98 in 1997. In furtherance of the
plan, the Company has successfully tested a new advertising campaign in Grandy's
markets and intends to introduce a full-scale campaign in all Grandy's markets
in 1998.
Other. The Company's Spoons, Spectrum and National Sports
Grill concepts are smaller divisions representing 39 of the Company's 229
restaurants. Following the Offering, the Company may selectively expand each of
these divisions by one or two restaurants per year.
29
<PAGE> 37
Although the Company has no current arrangements to sell any
restaurants or divisions, the Company will review opportunities to sell
restaurants in its smaller divisions from time to time. In addition, the Company
may convert certain Company-operated Grandy's restaurants to franchised
operations through the sale of these restaurants to franchisees. No assurances
can be given as to whether the Company will sell any restaurants or if it elects
to sell restaurants the amount of consideration it will receive in such sales.
Upon the sale of restaurants, the Company may be required by the terms of the
Indenture and the Preferred Stock to apply the proceeds in a specified manner.
See "Description of the Notes--Certain Covenants" and "Description of Preferred
Stock--Covenants."
BLACK ANGUS
General. The Company's largest division, Black Angus, is the
largest steakhouse chain west of the Mississippi River and has been ranked the
first or second best steakhouse chain in the United States by Restaurants &
Institutions magazine's "Choice in Chains" annual survey in each of the last ten
years. As of March 30, 1998, Black Angus operated 101 full-service restaurants
which feature steak and prime rib, and also serve chicken and seafood entrees.
Through its high-quality food offerings, friendly service and familiar, rustic
Western decor, Black Angus has developed a loyal customer base since its
inception in 1964. Black Angus' restaurant operations generated 60% of the
Company's revenues in 1997 and increased its EBITDAR (excluding late-night
entertainment, which has been phased out at most of its restaurants), from $27.3
million in 1993 to $44.5 million in 1997.
Black Angus restaurants are typically located in highly
visible and heavily traveled areas in or near retail and commercial businesses.
The restaurants are generally freestanding and generally range in size from
6,600 to 12,000 square feet, seating approximately 350 customers. Black Angus
restaurants are distinctively Western in their design and feature booth seating
for dining. They are generally open for lunch from 11:30 a.m. to 4:00 p.m. and
for dinner from 4:00 p.m. to 10:00 p.m.
As of December 28, 1992, Black Angus operated 66 in-restaurant
lounges which offered disc jockeys, dancing and a focus on the sale of alcoholic
beverages during the after-dinner and late-night time periods. While the
late-night entertainment business in isolation generated favorable profit
margins, management was concerned that this business was negatively affecting
the positive, family image of the restaurants and negatively affecting visits by
its core customer base of middle-income families and that liability and other
expenses associated with the late-night entertainment business were increasing.
Black Angus began limiting its late-night entertainment business in 1992 and
subsequently, between 1994 and 1997, phased out its late-night entertainment
business in 9 to 19 restaurants per year. It currently operates 12 restaurants
with late-night entertainment. Management may discontinue the late-night
entertainment at some or all of the remaining 12 locations based on an
evaluation of their ongoing operations. Management estimates that the
discontinued late-night entertainment operations generated approximately $7.8
million in annual EBITDA in 1992.
Menu Strategy. Black Angus restaurants are targeted to appeal
to middle-income couples and families, emphasizing quality and value, by
offering moderately priced entrees. The menu emphasizes prime rib and steak and
also includes chicken, fish and lighter accompanying items. Currently, 28% of
the menu's entrees are non-beef. In order to capitalize on consumer desires for
lighter, quicker meals, Black Angus has introduced a lunch menu with most items
guaranteed to be served within ten minutes.
In 1997, the average check per person was $8.86 at lunch and
$15.44 at dinner. In 1997, dinner, excluding beverages, accounted for
approximately 68% of revenues while lunch accounted for approximately 11% of
revenues. Beverage sales accounted for approximately 21% of total revenues.
Advertising and Promotion. Black Angus concentrates on
television as the most effective medium for reaching its highly concentrated
markets. The television advertisements feature price points which convey Black
Angus' high-value image and emphasize the excellent food quality. Management
believes that the Black Angus advertising campaign is effective at attracting
customers to its restaurants without significant discounting. For 1997, Black
Angus spent $13.5 million on advertising and promotion expenses, representing
5.1% of Black Angus' revenues. The Company intends to open restaurants in
markets which will enable the new restaurants to benefit from existing
television advertising campaigns and brand recognition.
30
<PAGE> 38
GRANDY'S
General. Founded in 1973, Grandy's operates 89 restaurants
located principally in Texas, Oklahoma and Kansas. Grandy's is a
family-oriented, quick-service concept. Grandy's differentiates itself from
other fast-food restaurants by offering comparable prices and speed, but with
the quality and ambiance of a full-service restaurant. For example, Grandy's
serves meals to its customers on ceramic plates and provides stainless flatware.
In addition to its company-operated restaurants, as of March 30, 1998 the
Company franchised 60 Grandy's restaurants primarily in the southern United
States. Grandy's restaurants are generally freestanding and are located near
shopping malls or other highly visible, heavily traveled areas. The restaurants
range in size from 3,800 to 5,200 square feet and have dining areas which
generally seat 130 to 220 customers. All restaurants offer self-service
beverages with free refills, and all but two restaurants have drive-thru
service. Grandy's restaurants are generally open from 6:00 a.m. to 10:00 p.m.
and serve breakfast, lunch and dinner. Grandy's differentiates itself from its
competitors by offering complete home-style meals with limited service. For
1997, Grandy's generated $78.8 million of revenues or 18% of consolidated
revenues.
In 1993, Grandy's generated $111.2 million of annual revenues
and $19.5 million of annual EBITDAR in the highly competitive quick-service
segment. In 1994, Grandy's management adopted a strategy to compete primarily on
the basis of price. This strategy positioned Grandy's as a bargain,
quick-service restaurant but resulted in significantly lower customer counts and
same-store-sales. In the fourth quarter of 1996, the Company restructured
Grandy's management team. In connection with the restructuring, Grandy's has
closed 21 restaurants, reduced overhead, and revised the pricing, menu and
marketing strategies. The Company intends to restore Grandy's to its image of a
quick-service, family-dining restaurant concept focused on quality,
"home-cooked" meals. Grandy's EBITDAR has decreased from $19.5 million for 1993
to $8.1 million in 1996 and was $11.0 million in 1997.
Menu Strategy. The menu features fried and grilled chicken,
grilled-chicken sandwiches, chicken nuggets and country-fried steak, served with
a choice of vegetable plus mashed potatoes, gravy and rolls. Grandy's bakes
these rolls on its premises for freshness, which provides a higher standard to
Grandy's food offering. Grandy's has also introduced pre-packaged salads for
both drive-thru and in-store customers. Breakfast is an important part of the
Grandy's concept and includes scrambled eggs with cheese, bacon, sausage, hot
cakes, freshly baked cinnamon rolls and biscuits, coffee and juice. Many
restaurants have breakfast bars either daily or on weekends. Grandy's does not
serve alcoholic beverages. Unlike most other restaurant chains, Grandy's is
strong during each of the three dining periods that it serves daily. In 1997,
breakfast, lunch and dinner accounted for 22%, 42% and 36% of revenues,
respectively. Most recently, the new management team reconfigured the menu to
focus on the sale of whole meals and meal pricing and reduced single-item
discounting in its marketing strategy. As a result, Grandy's has increased its
average breakfast check 2.4%, from $2.52 to $2.58, and its average lunch/dinner
check 6.7%, from $4.34 to $4.63 in 1997 as compared to 1996. Approximately 50%
of Grandy's revenues were for consumption in the dining room as opposed to
takeout.
Advertising and Promotion. Grandy's concentrates on television
as the most effective medium for reaching its highly concentrated markets.
Grandy's also relies on print advertising in its smaller markets and, to a
lesser extent, in its principal markets. Grandy's has tested new television
advertising in its markets. Based on the results of these tests, Grandy's
intends to roll out this advertising program in each of its markets. In 1997,
Grandy's spent $3.3 million on advertising expenses, representing 4.3% of
Grandy's revenues.
Franchising. As of March 30, 1998, the Company franchised 60
Grandy's restaurants primarily in the southern United States and the Company
intends to continue its franchising activities.
The Company's franchise agreements generally require initial
fees of $15,000 to $25,000 per restaurant and ongoing royalties of approximately
4% of sales (3% for some older franchises). The Company provides certain support
functions for franchisees, including initial training and ongoing monitoring and
consultations. The Company does not provide financing for franchisees. In 1997,
Grandy's generated $2.6 million of franchise income.
SPOONS
General. Spoons, founded in 1978, operates 18 casual-style
restaurants in California. Spoons restaurants are generally freestanding,
located in heavily traveled areas, range in size from 5,500 to 8,000 square feet
and seat approximately 200 customers. These full-service restaurants average a
40-minute table turnover and offer booth and table seating in a casual, highly
energetic atmosphere. In addition, each restaurant has a lounge area which also
serves food. Spoons provides the
31
<PAGE> 39
customer with a fresh, value-oriented alternative to traditional quick-service
restaurants. Spoons restaurants are generally open from 11:00 a.m. to 12:00
midnight and feature the same menu all day. Spoons generated $34.5 million or 8%
of the Company's revenues in 1997.
Menu Strategy. Spoons restaurants offer full service with a
menu featuring baby back ribs; hamburgers; french fries; fajitas (steak, chicken
and tuna); marinated tuna and steak sandwiches; soft tacos; pasta platters;
salads; and "Tex-Mex" appetizers such as nachos, "buffalo" wings and
quesadillas. Although the typical Spoons customer is in the 18-49 age group, the
Company believes that the Spoons California grill concept and menu have a wide
appeal encompassing couples, families and senior citizens. The average time from
placing to serving an order is under ten minutes. In 1997, the average food
check per person was $7.62. Lunch and dinner accounted for 36% and 48% of
revenues, respectively, in 1997, with beverages accounting for 16% of revenues.
Advertising and Promotion. The Company concentrates on
freestanding newspaper inserts as the most effective medium for reaching its
highly concentrated markets.
SPECTRUM
General. Spectrum, founded in 1970, operates 15 unique,
upscale, specialty restaurants in California. All restaurants focus on
"authentic" Northern Italian, contemporary American or Mexican cuisine. The
division includes four "Prego", three "Tutto Mare", two "MacArthur Park" and six
other restaurants which, although operated under different names, generally
concentrate on Northern Italian food. Spectrum restaurants vary in size and
physical type but are primarily located proximate to concentrations of young
professionals and other upper-income customers. The restaurants are generally
open from 11:00 a.m. to 12:00 midnight. Spectrum generated $46.8 million or 11%
of the Company's revenues in 1997.
Menu Strategy. Each Spectrum restaurant focuses on preparing
"authentic" cuisine of the featured country, with daily specials depending on
the restaurant. The restaurants are usually built with an open kitchen and all
food is prepared fresh with an emphasis on quality and service. In 1997,
excluding beverages, dinner accounted for approximately 49% of revenues with an
average food check of $18.56 per person, while lunch accounted for approximately
21% of revenues with an average food check of $14.59 per person. Beverages,
primarily wine by the bottle or the glass and served with meals, accounted for
approximately 30% of revenues in 1997. Beverage revenues as a percentage of
total revenues have remained stable over the past three years.
Advertising and Promotion. Due to the unique cuisine and
atmosphere of each of its restaurants, Spectrum does relatively little
advertising, relying instead on word-of-mouth. A modest amount of advertising
for individual restaurants is done in magazines and several of the restaurants
conduct promotional events. Spectrum has developed a successful "frequency
building" program called "Table One" with approximately 18,000 members who earn
gift certificates or other prizes based on expenditures in the restaurants.
NATIONAL SPORTS GRILL
National Sports Grill, founded in 1993, operates six
sports-theme restaurants. This concept offers a menu featuring generous portions
and microbrewery beers and provides multiple video telecasts of national and
regional sporting events as well as interactive video games and other
sporting-related games. National Sports Grill generated $15.6 million or 3% of
the Company's revenues in 1997.
National Sports Grill restaurants are freestanding and
generally range in size from 10,000 to 17,000 square feet, seating approximately
200 to 300 customers. The restaurants feature a bar, a dining area, a billiards
area, sports related video games and multiple video screens throughout. National
Sports Grill restaurants are typically open from 11:00 a.m. to 2:00 a.m.
RESTAURANT MANAGEMENT
The Company has five distinct divisions. The Black Angus
division is generally managed separately from the other divisions and is
organized functionally with separate operations, marketing, finance, real estate
and human resources departments. Grandy's and the three smaller divisions are
each operated independently but share among them certain support functions such
as finance, administration and human resources. In addition, at its corporate
headquarters, the Grandy's headquarters and the Company's law department
offices, the Company generally provides purchasing, cash management,
32
<PAGE> 40
insurance and other treasury functions, and accounting and legal services, all
on a centralized basis. The Company's corporate headquarters provides strategic
direction and approves major capital expenditures, annual budgets and all
salaries above a specified level.
The Company's cash management system is highly sophisticated
with controls down to the server level. Restaurants are required to make daily
deposits of cash and the Company uses a centralized cash concentration system
which sweeps all of its cash accounts on a daily basis. There is a central
accounts payable and check writing system with roughly 7,200 vendors profiled on
the system.
The Company uses a combination of in-house and
outside-contracted services for its management information system needs.
In-house systems include a point-of-sale system for each restaurant and
stand-alone computing at the restaurant, division and corporate levels. The
Company contracts for payroll services and for mainframe-based data processing.
Each restaurant is staffed with a General Manager who is
directly responsible for the operation of the restaurant, including product
quality, cleanliness, service, inventory, cash control and the appearance and
conduct of store employees. Except for Grandy's, most restaurants also have one
or two Assistant Managers and a Chef. Managers and supervisory personnel train
other restaurant employees in accordance with detailed procedures and guidelines
prescribed by each division.
General Managers are supervised by District Managers, each of
whom is responsible for approximately seven restaurants. District Managers,
General Managers, Assistant Managers and Chefs are eligible for bonuses under
each division's extra compensation program, for which goals and objectives are
established based on the profitability, sales and other factors relating to the
restaurants.
PURCHASING AND DISTRIBUTION
To ensure standards of quality and to maximize pricing
efficiencies, a central Purchasing Department coordinates the supply of almost
all restaurant items. The Company purchases products throughout the United
States and abroad through agreements with various food-service vendors. None of
the Company's vendors supply the Company exclusively and no material agreements
exist. The Company routinely uses public, cold-storage facilities and makes
forward commitments in order to establish the availability and price of key food
items such as beef and seafood. In order to achieve more favorable terms, the
Company recently chose to concentrate its distribution among certain of its
vendors but believes that it could replace any of these distributors, if
necessary, on a timely basis.
COMPETITION AND MARKETS
All aspects of the restaurant business are highly competitive.
Price, restaurant location, food quality, service and attractiveness of
facilities are important aspects of competition. The competitive environment is
often affected by factors beyond a particular restaurant management's control,
including changes in the public's taste and eating habits, population and
traffic patterns and economic conditions. The Company's restaurants compete with
a wide variety of restaurants, ranging from national and regional restaurant
chains to locally owned restaurants. Competition from other restaurant chains
typically represents the more important competitive influence, principally
because of their significant marketing and financial resources. Many of the
Company's competitors have substantially greater financial, marketing, personnel
and other resources than the Company. In addition, competition is not limited to
a particular segment of the restaurant industry because fast-food restaurants,
steakhouses and casual-dining restaurants are all competing for the same
consumer's dining dollars. The Company believes that its principal competitive
strengths lie in the distinctive atmosphere and food presentation offered; the
value, variety and quality of food products served; the quality and training of
its employees; the experience and ability of its management; and the economies
of scale enjoyed by the Company because of its size and geographic
concentration. The Company continually monitors consumer tastes and adjusts and
updates its menus accordingly.
EMPLOYEES
At March 30, 1998, the Company employed approximately 11,800
persons, of whom approximately 10,900 were hourly employees in restaurants,
approximately 700 were salaried employees in restaurants (Managers and Chefs)
and approximately 200 were hourly and salaried employees in divisional and
corporate management and administration. Approximately 63% of the hourly
restaurant employees work on a part-time basis (25 hours or less per week). None
of the Company's facilities are unionized. The Company believes it provides
competitive compensation and benefits to its employees and that its employee
relations are good.
33
<PAGE> 41
REGULATIONS
Each restaurant is subject to licensing and regulation by
state and local health, sanitation, safety, fire and other departments. In
addition, each restaurant (except for Grandy's) is subject to licensing with
respect to the sale of alcoholic beverages. The loss of licenses or permits by
the Company's restaurants to sell alcohol would interrupt or terminate the
Company's ability to serve alcoholic beverages at those restaurants and, if a
significant number of restaurants were affected, could have a material adverse
effect on the Company. The Company believes it has good relations with the
various alcoholic beverage authorities.
The Company is subject to the Fair Labor Standards Act and
various state laws governing such matters as minimum wages, overtime and other
working conditions. Substantially all of the Company's restaurant employees are
paid at rates related to the federal and state minimum wage, and, accordingly,
increases in the minimum wage increase the Company's labor costs.
In June 1996, the Company signed Tip Reporting Alternative
Commitment (TRAC) agreements with the Internal Revenue Service ("IRS") for all
divisions that have tipped employees. This program gives the Company partial
immunity from both past and future audits of employer-paid FICA taxes on tips
reported by employees. In exchange, the Company must encourage employees to
comply with tip reporting laws through quarterly educational materials. The
Company is also required to maintain detailed records for each tipped employee.
The IRS has the ability to terminate the TRAC agreements at any time, thereby
eliminating the Company's audit protection, if the Company's procedures are
inadequate or tip reporting by the Company's employees does not increase.
SERVICE MARKS
The Company regards its service marks and trademarks as
important to the identification of its restaurants and believes they have
significant value in the conduct of its business. The Company has registered
various service marks and trademarks with the United States Patent and Trademark
Office. In addition, certain marks have been registered in the State of
California, in various other states and in certain foreign countries.
SEASONALITY
The Company's restaurant revenues and profitability are not
subject to significant seasonal fluctuations.
LEGAL PROCEEDINGS
On January 28, 1998, a complaint was filed in Superior Court
of the State of California, County of Los Angeles by an affiliate of Trivest,
Inc. ("Trivest") against the Company seeking monetary and equitable relief
relating to the previously terminated agreement between the Company and Trivest
for the sale of the Black Angus division. On January 30, 1998, the Company
reached an agreement with Trivest to settle the litigation.
The Company is involved in various litigation incidental to
its business, including claims arising out of personal injuries, employment
practices, worker's compensation cases and contract lawsuits, the claims for
which sometimes involve substantial damages. Based on information presently
available, management does not believe that the outcome of such litigation will
have a material adverse effect on the Company's financial position, business or
results of operations.
PROPERTIES
Of the 229 restaurants operated by the Company on March 30,
1998, the Company owns the land and building for six, owns the building and
leases the land for 93, and leases both land and building for the remaining 130
restaurants. In addition, the Company currently leases the land for five, and
leases both the land and the building for 11 restaurants which are now closed
(of which six are sub-leased to others). Most of the Company's restaurants are
freestanding and range from approximately 4,000 square feet for a Grandy's
restaurant to as much as 17,000 square feet for the Company's other restaurants.
Most of the Company's leases provide for the payment of the greater of a set
base rental or a percentage rental of up to 6% of gross revenues, plus real
estate taxes, insurance and other expenses. When the Company has so desired, it
generally has been able to renew its restaurant leases as they expire. However,
there can be no assurance that the Company will be able to do so in the future.
In addition, the Company owns the land and building for the
Grandy's headquarters in Lewisville, Texas, and leases office space for its
other divisions and corporate headquarters in Los Altos and Newport Beach,
California.
34
<PAGE> 42
The following table sets forth, as of March 30, 1998, the
number of Company-operated restaurants by division and state of operation:
NUMBER OF COMPANY-OPERATED RESTAURANTS BY STATE AND DIVISION
<TABLE>
<CAPTION>
National Total
Black Sports Number of
State Angus Grandy's Spoons Spectrum Grill Restaurants
----- -------- ------ -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
California 56 0 18 15 6 95
Texas - 64 - - - 64
Oklahoma - 16 - - - 16
Washington 10 - - - - 10
Arizona 9 - - - - 9
Minnesota 6 - - - - 6
Colorado 5 - - - - 5
Kansas - 5 - - - 5
Oregon 5 - - - - 5
Indiana 3 - - - - 3
Florida - 3 - - - 3
Hawaii 2 - - - - 2
Nevada 2 - - - - 2
New Mexico 1 1 - - - 2
Alaska 1 - - - - 1
Utah 1 - - - - 1
--- --- --- --- --- ---
Total 101 89 19 15 6 229
=== === === === === ===
</TABLE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about the Company's
directors and each of its executive officers and key management personnel.
Unless otherwise specified, each person holds the same position with both the
Company and Holdings. The TCW Investors (as defined herein), which purchased
more than 50% of the Units, entered into the Securityholders Agreement with
holders of the Common Stock relating to the election of directors which, subject
to the terms and conditions thereof, provides that the Company's Board of
Directors will consist of five members, two of whom will be management nominees,
two of whom will be nominees of the TCW Investors and one of whom, the Remaining
Director, will be an independent director designated by the Initial Purchaser,
provided that after the Public Company Date, the TCW Investors and management
will mutually choose the Remaining Director and the Initial Purchaser will no
longer have any right to designate a director. See "Securityholders Agreement."
35
<PAGE> 43
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------ --- -------------------------------------------------------------------
<S> <C> <C>
Anwar S. Soliman 60 Chairman, Chief Executive Officer, Director
Ralph S. Roberts 55 President and Chief Operating Officer, Director
William J. McCaffrey, Jr 51 Chief Financial Officer, Vice President, Treasurer, Assistant Secretary
Wilfred H. Partridge 68 Vice President -- Purchasing, the Company
Patrick J. Kelvie, Esq 46 Secretary and General Counsel
Robert D. Beyer 38 Director, the Company
George G. Golleher 50 Director, the Company
Jeffry K. Weinhuff 43 Director, the Company
</TABLE>
Officers are elected by the Board of Directors and serve at
the discretion of the Board.
Anwar S. Soliman. Mr. Soliman has served as Chairman, Chief
Executive Officer and a Director of the Company since its organization in 1986.
Prior to joining the Company, Mr. Soliman was Executive Vice President of W. R.
Grace & Co. ("Grace") and Group Executive of the Grace Restaurant Group, which
he started in 1977. Mr. Soliman spent 22 years with Grace in various executive
positions. He is also a trustee of the Orange County Museum of Art and a member
of the Board Council of Boys Hope of California. Mr. Soliman received both a B.
Commerce and an M.B.A. from Alexandria University and a Ph.D. from New York
University.
Ralph S. Roberts. Mr. Roberts has served as a Director of the
Company since 1991 and has served as the President and Chief Operating Officer
of the Company since 1986. Mr. Roberts has over 30 years of experience in the
restaurant industry and before joining the Company was Deputy Group Executive of
Operations of the Grace Restaurant Group and Vice President of Grace. Prior to
joining Grace in 1980, he was Vice President of the Stouffer Restaurant Division
and President and co-founder of the Rusty Scupper restaurants. Mr. Roberts
received a B.A. from Princeton University.
William J. McCaffrey, Jr. Mr. McCaffrey served as a Director
of the Company from 1991 to 1998 and has served as the Chief Financial Officer,
Vice President, Treasurer and Assistant Secretary of the Company since 1986.
Prior thereto he was Chief Financial Officer of the Grace Restaurant Group,
having spent 12 years with Grace. For eight years, Mr. McCaffrey was assistant
to the Chief Executive Officer of Grace. He received a B.S., M.E. from the
University of Notre Dame and an M.B.A. from Harvard University.
Wilfred H. Partridge. Mr. Partridge has served as Vice
President responsible for purchasing and distribution for the Company since
1986. Mr. Partridge has extensive experience in the restaurant industry
encompassing purchasing, production and distribution, as well as restaurant
operations, and was President of Grace Restaurant Services before joining the
Company. Mr. Partridge served as Vice President of Purchasing, Production and
Distribution with Marriott Corporation (Bob's Big Boy Division) for 19 years. He
served as Director of Manufacturing and Distribution for Foodmaker Company
(Jack-in-the-Box) and also operated his own restaurants in the San Diego area.
He received a B.A. in Commercial Science from Benjamin Franklin University.
Patrick J. Kelvie. Mr. Kelvie has served as General Counsel of
the Company since 1987 and Secretary of the Company since 1989. From 1987 to
1989, Mr. Kelvie was an Assistant Secretary of the Company. Between 1978 and
1987, Mr. Kelvie held various legal counsel positions for Saga Corporation. Mr.
Kelvie received a B.A. from the University of California at Berkeley and a J.D.
from Harvard Law School.
Robert D. Beyer. Mr. Beyer was elected as a Director of the
Company in 1998. Mr. Beyer has served as Group Managing Director of Trust
Company of the West ("TCW") since 1995. Mr. Beyer was Co-Chief Executive Officer
of Cresent Capital Corporation, a registered investment advisor, from 1991 until
its acquisition by TCW in 1995. From 1986 to 1991, Mr. Beyer was a member of the
Investment Banking Department of Drexel Burnham Lambert, Incorporated. From 1983
to
36
<PAGE> 44
1986, Mr. Beyer was a member of the Investment Banking Department of Bear,
Stearns & Co., Inc. Mr. Beyer is also a Director of Fred Meyer, Inc.
George G. Golleher. Mr. Golleher was elected as a Director of
the Company in 1998. Mr. Golleher has served as Chief Executive Officer of
Ralphs Grocery Company ("Ralphs") since January 1996 and was Vice Chairman from
June 1995 to January 1996. Mr. Golleher was a Director of F4L Supermarkets since
its inception in 1989 and was the President and Chief Operating Officer of F4L
Supermarkets from January 1990 until its merger with Ralphs. From 1986 through
1989, Mr. Golleher served as Senior Vice President- Finance and Administration
of the Boys Markets, Inc. Mr. Golleher served as a Director of Dominick's Finer
Foods, Inc. from March 1995 until October 1996 and currently serves as a
Director of Ralphs.
Jeffry K. Weinhuff. Mr. Weinhuff was elected as a Director of
the Company in 1998. Mr. Weinhuff has served as Executive Vice President and
Director of Corporation Finance of Jefferies & Company, Inc. since May 1990. Mr.
Weinhuff is also a Director of Jefferies & Company, Inc.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for
services rendered in all capacities which the Company paid to or accrued for the
Chief Executive Officer and each of the other four most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------------------------ ----------------------- --------
NUMBER
OTHER RESTRICTED OF ALL
NAME AND ANNUAL STOCK OPTIONS/ LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(a) AWARD(S) SARS PAYOUTS COMPENSATION(b)
- -------------------------- ---- ---------- ------- ------------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anwar S. Soliman 1997 $ 945,793 $ 0 $99,975 -- -- -- $24,300
(Chairman and CEO) 1996 1,233,640 0 96,125 -- -- -- 24,303
1995 1,233,640 0 62,660 -- -- -- 18,002
Ralph S. Roberts 1997 558,181 0 50,360 -- -- -- 13,050
(President and COO) 1996 704,935 0 48,295 -- -- -- 8,351
1995 704,935 0 28,230 -- -- -- 8,351
William J. McCaffrey, Jr 1997 252,500 0 3,850 -- -- -- 17,525
(Chief Financial Officer) 1996 325,000 0 5,680 -- -- -- 14,846
1995 311,539 30,000 0 -- -- -- 9,571
Wilfred H. Partridge 1997 225,308 0 5,900 -- -- -- 7,038
(Vice President -- 1996 290,000 0 7,610 -- -- -- 5,754
Purchasing) 1995 279,231 30,000 0 -- -- -- 5,884
Patrick J. Kelvie 1997 188,077 0 0 -- -- -- 1,512
(Secretary and 1996 175,000 0 0 -- -- -- 1,312
General Counsel) 1995 175,000 0 0 -- -- -- 1,262
</TABLE>
(a) Amounts shown are for reimbursement during the fiscal year for the
payment of premiums and income taxes thereon relating to executive
life and disability plans. In addition, Holdings and the Company
maintain key man life insurance policies for the benefit of Holdings
and the Company on Messrs. Soliman and Roberts.
(b) Amounts shown in this column for the last fiscal year include the
following: group term life insurance premiums of $24,300, $13,050,
$15,286 and $5,040 for Messrs. Soliman, Roberts, McCaffrey and
Partridge, respectively; and Company matching contributions to a
401(k) plan of $2,239, $1,998 and $1,512 for Messrs. McCaffrey,
Partridge and Kelvie, respectively.
EMPLOYMENT AGREEMENTS
The following table sets forth, with respect to each executive
officer who has entered into an employment agreement with the Company, the base
salary for such officer provided for therein together with the termination date
of such agreement:
37
<PAGE> 45
<TABLE>
<CAPTION>
TERMINATION
NAME OF INDIVIDUAL CAPACITY IN WHICH SERVED BASE SALARY DATE
- ------------------ ------------------------- ----------- -----------
<S> <C> <C> <C>
Anwar S. Soliman Chairman and Chief Executive Officer $740,184 12/31/98
Ralph S. Roberts President and Chief Operating Officer 422,961 12/31/98
Wilfred H. Partridge Vice President - Purchasing 174,000 12/31/98
</TABLE>
Each of the employment agreements entered into between the
Company and such executive officers provides, among other things, for
adjustments to the base salaries and automatic extensions of the termination
date. The agreements also provide for certain other benefits, including, in the
case of Mr. Soliman, one year's severance pay equal to his then salary in the
event of disability or death; in the case of Mr. Roberts, one year's severance
pay in the event of death and salary for the remainder of the calendar year in
the event of disability; in the case of Mr. Partridge, six months' severance pay
in the event of death and salary for the remainder of the calendar year in the
event of disability. The employment agreements of Mr. Soliman and Mr. Roberts
each provide six months' severance pay if either executive terminates his
employment for cause. None of the Company's employment agreements provides for
any continuing salary obligations in the event of termination by the Company for
cause.
STOCK OPTION PLANS
The Company expects to adopt a stock option plan (the "New
Plan") for the grant of options to the management of the Company and select
employees of the Company and its subsidiaries. The Company expects that the New
Plan will provide for options for up to 15% of the diluted number of shares of
Common Stock of the Company.
SAVINGS PLAN
The Company currently has the American Restaurant Group
Savings and Investment Plan (the "Savings Plan"), which is a 401(k) plan
established for the benefit of employees who have satisfied certain
requirements. These requirements include completion of one year of service with
a minimum of 1,000 hours worked. Subject to applicable limits imposed on tax
qualified plans, eligible employees may elect pre-tax contributions up to 18.5%
of a participant's total earnings for a calendar year (but not in excess of
$9,500 for 1997). The Company makes matching contributions to the Savings Plan
equal to 25% of the participant's contributions up to 6% of the participant's
earnings. A participant is entitled to a distribution from the Savings Plan upon
termination of employment and any such distribution will be in a lump sum form.
Distributable benefits are based on the value of the participant's individual
account balance which is invested at the direction of the participant in one or
a combination of six investment funds, none of which include investments in the
Company. Under certain circumstances, a participant may borrow amounts held in
his account under the Savings Plan. Based upon the Savings Plan vesting
schedule, as of 1997, 100% of the Company matching contributions were vested for
Messrs. McCaffrey, Partridge and Kelvie.
EXECUTIVE INSURANCE PLANS
The Company has made available an executive disability
insurance plan to Messrs. Soliman, Roberts, McCaffrey and Partridge which
provides supplemental disability income based on a percentage of their
respective monthly salaries. In 1997, the cost to the Company of such disability
insurance for these executives was $52,500.
Messrs. Soliman, Roberts, McCaffrey and Partridge and their
dependents also participate in an executive medical plan which covers all of
their medical and dental expenditures. In 1997, the cost to the Company of this
plan for these executives as a group was $31,200.
38
<PAGE> 46
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
the beneficial ownership of the Company's common stock (as if the Warrants and
any other outstanding warrants were exercised), as of May 4, 1998, by (i) each
of the Company's directors, (ii) the Chief Executive Officer and certain other
highly compensated executive officers of the Company, (iii) all executive
officers and directors as a group and (iv) each person believed by the Company
to own beneficially more than 5% of the Company's outstanding common stock.
Pursuant to the Voting Trust Agreement, Anwar S. Soliman controls Holdings and,
accordingly, together with his direct ownership of Common Stock and the New
Voting Trust Agreement (as described below), effectively controls the voting of
all (without giving effect to the exercise of Warrants and any other outstanding
warrants) the outstanding Common Stock, subject to the terms of the
Securityholders Agreement. See "American Restaurant Group Holdings, Inc.--Voting
Trust Agreement and Other Agreements", "--Securityholders Agreement" and "Risk
Factors--Concentration of Ownership and Control of the Company."
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP OUTSTANDING CLASS DILUTED CLASS(1)
<S> <C> <C> <C>
Anwar S. Soliman 19,990(2) 8.6% 15.6%
Roberts Family Limited Partnership 9,702 7.6 4.2
William J. McCaffrey, Jr 2,426 1.9 1.0
Wilfred H. Partridge 2,426 1.9 1.0
Patrick J. Kelvie 387 0.3 0.2
Robert D. Beyer (3) -- -- --
George G. Golleher (4) -- -- --
Jeffry K. Weinhuff -- -- --
American Restaurant Group 93,150 72.7 40.0
Holdings, Inc. (5)
All directors and officers of the 34,931 27.3 15.0
Company as a group (8 persons)
TCW Investors (6) 55,558(7) -- 23.9
</TABLE>
- ------------------------------------
(1) Gives effect to the exercise of all outstanding warrants.
(2) Does not include shares of the Common Stock which Mr. Soliman is deemed
to be the owner of pursuant to the New Voting Trust Agreement.
(3) Does not include shares deemed to be beneficially owned by the TCW
Investors (as defined herein). Robert D. Beyer is a Group Managing
Director of TCW, of which TCW Group (see footnote 7) and the TCW
Investors are affiliates. Mr. Beyer shares investment power for the
following TCW Investors: TCW Shared Opportunity Fund II L.P., TCW
Leveraged Income Trust, L.P. and TCW Shared Opportunity Fund IIB, LLC.
See footnote 6.
(4) George G. Golleher was elected Director of the Company, as nominee of
the TCW Investors. See "--Securityholders Agreement."
(5) Anwar S. Soliman owns 228,577 shares of Holdings common stock,
representing 46.4% of the outstanding common stock of Holdings. In
addition, Mr. Soliman is deemed to be the owner, pursuant to the Voting
Trust Agreement, of an additional 175,963 shares of Holdings common
stock. See "Risk Factors--Concentration of Ownership and Control of the
Company."
(6) TCW Shared Opportunity Fund II, L.P., TCW Leveraged Income Trust, L.P.,
Brown University and TCW Shared Opportunity Fund IIB, LLC.
(7) Represents warrants which are immediately exercisable at a nominal
price per share. Includes warrants beneficially owned by the TCW
Investors and of which TCW Asset Management Company and certain
affiliates which control voting and investment power in their capacity
as general partner, investment manager or manager of the TCW Investors
(the "TCW Group"), disclaims beneficial ownership.
All of the Company's Management Stockholders have entered into
a voting trust agreement (the "New Voting Trust Agreement") dated February 25,
1998 in accordance with which Anwar S. Soliman, Chairman and Chief Executive
Officer of the Company, exercises, as voting trustee, all voting and
substantially all other rights to which such shareholders would otherwise be
entitled until the earlier of August 15, 2005 or the earlier termination of the
New Voting Trust Agreement. As a result, Mr. Soliman is considered the
beneficial owner of approximately 86.9% of the outstanding shares of the
Company's common stock (approximately 47.8% on a diluted basis). In addition,
the Management Stockholders have entered into other agreements pursuant to which
such holders were granted registration rights substantially identical to the
rights granted to the holders of the Warrants pursuant to the Securityholders'
Agreement. Each of the Management Stockholders is also party to
39
<PAGE> 47
a subscription agreement with Holdings which provides such stockholder certain
rights with respect to shares of Holdings common stock held by such stockholder.
See "Description of the Warrants".
As of May 4, 1998, holders of the Company's Preferred Stock
held warrants for 41% of the Common Stock on a diluted basis.
SECURITYHOLDERS AGREEMENT
In connection with the Recapitalization Plan, each of
Holdings, the Management Stockholders, Jefferies & Company, Inc. (the "Initial
Purchaser" of the Notes), and TCW Shared Opportunity Fund II, L.P., TCW
Leveraged Income Trust, L.P., Brown University and TCW Shared Opportunity Fund
IIB, LLC (collectively, the "TCW Investors") and TCW Asset Management Company
entered into a securityholders agreement concerning the Company (the
"Securityholders Agreement"). The Securityholders Agreement provides that the
parties will agree to vote all of their shares of the Company's equity
securities so that the composition of the Company's Board of Directors consists
of five members, two of whom will be management nominees, two of whom will be
nominees of the TCW Investors and one of whom, the Remaining Director, will be
an independent director designated by the Initial Purchaser; provided that after
the Public Company Date, the TCW Investors and management will mutually choose
the Remaining Director and the Initial Purchaser will no longer have any right
to designate a director. The Securityholders Agreement does not limit the rights
of the holders of the Preferred Stock under the Certificate of Designation to
elect additional directors to serve on the Company's Board of Directors in
certain circumstances.
The Securityholders Agreement also provides that (i) in the
event that Holdings sells or transfers any of its shares of Company equity
securities, directly or indirectly, the TCW Investors have the option to include
its Company equity securities in such sale or transfer on the same terms as
Holdings' sale or transfer, (ii) the TCW Investors have a right of first refusal
with respect to any sale of equity securities by the Company or a party to the
Securityholders Agreement (other than Management Stockholders) to purchase the
equity securities being sold; and (iii) the TCW Investors have the
nontransferable right to approve certain major corporate transactions concerning
the Company, including mergers and consolidations, sales of any capital stock of
the Company's Subsidiaries, a sale of a material amount of the assets and
properties of the Company, transactions with affiliates and amendments to the
Company's Certificate of Incorporation and Bylaws. In addition, the
Securityholders Agreement provides that certain of the TCW Investors' purchasers
will receive payments from the Company with respect to withholding obligations
as a result of their ownership of the Preferred Stock, which amount shall not
exceed $125,000 per year. None of the rights under the Securityholders Agreement
are transferable by the TCW Investors.
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
Holdings was incorporated in 1993. Currently, Holdings owns
72.7% of the outstanding common stock of the Company and does not have any other
assets.
HOLDINGS DEBENTURES
In December 1993, Holdings issued $88.6 million aggregate
principal amount of Holdings Debentures at a significant discount. In March,
1996, Holdings issued an additional $17.0 million aggregate principal amount of
Holdings Debentures at a significant discount. Substantially all of the proceeds
from the sale of the Holdings Debentures were contributed to the Company. In
connection with the Recapitalization Plan, certain holders of the Holdings
Debentures received $3.6 million principal amount of Notes and surrendered for
cancellation approximately $10.8 million accreted value of Holdings Debentures.
At May 4, 1998, the accreted value of the remaining Holdings Debentures was
$86.1 million. In addition, the indenture relating to the Holdings Debentures
(the "Holdings Indenture") was amended (the "Amendment") pursuant to the Second
Supplemental Indenture dated February 24, 1998. The following summary of the
material terms of the Holdings Debentures does not purport to be complete and is
qualified by reference to the Holdings Indenture and Amendment:
Ranking. The Holdings Debentures are senior unsecured
obligations of Holdings. None of the Company or any of its subsidiaries has
guaranteed the Holdings Debentures.
Interest and Maturity. Until December 15, 1998, the Holdings
Debentures accrete at a rate of 14% per annum. After December 15, 1998, the
Holdings Debentures bear interest, payable semi-annually on June 15 and December
15 of each year, at a rate of 14% per annum and will mature on December 15,
2005. Pursuant to the Amendment, the terms of the Holdings
40
<PAGE> 48
Debentures were amended as of February 25, 1998 to provide that the Debentures
will accrete at a rate of 14.25% per annum through maturity on December 15,
2005 to $245,679,000.
Redemption. Pursuant to the Amendment, at the option of
Holdings, the Holdings Debentures may be redeemed in whole or from time to time
in part at any time at a redemption price equal to 100% of their accreted value.
Restrictive Covenants. The Holdings Indenture imposes certain
limitations, among others, on the ability of (i) Holdings to make payments in
respect of Holdings' capital stock, (ii) Holdings and its subsidiaries to incur
additional indebtedness, (iii) Holdings and its subsidiaries to engage in
transactions with its affiliates, (iv) Holdings and its subsidiaries to allow to
become effective any payment restrictions with respect to any subsidiary, (v)
Holdings to incur any liens, (vi) Holdings and its subsidiaries to consummate
certain asset sales, (vii) subsidiaries of Holdings to issue preferred stock,
(viii) Holdings to permit the Company to issue any of its capital stock, and
(ix) Holdings to merge or sell all or substantially all of its assets or
property. Pursuant to the Amendment, these covenants will be amended to, among
other things, permit consummation of the Offering and to permit certain
additional exceptions to these covenants.
Events of Default and Remedies. The following are Events of
Default under the Holdings Indenture: (a) failure to pay principal of the
Holdings Debentures when due; (b) failure to pay any interest on the Holdings
Debentures when due, continued for 30 days; (c) failure to perform any covenant
in the indenture continued for 30 days after written notice; (d) failure by
Holdings or any Subsidiary to perform any term, covenant, condition or provision
of other indebtedness in an aggregate principal amount of $10 million or more,
which failure results in an acceleration of the maturity thereof; (e) certain
events of bankruptcy or insolvency; and (f) the entering of final judgments not
covered by insurance for the payment of money which in the aggregate at any one
time exceeds $10 million, which shall remain undischarged and unbonded for a
period (during which execution shall not be effectively stayed) of 60 days after
such judgment becomes final and nonappealable.
Net Proceeds Offering. Holdings is required, upon certain
asset sales or the receipt of cash, by dividend or otherwise, to offer to
purchase with the net proceeds thereof the Holdings Debentures at a price equal
to 100% of their accreted value to the date of purchase.
Change of Control Offer. Upon the occurrence of a change of
control, each holder of Holdings Debentures has the right to require the
repurchase of such holder's Holdings Debentures at a purchase price equal to
101% of the accreted value thereof to the date of purchase.
VOTING TRUST AGREEMENT AND OTHER AGREEMENTS
All of Holdings' management stockholders have entered into the
Voting Trust Agreement in accordance with which Anwar S. Soliman, Chairman and
Chief Executive Officer of the Company and Holdings, exercises, as voting
trustee, all voting and substantially all other rights to which such
stockholders would otherwise be entitled with respect to shares of Holdings
common stock until the earlier of August 15, 2005 or the earlier termination of
the Voting Trust Agreement. See "Risk Factors--Concentration of Ownership and
Control of the Company." Each of the management stockholders is also party to a
subscription agreement with Holdings which provides such stockholder certain
rights with respect to shares of Holdings common stock held by such stockholder.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries are qualified in their entirety by
reference to the definitive agreements and instruments described herein.
NEW CREDIT FACILITY
The Company and certain of its subsidiaries entered into the
New Credit Facility on February 25, 1998 with BankBoston, N.A., as agent, and a
group of banks in an aggregate principal amount of $15.0 million. The New Credit
Facility includes a letter of credit facility in the principal amount of
availability of up to $10.0 million, which may be used only by the subsidiaries
of the Company party to the New Credit Facility to support certain insurance,
workers' compensation and performance or payment obligations of such
subsidiaries. At May 4, 1998, the Company had $5.1 million of letters of credit
outstanding under the New Credit Facility. The New Credit Facility matures on
February 25, 2001.
41
<PAGE> 49
The New Credit Facility provides for a quarterly commitment
fee and fees payable on outstanding letters of credit. Borrowings under the New
Credit Facility, at the Company's option, bear interest at BankBoston, N.A.'s
prime rate plus 1.0% or the applicable eurodollar rate plus 2.5%.
The New Credit Facility is secured, subject to the
Intercreditor Agreement, by a first-priority security interest in the
Collateral. See "--Intercreditor Agreement and Collateral Documents."
The New Credit Facility contains financial and other
covenants, including, without limitation, (i) restrictions on the incurrence of
indebtedness, leases, liens and contingent obligations, (ii) restrictions on
mergers, acquisitions, sales of assets, investments and transactions with
affiliates, (iii) restrictions on dividends and other payments with respect to
shares of the Company's capital stock, (iv) restrictions on redemptions,
prepayments and distributions with respect to certain debt, (v) restrictions on
amendments to the Indenture, agreements relating to capital stock and certain
other agreements, (vi) a prohibition on engaging in businesses unrelated to the
business currently conducted by the Company and (vii) minimum debt service
coverage, minimum interest coverage and maximum leverage.
Events of Default under the New Credit Facility include, among
others, (i) any failure of the Company to pay amounts owing under the New Credit
Facility, subject, except in the case of principal, to a two-day grace period,
(ii) the breach by the Company or any of its subsidiaries of any covenants,
representations or warranties contained in the New Credit Facility, (iii) any
failure to pay amounts due under other indebtedness or contingent obligations of
the Company or any of its subsidiaries or defaults that result in or permit the
acceleration of such indebtedness or contingent obligations, if the aggregate
amount of such indebtedness or contingent obligations exceeds a specified
amount, (iv) certain events of bankruptcy, insolvency or dissolution of the
Company or any of its subsidiaries and (v) certain changes of control of the
Company.
INTERCREDITOR AGREEMENT AND COLLATERAL DOCUMENTS
Pursuant to mortgages, deeds of trust, personal property
security agreements, pledge agreements, a trademark security agreement and a
cash collection account agreement, in each case executed and delivered by the
Company and/or the Subsidiary Guarantors (as amended or supplemented,
collectively, the "Collateral Documents"), the Company and the Subsidiary
Guarantors granted to the Trustee, as Collateral Agent (the "Collateral Agent"),
a first-priority security interest in a portion of the owned or leased real
property, in a substantial portion of the owned personal property, in
substantially all of the accounts receivable of the Company and its Restricted
Subsidiaries and a pledge of all of the capital stock of the Company's
Restricted Subsidiaries and proceeds of the foregoing (collectively, the
"Collateral") for the benefit of the holders of the Notes and the Exchange Notes
and the lenders under the New Credit Facility. Pursuant to an intercreditor
agreement executed among the Trustee and the agents for the lenders under the
New Credit Facility (the "Intercreditor Agreement"), proceeds from the sale of
the Collateral are first to be applied to repay Indebtedness outstanding under
the New Credit Facility (with the principal amount thereof not to exceed
$20,000,000), if any, and thereafter paid to the Trustee for the benefit of the
holders of the Notes and the Exchange Notes. The Collateral Agent will be
directed by the agent under the New Credit Facility, and not the Trustee under
the Indenture, unless amounts due under the New Credit Facility have been paid
in full or 180 days have elapsed from the occurrence of an Event of Default
under the Indenture. See "Description of the Exchange Notes--Collateral."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Preferred Stock and $155 million in aggregate principal
amount of the Notes were originally issued and sold on February 25, 1998 to the
Initial Purchaser pursuant to a Purchase Agreement between the Company and the
Initial Purchaser (the "Purchase Agreement"); $3.6 million in aggregate
principal amount of the Notes was originally issued to certain holders of
Holdings Debentures in exchange for surrender for cancellation of approximately
$10.8 million accreted value of Holdings Debentures. The offer and sale of the
Securities was not required to be registered under the Act in reliance upon the
exemption provided by Section 4(2) of the Act. As a condition to the Purchase
Agreement, the Company and the Initial Purchaser entered into the Registration
Rights Agreement on February 25, 1998. Pursuant to the Registration Rights
Agreement, the Company agreed to file with the Commission a registration
statement under the Securities Act with respect to the Exchange Offer following
the Issue Date, (ii) to use its reasonable best efforts to cause such
registration statement to become effective under the Securities Act at the
earliest possible time thereafter, but in no event later than 150 days after the
Issue Date, and (iii) upon effectiveness of the registration statement, to
commence the Exchange Offer. The purpose of the Exchange Offer is to fulfill the
Company's obligations with respect to the Registration Rights Agreement and the
Purchase Agreement. See "Registration Rights Agreement."
42
<PAGE> 50
As a result of the effectiveness of the Registration Statement
of which this Prospectus is a part, payment of certain liquidated damages
provided for in the Registration Rights Agreement will not occur. Following the
consummation of the Exchange Offer, holders of Notes and shares of Preferred
Stock will not have any further registration rights and the Notes and Preferred
Stock will continue to be subject to certain restrictions on transfer. See
"--Consequences of Failure to Exchange." Accordingly, the liquidity of the
market for the Notes and Preferred Stock could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the applicable Letter of Transmittal, the Company will accept
(i) any Notes in principal amounts of $1,000 validly tendered and not withdrawn
prior to the Expiration Date and (ii) any and all shares of Preferred Stock
validly tendered and not withdrawn prior to the Expiration Date. The Company
will issue (i) Exchange Notes in principal amounts of $1,000 for each $1,000
principal amount outstanding of the Notes and (ii) one share of Exchange
Preferred Stock in exchange for each share of Preferred Stock, accepted in the
Exchange Offer. Holders may tender some or all of their Notes or shares of
Preferred Stock pursuant to the Exchange Offer.
The form and terms of the Exchange Notes and the Exchange
Preferred Stock are the same as the form and terms of the Notes and the
Preferred Stock except that the Exchange Notes and the shares of Exchange
Preferred Stock will have been registered under the Securities Act and hence
will not bear legends restricting their transfer pursuant to the Securities Act.
As of the date of this Prospectus, $158,600,000 principal
amount of Notes and 35,000 shares of Preferred Stock were outstanding. Only a
registered holder of the Notes and the Preferred Stock (or such holder's legal
representative or attorney-in-fact) as reflected on the records of the transfer
agent and registrar for the Notes or the Preferred Stock may participate in the
Exchange Offer. There will be no fixed record date for determining registered
holders of the Notes or the Preferred Stock entitled to participate in the
Exchange Offer.
Holders of the Preferred Stock do not have any appraisal or
dissenters' rights under the General Corporation Law of Delaware or the
Certificate of Designations for the Preferred Stock in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered
Notes or shares of Preferred Stock when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders of the Notes or the Preferred Stock for the
purposes of receiving the Exchange Notes or the Exchange Preferred Stock from
the Company.
If any tendered Notes or shares of Preferred Stock are not
accepted for exchange because of an invalid tender, the occurrence of certain
other events set forth herein or otherwise, certificates for any such unaccepted
Notes or shares of Preferred Stock will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Notes or shares of Preferred Stock in the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the applicable Letter of Transmittal, transfer
taxes with respect to the exchange of Notes or shares of Preferred Stock
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"--Fees and Expenses."
Each broker-dealer that receives Exchange Notes or Exchange
Preferred Stock for its own account in exchange for Notes or Preferred Stock,
where such Exchange Notes or Exchange Preferred Stock 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 or Exchange Preferred Stock. See "Plan of
Distribution."
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer shall expire on the Expiration Date. The
term "Expiration Date" means 5:00 p.m., New York City time, on ,
1998, unless the Company in its sole discretion extends the period during which
the Exchange Offer is open, in which event the term "Expiration Date" shall mean
the latest time and date on which the Exchange Offer, as so extended by the
Company, shall expire. The Company reserves the right to extend the Exchange
Offer at any time and from time to time by giving oral or written notice to
United States Trust Company of New York (the "Exchange Agent") and,
43
<PAGE> 51
unless otherwise required by applicable law or regulation, by making a press
release prior to 9:00 a.m., New York City time, on the next business day after
the previously scheduled Expiration Date. During any extension of the Exchange
Offer, all Securities previously tendered pursuant to the Exchange Offer will
remain subject to the Exchange Offer.
The Company reserves the right, (i) to delay accepting any Notes
or shares of Preferred Stock, (ii) to extend the Exchange Offer, (iii) if any of
the conditions set forth below under "--Conditions of the Exchange Offer" shall
not have been satisfied, to terminate the Exchange Offer, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent, or
(iv) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the terms of the Exchange Offer
are amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendments by means of a
prospectus supplement that will be distributed to the registered holders of the
Notes and the Preferred Stock, and the Company will extend the Exchange Offer
for a period of five to ten business days, 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 five to ten business day
period.
Without limiting the manner in which the Company may choose to
make public announcement of any delay, extension, termination or amendment of
the Exchange Offer, the Company shall not have an obligation to publish,
advertise, or otherwise communicate any such public announcement, other than by
making a timely press release.
PROCEDURES FOR TENDERING
Only a registered holder (which term, for the purposes
described herein, shall include any participant in The Depository Trust Company
(also referred to as a book-entry transfer facility) whose name appears on a
security listing as the owner of the Notes or the Preferred Stock) of Notes or
shares of Preferred Stock may tender such Notes or shares of Preferred Stock in
the Exchange Offer. To tender in the Exchange Offer a holder must complete, sign
and date the applicable Letter of Transmittal, or a facsimile thereof, have the
signatures thereon guaranteed if required by the applicable Letter of
Transmittal and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Notes or the shares of Preferred Stock and any
other required documents, to the Exchange Agent at the address set forth below
under "Exchange Agent" for receipt prior to the Expiration Date (or comply with
the procedure for book-entry transfer described below).
The tender by a holder will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the applicable Letter of Transmittal.
THE METHOD OF DELIVERY OF THE NOTES OR THE SHARES OF PREFERRED
STOCK AND THE APPLICABLE 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, NOTES OR SHARES OF PREFERRED STOCK SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTION FOR SUCH HOLDERS.
The Exchange Agent will make a request promptly after the date
of this Prospectus to establish accounts with respect to the Notes and the
Preferred Stock at the book-entry transfer facility for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial institution that is a participant in the book-entry transfer
facility's system may make book-entry delivery of Notes and/or shares of
Preferred Stock by causing such book-entry transfer facility to transfer such
Notes and/or shares of Preferred Stock into the Exchange Agent's account with
respect to the Notes and/or shares of Preferred Stock in accordance with the
book-entry transfer facility's procedures for such transfer. Although delivery
of Notes and/or shares of Preferred Stock may be effected through book-entry
transfer into the Exchange Agent's accounts at the book-entry transfer facility,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth on the back cover page
of this Prospectus on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
Any beneficial owner whose Notes or shares of Preferred Stock
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
44
<PAGE> 52
and instruct such registered holder to tender on such beneficial owner's behalf.
See "Instruction to Registered Holder from Beneficial Owner" included with each
Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by an Eligible Institution
(as defined below) unless the Notes or shares of Preferred Stock tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box entitled "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 guarantee must be by 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 (each an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than
the registered holder of any Notes or any shares of Preferred Stock listed
therein, such Notes or shares of Preferred Stock must be endorsed or accompanied
by a properly completed stock power, signed by such registered holder as such
registered holder's name appears on such Notes or shares of Preferred Stock.
If the Letter of Transmittal, Notes or any shares of Preferred
Stock or stock 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 evidence satisfactory to the Company 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 and withdrawal of tendered Notes or shares of
Preferred Stock will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Notes or shares of Preferred Stock not properly tendered
or any Notes or shares of Preferred Stock the Company's acceptance of which
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Notes or shares of Preferred Stock. The Company's
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 Notes or the shares of Preferred Stock must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Notes or the shares of
Preferred Stock, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Notes or the shares of Preferred Stock will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Notes or
shares of Preferred Stock received by the Exchange Agent that are not validly
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 applicable Letter of Transmittal, as soon as
practicable following the Expiration Date.
By tendering, each registered holder will represent to the
Company that, among other things, (i) the Exchange Securities to be acquired by
such holder in the Exchange Offer are being acquired by the holder in the
ordinary course of its business, (ii) such holder has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Securities within the meaning of the Securities Act or resale of the
Exchange Securities in violation of the Securities Act, (iii) if such holder is
not a broker-dealer, that it is not engaged in and does not intend to engage in,
the distribution of the Exchange Securities, (iv) if such holder is a
broker-dealer that will receive Exchange Securities for its own account in
exchange for Notes and/or Preferred Stock that were acquired as a result of
market-making or other trading activities and that it will deliver a prospectus,
as required by law, in connection with any resale of such Exchange Securities,
and (v) if such holder is an affiliate of the Company, that it will comply with
the registration and prospectus delivery requirements of the Securities Act
applicable to it.
Each broker-dealer who holds Notes or Preferred Stock acquired
for its own account as a result of market-making activities or other trading
activities and who receives Exchange Notes or Exchange Preferred Stock in the
Exchange Offer
45
<PAGE> 53
may be a statutory underwriter and must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes or Exchange
Preferred Stock. By so acknowledging 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. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes or Exchange Preferred Stock received in exchange
for Notes or Preferred Stock where such Notes or Preferred Stock were acquired
by such broker-dealer as a result of market-making activities or other trading
activities. The Company will, for a period of 90 days after the Expiration Date,
make copies of this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes or shares of Preferred
Stock and (i) whose Notes or shares of Preferred Stock are not immediately
available, or (ii) who cannot deliver their Notes or shares of Preferred Stock,
the applicable Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date or complete the procedure for
book-entry transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the
certificate number(s) of such Notes or shares of Preferred Stock and the
principal amount of Notes or the number of shares of Preferred Stock
being tendered, stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Notes or shares of Preferred Stock (or a
confirmation of book-entry transfer of such Notes or shares of Preferred
Stock into the Exchange Agent's account at the book-entry transfer
facility) and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent;
and
(c) Such properly completed and executed Letter of Transmittal
(or facsimile thereof), as well as the certificate(s) representing all
tendered Notes or shares of Preferred Stock in proper form for transfer
and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three business days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed
Delivery will be sent to holders who wish to tender their Notes or shares of
Preferred Stock according to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of the Notes or
shares of Preferred Stock may be withdrawn at any time prior to the Expiration
Date or, if tendered Notes or shares of Preferred Stock have not yet been
accepted for exchange, after the expiration of forty business days from the
commencement of the Exchange Offer.
To withdraw a tender of Notes or shares of Preferred Stock in
the Exchange Offer, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Notes or shares of Preferred Stock to be
withdrawn (the "Depositor"), (ii) identify the Notes or shares of Preferred
Stock to be withdrawn (including the certificate number or numbers and principal
amount of Notes or number of shares), and (iii) be signed by the holder in the
same manner as the original signature on the Letter of Transmittal by which such
Notes or shares of Preferred Stock were tendered (including any required
signature guarantees). If Notes or shares of Preferred Stock have been tendered
pursuant to the procedure for book-entry transfer, any notice of withdrawal must
specify the name and number of the account at the book-entry transfer facility
to be credited with the withdrawn Notes or shares of Preferred Stock or
otherwise comply with the book-entry facility procedure. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company in its sole discretion, which determination shall
be final and binding on all parties. Any Notes or shares of Preferred Stock so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes or shares of Exchange Preferred Stock will
be issued with respect thereto unless the Notes or shares of Preferred Stock so
withdrawn are validly retendered. Properly withdrawn Notes or shares of
Preferred Stock may be retendered by following one of the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
46
<PAGE> 54
Any Notes or shares of Preferred Stock which have been
tendered but which are not accepted for exchange due to rejection of tender or
termination of the Exchange Offer, or which have been validly withdrawn, will be
returned as soon as practicable to the holder thereof without cost to such
holder.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the
Company shall not be required to accept for exchange, or exchange Exchange Notes
or shares of Exchange Preferred Stock for, any Notes or shares of Preferred
Stock, and may terminate the Exchange Offer as provided herein before the
acceptance of such Notes or shares of Preferred Stock, if:
(a) any action or proceeding is instituted or threatened in
any court or by or before any governmental agency with respect to the
Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the
Company or any of its subsidiaries;
(b) any change, or any development involving a prospective
change, in the business or financial affairs of the Company or any of
its subsidiaries has occurred which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company;
(c) any law, statute, rule or regulation is proposed, adopted
or enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company;
(d) any governmental approval has not been obtained, which
approval the Company shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby; or
(e) there shall occur a change in the current interpretation
by the staff of the Commission which permits the Exchange Securities to
be issued pursuant to the Exchange Offer in exchange for Securities to
be offered for resale, resold and 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 Act) without compliance
with the registration and prospectus delivery provisions of the Act
provided that such Exchange Securities are acquired in the ordinary
course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Exchange
Securities.
If the Company determines in its sole discretion that any of
the conditions are not satisfied, the Company may (i) refuse to accept any Notes
or shares of Preferred Stock and return all tendered Notes or shares of
Preferred Stock to the tendering holders, (ii) extend the Exchange Offer and
retain all Notes or shares of Preferred Stock tendered prior to the Expiration
Date, subject, however, to the rights of holders to withdraw such Notes or
shares of Preferred Stock (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all validly
tendered Notes or shares of Preferred Stock which have not been withdrawn. If
such determination or waiver constitutes a material change to the Exchange
Offer, the Company will promptly disclose such determination or waiver by means
of a prospectus supplement that will be distributed to the registered holders,
and the Company will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as
the Exchange Agent for the Exchange Offer. Letters of Transmittal must be
addressed to the Exchange Agent at its address set forth on the back cover page
of this Prospectus.
Delivery to an address other than as set forth herein, or
transmissions of instructions via a facsimile or telex number other than the
ones set forth herein, will not constitute a valid delivery.
FEES AND EXPENSES
47
<PAGE> 55
The expenses of soliciting tenders will be borne by the
Company. The principal solicitation is being made by mail; however, additional
solicitation may be made by telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
others soliciting acceptance of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the
Exchange Offer will be paid by the Company and are estimated in the aggregate to
be approximately $_____________. Such expenses include fees and expenses of the
Exchange Agent and transfer agent and registrar, accounting and legal fees and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to
the exchange of the Notes or the Preferred Stock pursuant to the Exchange Offer.
If, however, a transfer tax is imposed for any reason other than the exchange of
the Notes or the Preferred Stock pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxpayers or exemption therefrom is not submitted with the
applicable Letter of Transmittal, the amount of such transfer taxes will be
billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes or the shares of Preferred Stock which are not
exchanged for Exchange Notes or shares of Exchange Preferred Stock pursuant to
the Exchange Offer will remain restricted securities within the meaning of Rule
144 of the Securities Act. Accordingly, such Notes or the shares of Preferred
Stock may be resold only (i) to the Company, (ii) pursuant to a registration
statement which has been declared effective under the Securities Act, (iii) for
so long as the Securities are eligible for resale pursuant to Rule 144A under
the Securities Act, to a person the holder reasonably believes is a "qualified
institutional buyer" (as defined in Rule 144A) that purchases for its own
account or for the account of a qualified institutional buyer to whom notice is
given that the transfer is being made in reliance on Rule 144A, (iv) pursuant to
offers and sales to non-U.S. persons that occur in offshore transactions and
without directed selling efforts within the meanings of such terms as defined in
Regulations S under the Securities Act, (v) to an institutional "Accredited
Investor" within the meaning of Rule 501(A)(1), (2), (3) or (7) under the
Securities Act that is purchasing the security for its own account, or for the
account of such an institutional "Accredited Investor," for investment purposes
and not with a view to, or for offer or sale in connection with, any
distribution in violation of the Securities Act or (vi) pursuant to another
available exemption from the registration requirements of the Securities Act,
subject to certain requirements of the Company and the transfer agent and
registrar being met. The liquidity of the Notes or the Preferred Stock could be
adversely affected by the Exchange Offer. Following the consummation of the
Exchange Offer, holders of the Notes or the Preferred Stock will have no further
registration rights under the Registration Rights Agreement.
ACCOUNTING TREATMENT
The carrying value of the Notes or the Preferred Stock is not
expected to be materially different from the fair value of the Exchange Notes or
the Exchange Preferred Stock at the time of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The expenses of the Exchange
Offer associated with the Exchange Notes will be reported as a non-current asset
and amortized over the term of the Exchange Notes. The expenses of the Exchange
Offer associated with the Exchange Preferred Stock will be reported as a
reduction in the carrying value of the Exchange Preferred Stock. Such carrying
value of the Exchange Preferred Stock will increase to the amount of the
redemption value of the Exchange Preferred Stock over the term of the Exchange
Preferred Stock.
RESALES OF THE EXCHANGE NOTES AND THE EXCHANGE PREFERRED STOCK
With respect to resales of the Exchange Notes or the Exchange
Preferred Stock, based on interpretations by the staff of the SEC set forth in
no-action letters issued to third parties, the Company believes that a holder
(other than a person that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Notes or shares of Preferred
Stock for Exchange Notes or shares of Exchange Preferred Stock in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes or the Exchange Preferred Stock, will be
allowed to resell the Exchange Notes or the Exchange Preferred Stock to the
public without further registration under the Securities Act and without
delivering to the
48
<PAGE> 56
purchasers of the Exchange Notes or the Exchange Preferred Stock a prospectus
that satisfies the requirements of Section 10 thereof. However, if any holder
acquires Exchange Notes or shares of Exchange Preferred Stock in the Exchange
Offer for the purpose of distributing or participating in a distribution of the
Exchange Notes or the Exchange Preferred Stock, such holder cannot rely on the
position of the staff of the SEC in such no-action letter 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. Each broker-dealer that receives Exchange
Notes or Exchange Preferred Stock for its own account in exchange for Notes or
Preferred Stock, where such Notes or Preferred Stock 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 or Exchange Preferred Stock. See "Plan of
Distribution."
As contemplated by the above no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Company in the applicable Letter of Transmittal
as set forth in "-- Procedures for Tendering."
REGISTRATION RIGHTS AGREEMENT
The Company entered into the Registration Rights Agreement for
the benefit of the holders of the Securities. The following summary of certain
provisions of the Registration Rights Agreement does not purport to be complete
and is subject to, and is qualified by reference to, all the provisions of such
agreement which has been incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part.
Pursuant to the Registration Rights Agreement the Company
agreed, for the benefit of the holders of the Securities, that, at its cost, (i)
the Company will file the Exchange Offer Registration Statement with the
Commission on or prior to 90 days after the Issue Date, (ii) the Company will
use its best efforts to have such Exchange Offer Registration Statement declared
effective by the Commission on or prior to 150 days after the Issue Date (the
"Effectiveness Date"), (iii) the Company will keep the Exchange Offer
Registration Statement effective until the consummation of the Exchange Offer
pursuant to its terms, and (iv) unless the Exchange Offer would not be
permitted by a policy of the Commission, the Company will have commenced the
Exchange Offer and will use its best efforts to issue, on or prior to 180
business days after the Issue Date, Exchange Securities in exchange for all
Notes and Preferred Stock tendered prior thereto in the Exchange Offer.
If (i) applicable interpretations of the staff of the
Commission would not permit the consummation of the Exchange Offer prior to the
Effectiveness Date, (ii) subsequent to the consummation of the Private Exchange
(as defined in the Registration Rights Agreement) but within 270 days of the
Issue Date, the Initial Purchaser so requests with respect to Securities held by
the Initial Purchaser and having the status as an unsold allotment, (iii) the
Exchange Offer is not consummated within 180 days of the Issue Date for any
reason or (iv) in the case of any holder not permitted to participate in the
Exchange Offer or of any holder participating in the Exchange Offer that
receives Exchange Securities that may not be sold without restriction under
state and federal securities laws (other
49
<PAGE> 57
than due solely to the status of such holder as an affiliate of the Company
within the meaning of the Securities Act) and, in either case contemplated by
this clause (iv), such holder notifies the Company within six months of the
consummation of the Exchange Offer, then the Company shall promptly deliver to
the holders (or in the case of any occurrence of the event described in clause
(iv) hereof, to any such holder) and the Trustee, Transfer Agent or Exchange
Debenture Trustee notice thereof and shall as promptly as possible thereafter
file an Initial Shelf Registration Statement (the "Initial Shelf Registration
Statement"). The Company shall use its best efforts to file the Initial Shelf
Registration Statement within 45 days after an obligation to file such Initial
Shelf Registration arises. The Company shall (i) not permit any securities other
than the Registrable Securities to be included in any Shelf Registration (as
defined in the Registration Rights Agreement), and (ii) use its best efforts to
cause the Initial Shelf Registration Statement to be declared effective as
promptly as practicable after the filing thereof and to keep the Initial Shelf
Registration Statement continuously effective until the date that is 24 months
after the Effectiveness Date, or such shorter period ending when (i) all
Registrable Securities covered by the Initial Shelf Registration Statement have
been sold or (ii) a Subsequent Shelf Registration Statement (as defined in the
Registration Rights Agreement) covering all of the Registrable Securities has
been declared effective under the Securities Act. The Company will, in the event
of the Initial Shelf Registration Statement, provide to each holder of the
Securities copies of the prospectus, which is a part of the Initial Shelf
Registration Statement, notify each such holder when the Initial Shelf
Registration Statement for the Securities has become effective and take certain
other actions as are required to permit unrestricted resales of the Securities.
A holder of Securities who sells such Securities pursuant to the Initial Shelf
Registration Statement generally would be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Act in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification rights and obligations).
If (i) neither the applicable Registration Statement nor the
Initial Shelf Registration Statement has been declared effective by the
Commission prior to the Effectiveness Date, (ii) the Exchange Offer, if
permitted, has not been consummated within 180 days after the Issue Date or
(iii) the Initial Shelf Registration Statement is filed and declared effective
but thereafter will cease to be effective without being succeeded within 45 days
by an additional Registration Statement filed and declared effective (each such
event referred to in clauses (i) through (iii), a "Registration Default"), the
Company will pay liquidated damages to each holder of Registrable Securities (as
defined in the Registration Rights Agreement), during the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount or liquidation preference, as
the case may be, of Registrable Securities held by such Holder. The amount of
the liquidated damages thereafter will increase to a maximum of $.10 per week
per $1,000 principal amount or liquidation preference, as the case may be, of
Registrable Securities until the applicable Registration Statement is declared
effective, the Exchange Offer is consummated or the Shelf Registration Statement
again becomes effective, as the case may be. The Company will not be required to
pay liquidated damages in respect of more than one Registration Default in
respect of any given period of time. All accrued liquidated damages in respect
of the Notes will be paid in the same manner as interest payments on the Notes
on semiannual damages payment dates that correspond to interest payment dates
for the Notes. All accrued liquidated damages in respect of the Preferred Stock
will be paid on February 15 and August 15 in the same manner (in cash or with
the issuance of additional shares of Preferred Stock) as dividends on the
Preferred Stock. Following the cure of all Registration Defaults, the accrual of
liquidated damages will cease.
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to the Indenture
among the Company, the Guarantors and U.S. Trust Company of California, N.A. as
trustee (the "Trustee"). The terms of the Exchange Notes will be identical in
all respects to the terms of the Notes. In addition, 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 "Trust
Indenture Act"). The following summary of certain provisions of the Indenture,
the Collateral Documents (as defined) and the Registration Rights Agreement
between the Company and the Initial Purchaser does not purport to be complete
and is qualified by reference to the Indenture, the Collateral Documents and the
Registration Rights Agreement including the definitions therein of certain terms
used below. Copies of the forms of the Indenture, the Collateral Documents and
the Registration Rights Agreement are available from the Company upon request.
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions."
50
<PAGE> 58
The Exchange Notes are senior secured obligations of the
Company and rank senior in right of payment to all subordinated Indebtedness of
the Company and pari passu in right of payment with all senior Indebtedness.
The Exchange Notes are issued in registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount
to $158,600,000 and will mature on February 15, 2003. Interest on the Exchange
Notes will be payable semiannually on February 15 and August 15 of each year,
commencing on August 15, 1998, to holders of record on the immediately preceding
February 1 and August 1, respectively. The Exchange Notes will bear interest at
11 1/2% per annum. 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 February 24, 1998. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Exchange Notes will be payable both as to
principal and interest at the office or agency of the Company maintained for
such purpose within The City of New York or, at the option of the Company,
payment of interest may be made by check mailed to the holders of the Exchange
Notes at their respective addresses set forth in the register of holders of
Exchange Notes. Until otherwise designated by the Company, such office or agency
will be the office of the Trustee maintained for such purpose. If a payment date
is a Legal Holiday, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.
REDEMPTION
The Exchange Notes will not be redeemable at the Company's option prior to
February 15, 2001. Thereafter, the Exchange Notes will be subject to redemption
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable date of redemption, if redeemed during the 12-month
period beginning on February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001 105.75%
2002 and thereafter 100.00%
</TABLE>
Notwithstanding the foregoing, at any time or from time to
time prior to February 15, 2000, the Company may, at its option, redeem up to
one third of the original aggregate principal amount of the Exchange Notes, at a
redemption price of 111.5% of the principal amount thereof, plus accrued and
unpaid interest, if any, through the date of redemption, with the net cash
proceeds of one or more Qualified Equity Offerings; provided, that (a) such
redemption shall occur within 60 days of the date of closing of such offering
and (b) at least two thirds of the aggregate original principal amount of
Exchange Notes remains outstanding immediately after giving effect to each such
redemption.
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchange Notes are listed, or, if the Exchange Notes are
not so listed, on a pro rata basis, by lot or by such other method as the
Trustee deems to be fair and appropriate, provided, that Exchange Notes of
$1,000 or less may not be redeemed in part. 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 Exchange Notes to be redeemed at such holder's registered
address. If any Exchange Note is to be redeemed in part only, the notice of
redemption that relates to such Exchange Note will state the portion of the
principal amount thereof to be redeemed. A new Exchange Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Exchange Note. On and after the date
of redemption, interest will cease to accrue on Exchange Notes or portions
thereof called for redemption.
The Exchange Notes will not be entitled to any mandatory
redemption or sinking fund.
GUARANTORS
51
<PAGE> 59
The repayment of the Exchange Notes will be fully and
unconditionally and irrevocably guaranteed, on a senior secured basis, by all
Restricted Subsidiaries of the Company (the "Guarantors"), jointly and
severally. The Indenture provides that as long as any Exchange Notes remain
outstanding, any future Restricted Subsidiary shall enter into a similar
Guarantee.
The obligations of each Guarantor will be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee, result in the
obligations of such Guarantor under the Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal or state law or render a
Guarantor insolvent. See "Risk Factors--Fraudulent Transfer Considerations."
COLLATERAL
Subject to certain exceptions, the Exchange Notes and the
Guarantees will be secured, subject to the terms of the Intercreditor Agreement,
by a first priority security interest in the Collateral. The Exchange Notes will
not be secured by any other property. See "Description of Certain
Indebtedness--Intercreditor Agreement and Collateral Documents" and "Risk
Factors--Collateral; Other Secured Indebtedness."
So long as no Event of Default has occurred and is continuing,
and subject to certain terms and conditions in the Indenture and the Collateral
Documents, the Company will be entitled to receive all cash dividends, interest
and other payments made upon or with respect to the Capital Stock of any
Subsidiary pledged by it, and to exercise any voting, other consensual rights
and other rights pertaining to such Collateral pledged by it. Upon the
occurrence and during the continuance of an Event of Default, (i) all rights of
the Company to exercise such voting, other consensual rights or other rights
will cease upon notice from the Collateral Agent pursuant to the Intercreditor
Agreement, and all such rights will become vested in the Collateral Agent, which
to the extent permitted by law, will have the sole right to exercise such
voting, other consensual rights or other rights; and (ii) all rights of the
Company to receive cash dividends, interest and other payments made upon or with
respect to the pledged Collateral will, upon notice from the Collateral Agent,
cease and such cash dividends, interest and other payments will be paid to the
Collateral Agent. All funds distributed under the Collateral Documents and
received by the Collateral Agent for the benefit of the holders of the Exchange
Notes will be retained and/or distributed by the Collateral Agent in accordance
with the provisions of the Indenture and the Intercreditor Agreement.
If the Exchange Notes become due and payable prior to the
final stated maturity thereof for any reason or are not paid in full at the
final stated maturity thereof, and after any applicable grace period has
expired, the Collateral Agent has the right to foreclose upon such Collateral,
subject to the Intercreditor Agreement. Under the terms of the Collateral
Documents and the Intercreditor Agreement, the Collateral Agent will determine
the circumstances and manner in which the Collateral will be disposed of,
including, but not limited to, the determination of whether to foreclose on the
Collateral following an Event of Default. The Collateral Agent will be directed
by the agent under the New Credit Facility, and not the Trustee under the
Indenture, unless amounts due under the New Credit Facility have been paid in
full or 180 days have elapsed from the occurrence of an Event of Default under
the Indenture. Holders of the Exchange Notes may not enforce the Collateral
Documents. Proceeds from the sale of Collateral will first be applied to repay
Indebtedness outstanding under the New Credit Facility, if any, and thereafter
will be paid to the Trustee. The proceeds received by the Trustee will be
applied by the Trustee first to pay the expenses of any foreclosure and fees and
other amounts then payable to the Trustee under the Indenture and, thereafter,
to pay all amounts owing to the holders under the Indenture (with any remaining
proceeds to be payable to the Company or as may otherwise be required by law).
In the event of foreclosure on the Collateral, the proceeds
from the sale of the Collateral may not be sufficient to satisfy the Company's
Obligations under the Exchange Notes and the New Credit Facility in full. The
amount to be received upon such a sale would be dependent upon numerous factors
including the timing and the manner of the sale. In addition, the book value of
the Collateral should not be relied upon as a measure of realizable value. By
its nature, the Collateral will be illiquid and may have no readily
ascertainable market value. Accordingly, there can be no assurance that the
Collateral can be sold in a short period of time. A significant portion of the
Collateral, including the real property portion thereof, includes tangible and
intangible assets which may only be usable as part of the existing operating
businesses. Accordingly, any such sale of the Collateral, including the real
property portion thereof, separate from the sale of certain of the Company's
divisions as a whole, may not be feasible or of any value. To the extent that
third parties (including the lenders under the New Credit Facility) enjoy
Permitted Liens, such third parties may have rights and remedies with respect to
the property subject to such Lien that, if exercised, could adversely affect the
value of the Collateral. In addition, the ability of the Holders to
52
<PAGE> 60
realize upon any of the Collateral may be subject to certain bankruptcy law
limitations in the event of a bankruptcy. See "Risk Factors--Collateral; Other
Secured Indebtedness."
Upon the full and final payment and performance of all
Obligations of the Company under the Indenture and the Exchange Notes (or
defeasance of such Obligations), and all obligations under the New Credit
Facility, the Collateral Documents will terminate and the pledged Collateral
will be released. In addition, subject to the Intercreditor Agreement, in the
event that the pledged Collateral is sold, the Collateral Agent will release
simultaneously with such sale the Liens in favor of the Collateral Agent in the
assets sold.
REPURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will
be required to offer to repurchase all the Exchange Notes then outstanding (the
"Change of Control Offer") at a purchase price equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Company must mail or cause to be mailed a notice to each
holder stating, among other things (i) that the Change of Control Offer is being
made pursuant to this provision and that all Exchange Notes tendered will be
accepted for payment; (ii) the purchase price and the purchase date, which will
be no earlier than 30 days nor later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"); (iii) that any Note not tendered
will continue to accrue interest; (iv) that, unless the Company defaults in the
payment of the Change of Control Payment, all Exchange Notes accepted for
payment pursuant to the Change of Control Offer will cease to accrue interest on
the Change of Control Payment Date; (v) that any holder electing to have
Exchange Notes purchased pursuant to a Change of Control Offer will be required
to surrender the Exchange Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Exchange Notes completed, to the paying
agent with respect to the Exchange Notes (the "Paying Agent") at the address
specified in the notice prior to the close of business on the third business day
preceding the Change of Control Payment Date; (vi) that any holder will be
entitled to withdraw such election if the Paying Agent receives, not later than
the close of business on the second business day preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the holder, the principal amount of Exchange Notes delivered for
purchase, and a statement that such holder is withdrawing his election to have
such Exchange Notes purchased; and (vii) that a holder whose Exchange Notes are
being purchased only in part will be issued new Exchange Notes equal in
principal amount to the unpurchased portion of the Exchange Notes surrendered,
which unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof.
The Company will comply with the requirements of 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 connection with the
repurchase of the Exchange Notes in connection with a Change of Control. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the Indenture, the Company will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
On the Change of Control Payment Date, the Company will, to
the extent lawful, (i) accept for payment the Exchange Notes or portions thereof
tendered pursuant to the Change of Control Offer; (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and not withdrawn; and (iii)
deliver or cause to be delivered to the Trustee the Exchange Notes so accepted
together with an Officer's Certificate stating that the Exchange Notes or
portions thereof tendered to the Company are accepted for payment. The Paying
Agent will promptly mail to each holder of Exchange Notes so accepted payment in
an amount equal to the purchase price for such Exchange Notes, and the Trustee
will authenticate and mail to each holder a new Note equal in principal amount
to any unpurchased portion of the Exchange Notes surrendered, if any, provided,
that each such new Note will be in principal amount of $1,000 or an integral
multiple thereof. The Company will announce the result of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control,
the Indenture does not contain provisions that permit the holders of the
Exchange Notes to require that the Company repurchase or redeem the Exchange
Notes in the event of a takeover, recapitalization or similar restructuring.
There can be no assurance that sufficient funds will be
available at the time of any Change of Control Offer to make required
repurchases.
53
<PAGE> 61
"Change of Control" means (i) the transfer (in one transaction
or a series of transactions) of all or substantially all of the Company's assets
to any Person or group (as such term is used in Section 13(d)(3) of the Exchange
Act) other than to one or more Existing Holders; (ii) the liquidation or
dissolution of the Company or the adoption of a plan by the stockholders of the
Company relating to the dissolution or liquidation of the Company; (iii) the
acquisition by any Person or group (as such term is used in Section 13(d)(3) of
the Exchange Act), except for one or more Existing Holders, of beneficial
ownership, directly or indirectly, of more than 50% of the aggregate ordinary
voting power of the total outstanding Voting Stock of the Company; or (iv)
during any period of two consecutive years, Continuing Directors cease for any
reason to constitute a majority of the Board of Directors of the Company, as the
case may be, then still in office.
"Continuing Directors" means (i) individuals who at the
beginning of such period were directors of the Company; (ii) any TCW Director
and (iii) any director whose election by the Board of Directors of the Company
or whose nomination for election by the stockholders of the Company was approved
by a majority of the Continuing Directors then still in office.
"Existing Holders" shall mean the holders of the common stock
of the Company on the Issue Date, TCW or any of their affiliates.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly
(i) declare or pay any dividend or make any distribution on account of any
Equity Interests of the Company or any of its Restricted Subsidiaries (other
than (A) dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or (B) dividends or distributions payable to
the Company or any Restricted Subsidiary or (C) if the Subsidiary making such a
dividend or distribution is not a Wholly Owned Subsidiary, dividends to its
shareholders on a pro rata basis); (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interest of the Company, any Subsidiary or any other
Affiliate of the Company (other than any such Equity Interest owned by the
Company or any Wholly Owned Subsidiary); (iii) make any principal payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness of the Company or any Guarantor that is subordinated in right of
payment to the Exchange Notes or such Guarantor's Guarantee thereof, as the case
may be; (iv) make any Restricted Investment; or (v) make any payment or transfer
any assets to, or on behalf of, Holdings or any of its Affiliates (all such
payments and other actions set forth in clauses (i) through (v) above being
collectively referred to as "Restricted Payments") unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default has
occurred and is continuing or would occur as a consequence
thereof;
(b) immediately after giving effect thereto
on a pro forma basis, the Company could incur at least $1.00
of additional Indebtedness under the Interest Coverage Ratio
test set forth in the covenant described under "Limitation on
Incurrence of Indebtedness"; and
(c) such Restricted Payment (the value of
any such payment, if other than cash, being determined in good
faith by the Board of Directors and evidenced by a resolution
set forth in an Officers' Certificate delivered to the
Trustee), together with the aggregate of all other Restricted
Payments made after the date of the Indenture (including
Restricted Payments permitted by clauses (i), (v) (to the
extent made in cash) and (vi) of the next following paragraph
and excluding Restricted Payments permitted by the other
clauses therein) is less than the sum of (1) 50% of the
Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first
quarter commencing immediately after the Issue Date to the end
of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, 100% of such deficit), plus (2)
100% of the aggregate net cash proceeds (or of the net cash
proceeds received upon the conversion of non-cash proceeds
into cash) received by the Company from the issuance or sale,
other than to a Subsidiary, of Equity Interests of the Company
(other than Disqualified Stock) after the Issue Date and on or
prior to the time of such Restricted Payment, plus (3) 100% of
the aggregate net cash proceeds (or of the net cash proceeds
received upon the conversion of non-cash proceeds into cash)
received by the Company from the issuance or sale, other than
to a Subsidiary, of any convertible or exchangeable debt
security of the Company that has been converted or exchanged
into Equity Interests of the Company (other than Disqualified
Stock) pursuant to the terms thereof after the Issue Date and
on or prior to the time of such Restricted Payment (including
any additional net cash proceeds not included in clause (2)
above received by the Company upon such conversion or
exchange). The aggregate amount of each Investment
constituting a Restricted Payment since the date of the
Indenture shall be reduced by the aggregate after-tax amount
of all
54
<PAGE> 62
payments made to the Company and its Restricted Subsidiaries
with respect to such Investments; provided, that (a) the
maximum amount of such payments shall not exceed the original
amount of such Investment and (b) such payments shall also be
excluded from the calculations contemplated by clauses (c)(1)
through (3) above.
The foregoing provisions will not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would not have been prohibited by the
provisions of the Indenture; (ii) the redemption, purchase, retirement or other
acquisition of any Equity Interests of the Company or Indebtedness of the
Company or any Restricted Subsidiary solely in exchange for Equity Interests of
the Company (other than Disqualified Stock); (iii) the redemption, repurchase or
payoff of any Indebtedness with proceeds of any Refinancing Indebtedness
permitted to be incurred pursuant to the provision described under "--Limitation
on Incurrence of Indebtedness"; (iv) payments by the Company to Holdings in
respect of Permitted Tax Payments to Holdings; (v) the redemption of the
Exchange Preferred Stock with the proceeds of a Qualified Equity Offering; (vi)
Permitted Affiliate Transactions; (vii) Exchange Preferred Stock Repurchases;
(viii) the TCW Tax Payments, (ix) payments of dividends on Disqualified Stock
issued in accordance with the Interest Coverage Ratio test or (x) other
Restricted Payments in an aggregate amount not to exceed $2.0 million.
Not later than the date of making any Restricted Payment, the
Company will deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
Limitation on Incurrence of Indebtedness. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, (1) create, incur, issue, assume, guaranty or otherwise become
directly or indirectly liable with respect to, contingently or otherwise
(collectively, "incur"), any Indebtedness (including Acquired Debt) or (2) issue
any Disqualified Stock; provided, that the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock, any Guarantor
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and
any Restricted Subsidiary may incur Acquired Debt, in each case if (x) no
Default or Event of Default shall have occurred and be continuing at the time
of, or would occur after giving effect on a pro forma basis to such incurrence
or issuance, and (y) the Interest Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least equal
to 2:1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness (including
Acquired Debt) had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The foregoing limitations will not prohibit the incurrence of:
(a) Indebtedness under the New Credit
Facility, provided, that the aggregate principal amount of
Indebtedness so incurred on any date, together with all other
Indebtedness incurred pursuant to this clause (a) and
outstanding on such date, shall not exceed $15 million, less
(i) any repayments thereunder pursuant to the provisions under
"Limitation on Asset Sales" and (ii) any outstanding
Indebtedness represented by letters of credit or reimbursement
obligations with respect thereto, provided, that at the time
of any incurrence under this clause (a), the aggregate
principal amount of Indebtedness outstanding under this clause
(a) that is not evidenced by a letter of credit or
reimbursement obligation with respect thereto shall not exceed
$10 million;
(b) performance bonds, appeal bonds, surety
bonds, insurance obligations or bonds and other similar bonds
or obligations incurred in the ordinary course of business;
(c) obligations incurred to fix the interest
rate on any variable rate Indebtedness otherwise permitted by
the Indenture (collectively, "Hedging Obligations");
(d) Indebtedness owed by (i) a Restricted
Subsidiary to the Company or to a Wholly Owned Subsidiary; or
(ii) the Company to a Wholly Owned Subsidiary;
(e) Indebtedness outstanding on the Issue
Date, including the Exchange Notes and the Guarantees;
(f) Indebtedness arising from the honoring
by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided that such Indebtedness
is extinguished within three business days of incurrence;
55
<PAGE> 63
(g) Indebtedness represented by Guarantees
by the Company of Indebtedness otherwise permitted to be
Incurred pursuant to this covenant and Indebtedness
represented by Guarantees by a Restricted Subsidiary of
Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this
covenant;
(h) obligations with respect to customary
provisions regarding post-closing purchase price adjustments
and indemnification in agreements for the purchase or sale of
a business or assets otherwise permitted by the Indenture;
(i) other Indebtedness in an aggregate
principal amount at any one time outstanding not to exceed
$5.0 million; and
(j) Indebtedness issued in exchange for, or
the proceeds of which are contemporaneously used to extend,
refinance, renew, replace, or refund (collectively,
"Refinance") Indebtedness referred to in clauses (a) or (e)
above or this clause (j) or Indebtedness incurred pursuant to
the Interest Coverage Ratio test set forth in the immediately
preceding paragraph ("Refinancing Indebtedness"); provided,
that (1) the principal amount of such Refinancing Indebtedness
does not exceed the principal amount of Indebtedness so
Refinanced (plus the premiums required to be paid, and the
out-of-pocket expenses (other than those payable to an
Affiliate of the Company) reasonably incurred, in connection
therewith), (2) the Refinancing Indebtedness has a final
scheduled maturity that exceeds the final stated maturity, and
a Weighted Average Life to Maturity that is equal to or
greater than the Weighted Average Life to Maturity, of the
Indebtedness being Refinanced and (3) the Refinancing
Indebtedness ranks, in right of payment, no more favorable to
the Exchange Notes as the Indebtedness being Refinanced.
Limitation on Asset Sales. The Company will not, and will not
permit any Restricted Subsidiary to, make any Asset Sale unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the fair market value (as determined in good faith by the
Board of Directors as evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets
subject to such Asset Sale; (ii) at least 75% of the consideration for such
Asset Sale is in the form of cash, Cash Equivalents or liabilities of the
Company or any Restricted Subsidiary (other than liabilities that are by their
terms subordinated to the Exchange Notes or any Guarantee of the Exchange Notes)
that are assumed by the transferee of such assets (provided, that following such
Asset Sale there is no further recourse to the Company and its Restricted
Subsidiaries with respect to such liabilities); and (iii) within 12 months of
such Asset Sale, the Net Proceeds thereof, at the Company's election, are (a)
invested in assets related to the business of the Company or its Restricted
Subsidiaries, or (b) used to repay, purchase or otherwise acquire Indebtedness
under the New Credit Facility or (c) to the extent not used as provided in
clause (a) or (b), applied to make an offer to purchase Exchange Notes as
described below (an "Excess Proceeds Offer"); provided, that if the amount of
Net Proceeds from any Asset Sale not invested or used pursuant to clause (a) or
clause (b) above is less than $5.0 million, the Company will not be required to
make an offer pursuant to clause (c) until the aggregate amount of Excess
Proceeds from all Asset Sales exceeds $5.0 million. Pending the final
application of any such Net Proceeds, the Company or any Restricted Subsidiary
may temporarily reduce Indebtedness under the New Credit Facility or temporarily
invest such Net Proceeds in Cash Equivalents.
For the purposes of this covenant, the following are deemed to
be cash: (y) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash and (z) assets related to the business of the
Company or its Restricted Subsidiaries received in an exchange of assets
transaction; provided that (i) in the event such exchange of assets transaction
or series of related exchange of assets transactions (each an "Exchange
Transaction") involves an aggregate value in excess of $2.5 million, the terms
of such Exchange Transaction shall have been approved by a majority of the
disinterested members of the Board of Directors, (ii) in the event such Exchange
Transaction involves an aggregate value in excess of $5.0 million, the Company
shall have received a written opinion from a nationally recognized independent
investment banking firm that the Company has received consideration equal to the
fair market value of the assets disposed of and (iii) any assets to be received
shall be comparable to those being exchanged as determined in good faith by the
Board of Directors.
The amount of Net Proceeds not invested, used or applied as
set forth in the preceding clauses (a), (b) and (c) constitutes "Excess
Proceeds." If the Company elects, or becomes obligated to make an Excess
Proceeds Offer, the Company will offer to purchase Exchange Notes having an
aggregate principal amount equal to the Excess Proceeds (the "Purchase Amount"),
at a purchase price equal to 100% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the purchase date. The Company must
commence such Excess Proceeds Offer not later than 30 days after the expiration
of the 12-month period following the Asset Sale that produced Excess Proceeds.
If the aggregate purchase price
56
<PAGE> 64
for the Exchange Notes tendered pursuant to the Excess Proceeds Offer is less
than the Excess Proceeds, the Company and its Restricted Subsidiaries may use
the portion of the Excess Proceeds remaining after payment of such purchase
price for general corporate purposes.
Each Excess Proceeds Offer will remain open for a period of 20
business days and no longer, unless a longer period is required by law (the
"Excess Proceeds Offer Period"). Promptly after the termination of the Excess
Proceeds Offer Period (the "Excess Proceeds Payment Date"), the Company will
purchase and mail or deliver payment for the Purchase Amount for the Exchange
Notes or portions thereof tendered, pro rata or by such other method as may be
required by law, or, if less than the Purchase Amount has been tendered, all
Exchange Notes tendered pursuant to the Excess Proceeds Offer. The principal
amount of Exchange Notes to be purchased pursuant to an Excess Proceeds Offer
may be reduced by the principal amount of Exchange Notes acquired by the Company
through purchase or redemption (other than pursuant to a Change of Control
Offer) subsequent to the date of the Asset Sale and surrendered to the Trustee
for cancellation.
Each Excess Proceeds Offer will be conducted in compliance
with applicable regulations under the federal securities laws, including
Exchange Act Rule 14e-1. To the extent that the provisions of any securities
laws or regulations conflict with the "Asset Sale" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Asset Sale"
provisions of the Indenture by virtue thereof.
There can be no assurance that sufficient funds will be
available at the time of any Excess Proceeds Offer to make required repurchases.
Limitation on Liens. The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset (including, without limitation, all real,
tangible or intangible property) of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or on any income or profits therefrom,
or assign or convey any right to receive income therefrom, securing any
obligation, except (i) Liens in favor of the Collateral Agent securing the
Exchange Notes and Indebtedness permitted to be incurred under the New Credit
Facility; (ii) Purchase Money Liens; and (iii) Permitted Liens.
Limitation on Restrictions on Subsidiary Dividends. The
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary (a) to
(1) pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (A) on such Restricted Subsidiary's Capital Stock or (B)
with respect to any other interest or participation in, or measured by, such
Restricted Subsidiary's profits or (2) pay any indebtedness owed to the Company
or any of its Restricted Subsidiaries, or (b) make loans or advances to the
Company or any of its Restricted Subsidiaries, or (c) transfer any of its assets
to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (i) agreements
existing on the Issue Date and the New Credit Facility, as in effect on the
Closing Date, or any refinancings, amendments, modifications or supplements
thereof containing dividend and other payment restrictions that are not
materially more restrictive than those contained in agreements existing on the
Issue Date and the New Credit Facility on the Closing Date; (ii) the Indenture,
the Security Documents and the Exchange Notes; (iii) applicable law; (iv)
restrictions with respect to a Subsidiary that was not a Subsidiary on the
Closing Date in existence at the time such Person becomes a Subsidiary (but not
created as a result of or in anticipation of such Person becoming a Subsidiary);
provided, that such restrictions are not applicable to any other Person or the
properties or assets of any other Person; (v) customary nonassignment and net
worth provisions of any contract or lease entered into in the ordinary course of
business; (vi) customary restrictions on the transfer of assets subject to a
Lien permitted under the Indenture imposed by the holder of such Lien; (vii)
restrictions imposed by any agreement to sell assets or Capital Stock to any
Person pending the closing of such sale; and (viii) permitted Refinancing
Indebtedness (including Indebtedness Refinancing Acquired Debt), provided, that
such restrictions contained in any agreement governing such Refinancing
Indebtedness are not materially more restrictive than those contained in any
agreements governing the Indebtedness being Refinanced.
Merger, Consolidation or Sale of Assets. The Company may not
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets (determined on a
consolidated basis for the Company and its Restricted Subsidiaries) in one or
more related transactions to, any other Person unless (i) the Company is the
surviving Person or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition has been made is a corporation organized
and existing under the laws of the United States, any state thereof or the
District of Columbia, (ii) the Person formed by or surviving any such
consolidation or merger (if other
57
<PAGE> 65
than the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition has been made assumes all the Obligations of the
Company, pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee, under the Exchange Notes, the Indenture, the Collateral
Agreements and the Registration Rights Agreement; (iii) immediately after such
transaction, no Default or Event of Default exists; and (iv) the Company, or any
Person formed by or surviving any such consolidation or merger, or to which such
sale, assignment, transfer, lease, conveyance or other disposition has been
made, (A) has a Consolidated Net Worth (immediately after the transaction but
prior to any purchase accounting adjustments resulting from the transaction) not
less than 100% of the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will be permitted, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, to incur at
least $1.00 of additional Indebtedness pursuant to the Interest Coverage Ratio
test set forth in the covenant described under "Incurrence of Indebtedness."
In the event of any transaction (other than a lease) complying
with the conditions listed in the immediately preceding paragraph in which the
Company is not the surviving Person, such surviving Person or transferee shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from its Obligations under, the
Indenture, the Exchange Notes, the Collateral Agreements and the Registration
Rights Agreement.
Limitation on Transactions with Affiliates. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, sell, lease, transfer or otherwise dispose of any of its properties
or assets to, or purchase any property or assets from, or enter into any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
except for (i) Affiliate Transactions, which together with all Affiliate
Transactions that are part of a common plan, have an aggregate value of not more
than $1.0 million; provided, that such transactions are conducted in good faith
and on terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction at such time on an arms-length basis from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary; (ii) Affiliate
Transactions, which together with all Affiliate Transactions that are part of a
common plan, have an aggregate value of not more than $2.5 million; provided,
that a majority of the disinterested members of the Board of Directors of the
Company determine that such transactions are conducted in good faith and on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
at such time on an arms-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary; (iii) Affiliate Transactions for
which the Company delivers to the Trustee an opinion as to the fairness to the
Company or such Restricted Subsidiary from a financial point of view, issued by
an investment banking firm of national standing; and (iv) Permitted Affiliate
Transactions and other Restricted Payments permitted by the provisions described
above under "Limitations on Restricted Payments."
Line of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any type of business other than the type
of business conducted or proposed to be conducted by the Company and the
Restricted Subsidiaries on the Closing Date and businesses reasonably related
thereto.
Restrictions on Sale and Issuance of Subsidiary Stock. The
Company shall not sell, and shall not permit any of its Restricted Subsidiaries
to issue or sell, any shares of Capital Stock of any Restricted Subsidiary to
any Person other than the Company or a Wholly Owned Subsidiary, other than
directors' qualifying shares; provided, however, that this provision shall not
prohibit the sale of all of the Capital Stock of any Restricted Subsidiary owned
by the Company and its Restricted Subsidiaries if the Net Proceeds from such
sale or issuance are used in accordance with the terms of the covenant described
under "--Limitation on Asset Sales.
Guarantors. The Indenture will provide that so long as any
Exchange Notes remain outstanding, any Restricted Subsidiary (other than a
foreign Restricted Subsidiary, if any) shall (a) execute and deliver to the
Trustee a supplemental indenture in form reasonably satisfactory to the Trustee
pursuant to which such Restricted Subsidiary shall unconditionally guarantee all
of the Company's obligations under the Exchange Notes and the Indenture on terms
set forth in the Indenture and (b) deliver to the Trustee an opinion of counsel
that such supplemental indenture has been duly authorized, executed and
delivered by such Restricted Subsidiary and constitutes a legal, valid, binding
and enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
If all of the Capital Stock of any Guarantor is sold to a
Person (other than the Company or any of its Restricted Subsidiaries) and the
Net Proceeds from such Asset Sale are used in accordance with the terms of the
covenants described
58
<PAGE> 66
under "--Limitation on Asset Sales," then such Guarantor will be released and
discharged from all of its obligations under its Guarantee of the Exchange Notes
and the Indenture.
The obligations of each Guarantor will be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other guarantor under its Guarantee of the Exchange Notes,
result in the obligations of such Guarantor under its Guarantee of the Exchange
Notes not constituting a fraudulent conveyance or fraudulent transfer under
Federal or state law.
Reports. Whether or not required by the rules and regulations
of the Commission, so long as any Exchange Notes are outstanding, the Company
will furnish to the Trustee, and deliver or cause to be delivered to the holders
of Exchange Notes (i) 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 for each a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's independent certified public accountants; and (ii) all reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. From and after the time a
registration statement with respect to the Exchange Notes is declared effective
by the Commission, the Company will file such information with the Commission,
provided that the Commission will accept such filing.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will constitute an Event of Default
under the Indenture (i) default for 30 days in the payment when due of interest
on the Exchange Notes; (ii) default in payment of principal (or premium, if any)
on the Exchange Notes when due at maturity, redemption, by acceleration or
otherwise; (iii) default in the performance or breach of the provisions of
"Repurchase Upon Change of Control," "Limitation on Asset Sales," and "--Merger,
Consolidation or Sale of Assets"; (iv) default in the performance or breach of
the provisions of "Limitation on Restricted Payments" and "Limitation on
Incurrence of Indebtedness," and the continuance of such default for a period of
30 days; (v) failure by the Company or any Guarantor for 30 days after notice to
comply with certain other agreements in the Indenture or the Exchange Notes;
(vi) default under (after giving effect to any waivers, amendments, applicable
grace periods or any extension of any maturity date) any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any Restricted
Subsidiary (or the payment of which is guaranteed by the Company or any
Restricted Subsidiary), whether such Indebtedness or guarantee now exists or is
created after the date of the Indenture, if (a) either (1) such default results
from the failure to pay principal on such Indebtedness or (2) as a result of
such default the maturity of such Indebtedness has been accelerated, and (b) the
principal amount of such Indebtedness, together with the principal amount of any
other such Indebtedness with respect to which such a payment default (after the
expiration of any applicable grace period or any extension of the maturity date)
has occurred, or the maturity of which has been so accelerated, exceeds $2.5
million in the aggregate; (vii) failure by the Company or any Restricted
Subsidiary to pay final non-appealable judgments (other than any judgment as to
which a reputable insurance company has accepted full liability) aggregating in
excess of $2.5 million which judgments are not discharged, bonded or stayed
within 60 days after their entry; (viii) breach by the Company or any Guarantor
of any provision of the Collateral Agreements to which it is a party after
giving effect to applicable cure periods and notice provisions; (ix) written
assertion by the Company or any of the Guarantors of the unenforceability of its
obligations under the Indenture, the Collateral Documents, the Exchange Notes or
the Guarantee to which it is a party; and (x) certain events of bankruptcy or
insolvency with respect to the Company or any Material Subsidiary.
If any Event of Default occurs and is continuing, the Trustee
or the holders of at least 25% in principal amount of the then outstanding
Exchange Notes may declare by written notice to the Company and the Trustee all
of the Exchange Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, all outstanding Exchange Notes will become due and
payable without further action or notice. Holders of the Exchange Notes may not
enforce the Indenture or the Exchange Notes except as provided in the Indenture.
Subject to certain limitations, holders of a majority in principal amount of the
then outstanding Exchange Notes may direct the Trustee in its exercise of any
trust or power.
The holders of a majority in aggregate principal amount of the
Exchange Notes then outstanding, by written notice to the Company and the
Trustee, may on behalf of the holders of all of the Exchange Notes (i) waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment
59
<PAGE> 67
of interest on, or the principal of, the Exchange Notes or a Default or an Event
of Default with respect to any covenant or provision which cannot be modified or
amended without the consent of the holder of each outstanding Note affected;
and/or (ii) rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal or interest that has become due solely because
of the acceleration) have been cured or waived.
The Company is required upon becoming aware of any Default or
Event of Default, to deliver to the Trustee a statement specifying such Default
or Event of Default and what action the Company is taking or proposes to take
with respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, stockholder or
controlling person of the Company or any Guarantor, as such, will have any
liability for any obligations of the Company or any Guarantor under the Exchange
Notes, the Indenture or the Registration Rights Agreement or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder of the Exchange Notes by accepting a Note waives and releases all such
liability. The waiver and release will be part of the consideration for issuance
of the Exchange Notes and the Guarantees. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
DEFEASANCE AND DISCHARGE OF THE INDENTURE AND THE EXCHANGE NOTES
The Indenture provides that the Company (i) will be discharged
from any and all obligations in respect of the Exchange Notes, other than the
obligation to duly and punctually pay the principal of, and premium, if any, and
interest on, the Exchange Notes in accordance with the terms of the Exchange
Notes and the Indenture or (ii) will be released from compliance with the
restrictive covenants and certain Events of Default, upon irrevocable deposit
with the Trustee, in trust, of money and/or U.S. government obligations that
will provide money in an amount sufficient in the opinion of a nationally
recognized accounting firm to pay the principal of and premium, if any, and each
installment of interest, if any, on the due dates thereof on the Exchange Notes.
Such trust may only be established if, among other things (i) the Company has
delivered to the Trustee an opinion of independent counsel to the effect that
the holders of the Exchange Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and defeasance and will
be subject to federal income tax on the same amount, in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred; (ii) no Default or Event of Default shall have occurred or be
continuing; and (iii) certain customary conditions precedent are satisfied.
The Company may satisfy and discharge its Obligations under
the Indenture to holders of the Exchange Notes by delivering to the Trustee for
cancellation all outstanding Exchange Notes or by depositing with the Trustee or
the Paying Agent, if applicable, after the Exchange Notes have become due and
payable, cash sufficient to pay all amounts due under all of the outstanding
Exchange Notes and paying all other sums payable under the Indenture by the
Company. If the Company has so deposited such cash, the Guarantors will be
discharged from their Obligations under their Guarantees of the Exchange Notes
and the Indenture.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Exchange Notes in accordance
with the Indenture. The Registrar and the Trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Exchange Note for a period of 15 days before a selection of
Exchange Notes to be redeemed. The registered holder of an Exchange Note will be
treated as the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the two succeeding paragraphs, the
Indenture and the Exchange Notes may be amended or supplemented with the consent
of the holders of at least a majority in principal amount of the Exchange Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Exchange Notes) and any existing Default or Event of
Default or compliance with any provision of the Indenture or the Exchange Notes
may be waived
60
<PAGE> 68
with the consent of the holders of a majority in principal amount of the then
outstanding Exchange Notes (including consents obtained in connection with a
tender offer or exchange offer for Exchange Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Exchange Notes held by a non-consenting holder of Exchange
Notes) (i) reduce the principal amount of Exchange Notes whose holders must
consent to an amendment, supplement or waiver; (ii) reduce the principal of, or
the premium on, or change the fixed maturity of any Exchange Note, alter the
provisions with respect to the redemption of the Exchange Notes in a manner
adverse to the holders of the Exchange Notes, or alter the price at which
repurchases of the Exchange Notes may be made pursuant to an Excess Proceeds
Offer or Change of Control Offer; (iii) reduce the rate of or change the time
for payment of interest on any Exchange Note; (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Exchange Notes; (v) make any Exchange Note payable in money other than that
stated in the Exchange Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of
Exchange Notes to receive payments of principal of or interest on the Exchange
Notes; (vii) waive a redemption payment with respect to any Exchange Note;
(viii) adversely affect the contractual ranking of the Exchange Notes or
Guarantees of the Exchange Notes; or (ix) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of the
holders of Exchange Notes, the Company, the Guarantors and the Trustee may amend
or supplement the Indenture or the Exchange Notes to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Exchange Notes in addition to or
in place of certificated Exchange Notes, to provide for the assumption of the
Company's obligations to holders of the Exchange Notes or any Guarantor's
obligation under its Guarantee of the Exchange Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of the Exchange Notes or that does not adversely affect
the legal rights under the Indenture of any such holder, to release any
Guarantee of the Exchange Notes permitted to be released under the terms of the
Indenture, or to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain 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 in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; provided, that if the Trustee acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then
outstanding Exchange Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any holder of Exchange Notes, unless such holder shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Any person who receives this Prospectus may obtain a copy of
the Indenture without charge by writing to the Company at 450 Newport Center
Drive, 6th Floor, Newport Beach, California 92660.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the
Indenture. Reference is made to the Indenture for a full definition of all such
terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Debt" means Indebtedness of a Person existing at the
time such Person is merged with or into the Company or a Restricted Subsidiary
or becomes a Restricted Subsidiary, other than Indebtedness incurred in
connection with, or in contemplation of, such Person merging with or into the
Company or a Restricted Subsidiary or becoming a Restricted Subsidiary;
provided, that Indebtedness of such other Person that is redeemed, defeased,
retired or otherwise repaid at the time, or immediately upon consummation, of
the transaction by which such other Person is merged with or into the Company or
a Restricted Subsidiary or becomes a Restricted Subsidiary shall not be Acquired
Debt.
61
<PAGE> 69
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, will mean (i) the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
(ii) in the case of a corporation, beneficial ownership of 10% or more of any
class of Capital Stock of such Person; and (iii) in the case of an individual
(A) members of such Person's immediate family (as defined in Instruction 2 of
Item 404(a) of Regulation S-K under the Securities Act) and (B) trusts, any
trustee or beneficiaries of which are such Person or members of such Person's
immediate family. Notwithstanding the foregoing, neither the Initial Purchaser
nor any of its Affiliates will be deemed to be Affiliates of the Company.
"Asset Sale" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
shares of Capital Stock or a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets, including by way of a
sale/leaseback transaction (each referred to for the purposes of this definition
as a "disposition"), by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, (iii) dispositions of inventory in the ordinary course of business,
(iv) for purposes of the "Limitation on Asset Sales" covenant only, a
disposition that constitutes a Restricted Payment permitted by the "Limitation
on Restricted Payments" covenant, (v) the sale, lease, transfer or other
disposition of all or substantially all the assets of the Company as permitted
under the covenant "Merger, Consolidation or Sale of Assets", (vi) the grant of
Liens permitted by the covenant "Limitation on Liens" and (vii) sales of
obsolete or worn-out equipment.
"Capital Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP, and the amount of such
obligations at any date shall be the capitalized amount of such obligations at
such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock; and (ii) with respect to
any other Person, any and all partnership or other equity interests of such
Person.
"Cash Equivalents" means (i) securities issued by the United
States of America or any agency or instrumentality thereof; (ii) time deposits
and certificates of deposit and commercial paper issued by the parent
corporation of any domestic commercial bank of recognized standing having
capital and surplus in excess of $250,000,000 and commercial paper issued by
others rated at least A-1 or the equivalent thereof by Standard & Poor's
Corporation or at least P-1 or the equivalent thereof by Moody's Investors
Service, Inc. and in each case maturing within one year after the date of
acquisition; and (iii) investments in money market funds substantially all of
whose assets comprise securities of the types described in clauses (i) and (ii)
above.
"Closing Date" or "Issue Date" means February 25, 1998.
"Consolidated EBITDA" means, with respect to any Person (the
referent Person) for any period, consolidated operating profit of such Person
and its subsidiaries for such period, determined in accordance with GAAP, plus
(to the extent such amounts are deducted in calculating such operating profit
(loss) of such Person for such period, and without duplication) amortization,
depreciation and other non-cash charges (including, without limitation,
impairment charges, amortization of goodwill, deferred financing fees and other
intangibles but excluding non-cash charges incurred after the date of the
Indenture that require an accrual of or a reserve for cash charges for any
future period); provided, that the operating profit (loss) of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of dividends or
distributions paid during such period to the referent Person or a Wholly Owned
Subsidiary of the referent Person.
"Consolidated Interest Expense" means, with respect to any
Person for any period, the sum of (i) the consolidated interest expense (net of
interest income) of such Person and its subsidiaries for such period, whether
paid or accrued (including, without limitation, amortization of original issue
discount, noncash interest payments, and the interest component of Capital Lease
Obligations but excluding amortization of deferred financing costs), to the
extent such expense was deducted in computing Consolidated Net Income of such
Person for such period, and (ii) dividend requirements of such Person and its
consolidated subsidiaries (whether in cash or otherwise (except dividends
payable solely in shares of Qualified Capital
62
<PAGE> 70
Stock)) with respect to preferred stock paid, accrued, or scheduled to be paid
or accrued during such period, in each case to the extent attributable to such
period and excluding items eliminated in consolidation. For purposes of clause
(ii) above, dividend requirements shall be increased to an amount representing
the pre-tax earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator or
which is such dividend requirements and the denominator of which is 1 minus the
applicable actual combined effective federal, state, local, and foreign income
tax rate of such Person and its subsidiaries (expressed as a decimal), on a
consolidated basis, for the fiscal year immediately preceding the date of the
transaction giving rise to the need to calculate Consolidated Interest Expense.
"Consolidated Net Income" means, with respect to any Person
(the referent Person) for any period, the aggregate of the Net Income of such
Person and its subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP; provided, that (i) the Net Income of any Person that is
not a Restricted Subsidiary or that is accounted for by the equity method of
accounting will be included in calculating the referent Person's Consolidated
Net Income only to the extent of the amount of dividends or distributions paid
during such period to the referent Person or a Wholly Owned Subsidiary of the
referent Person; (ii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition will
be excluded; and (iii) the Net Income of any Subsidiary will be excluded, to the
extent that declarations of dividends or similar distributions by that
Subsidiary of such Net Income are not at the time permitted, directly or
indirectly, by operation of the terms of its organization documents or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its owners.
"Consolidated Net Worth" means, with respect to any Person,
the total stockholders' equity of such Person determined on a consolidated basis
in accordance with GAAP adjusted to exclude (to the extent included in
calculating such equity) (i) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock of such Person and its consolidated
subsidiaries; (ii) all upward revaluations and other write-ups in the book value
of any asset of such person or a consolidated subsidiary of such person
subsequent to the Closing Date; and (iii) all Investments in persons that are
not consolidated Restricted Subsidiaries.
"Default" means any event that is, or after notice or the
passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Equity Interests that either by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable) is or upon the happening of an event would be required
to be redeemed or repurchased prior to the final stated maturity of the Exchange
Notes or is redeemable at the option of the holder thereof at any time prior to
such final stated maturity.
"Equity Interests" means Capital Stock or warrants. options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Preferred Stock Repurchases" means any purchase of
Exchange Preferred Stock with the portion of Excess Proceeds remaining after
payment of the purchase price of the Exchange Notes tendered pursuant to an
Excess Proceeds Offer if such purchase of Exchange Preferred Stock is within 485
days of the date of the Asset Sale which gave rise to such Excess Proceeds
Offer.
"GAAP" means generally accepted accounting principles 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, and in the rules and regulations of the Commission, that
are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
"Indebtedness" of any Person means (without duplication) (1)
all liabilities and obligations, contingent or otherwise, of such Person (a) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof), (b) evidenced
by bonds, debentures, notes or other similar instruments, (c) representing the
deferred purchase price of property or services (other than trade payables and
other liabilities incurred in the ordinary course of business which are not more
than 90 days past due), (d) created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (e) as
63
<PAGE> 71
lessee under capitalized leases, (f) under bankers' acceptance and letter of
credit facilities, (g) to purchase, redeem, retire, defease or otherwise acquire
for value any Disqualified Stock, or (h) in respect of Hedging Obligations, (2)
all liabilities and obligations of others of the type described in clause (1),
above, that are Guaranteed by such Person, and (3) all liabilities and
obligations of others of the type described in clause (1), above, that are
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on property (including,
without limitation, accounts and contract rights) owned by such Person;
provided, that the amount of such Indebtedness shall (to the extent such Person
has not assumed or become liable for the payment of such Indebtedness in full)
be the lesser of (x) the fair market value of such property at the time of
determination and (y) the amount of such Indebtedness. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Interest Coverage Ratio" means, for any period the ratio of
(i) Consolidated EBITDA of the Company for such period, to (ii) Consolidated
Interest Expense of the Company for such period. In calculating the Interest
Coverage Ratio for any period, pro forma effect shall be given to (a) the
incurrence, assumption, guarantee, repayment, repurchase, redemption or
retirement by the Company or any of its Subsidiaries of any Indebtedness
subsequent to the commencement of the period for which the Interest Coverage
Ratio is being calculated but on or prior to the date on which the event for
which the calculation is being made, as if the same had occurred at the
beginning of the applicable period; and (b) the occurrence of any Asset Sale
during such period by reducing Consolidated EBITDA for such period by an amount
equal to the Consolidated EBITDA (if positive) directly attributable to the
assets sold and by reducing Consolidated Interest Expense by an amount equal to
the Consolidated Interest Expense directly attributable to any Indebtedness
assumed by third parties or repaid with the proceeds of such Asset Sale, in each
case as if the same had occurred at the beginning of the applicable period. For
purposes of making the computation referred to above, acquisitions that have
been made by the Company or any of its Restricted Subsidiaries, subsequent to
the commencement of such period but on or prior to the date on which the event
for which the calculation is being made shall be given effect on a pro forma
basis, assuming that all such acquisitions had occurred on the first day of such
period in a manner consistent with the calculations described in "Unaudited
Selected Consolidated Pro Forma Condensed Financial Data" contained elsewhere in
this Prospectus. Without limiting the foregoing, the financial information of
the Company with respect to any portion of such four fiscal quarters that falls
before the Closing Date shall be adjusted to give pro forma effect to the
issuance of the Exchange Notes and the application of the proceeds therefrom as
if they had occurred at the beginning of such four fiscal quarters.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of loans, Guarantees, advances or capital contributions (excluding (i)
commission, travel and similar advances to officers and employees of such Person
made in the ordinary course of business; and (ii) bona fide accounts receivable
arising from the sale of goods or services in the ordinary course of business
consistent with past practice), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, and any
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Lien" means any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).
"Material Subsidiary" means any Subsidiary (a) that is a
"Significant Subsidiary" of the Company as defined in Rule 1-02 of Regulation
S-X promulgated by the Commission or (b) is otherwise material to the business
of the Company.
"Net Income" means, with respect to any Person for any period,
the net income (loss) of such Person for such period, determined in accordance
with GAAP excluding any gain (but not loss), together with any related provision
for taxes on such gain (but not loss), realized in connection with any Asset
Sales and dispositions pursuant to sale and leaseback transactions, and
excluding any extraordinary gain (but not loss), together with any related
provision for taxes on such gain (but not loss).
"Net Proceeds" means the aggregate proceeds received in the
form of cash or Cash Equivalents in respect of any Asset Sale (including
payments in respect of deferred payment obligations when received), net of (a)
the reasonable and customary direct out-of-pocket costs relating to such Asset
Sale (including, without limitation, legal, accounting and investment banking
fees and sales commissions), other than any such costs payable to an Affiliate
of the Company, (b) taxes actually payable directly as a result of such Asset
Sale (after taking into account any available net operating loss carryovers,
64
<PAGE> 72
tax credits or deductions and any tax sharing arrangements), (c) amounts
required to be applied to the permanent repayment of Indebtedness in connection
with such Asset Sale, and (d) appropriate amounts provided as a reserve by the
Company or any Restricted Subsidiary, in accordance with GAAP, against any
liabilities associated with such Asset Sale and retained by the Company or such
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations arising from such Asset Sale.
"New Credit Facility" means the New Credit Facility, entered
into on February 25, 1998 between the Company, certain of its subsidiaries and
the agent for the lender named therein as the same may be amended, modified,
renewed, refunded, replaced or refinanced from time to time, including (i) any
related notes, letters of credit, guarantees, collateral documents, instruments
and agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time; and (ii)
any notes, guarantees, collateral documents, instruments and agreements executed
in connection with such amendment, modification, renewal, refunding, replacement
or refinancing.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other obligations and liabilities
of the Company or the Guarantors under the Indenture, the Collateral Agreements,
the Exchange Notes or the Guarantees of the Exchange Notes.
"Permitted Affiliate Transactions" means (i) employment
agreements, stockholder agreements, stock options or other incentive plans
existing on the Closing Date or thereafter entered into by the Company or any
Restricted Subsidiary in the ordinary course of business with the approval of a
majority of the disinterested members of the Company's Board of Directors; (ii)
transactions between, among or for the benefit of the Company and/or its
Restricted Subsidiaries; (iii) reasonable and customary fees and compensation
paid to and indemnity, loans or advances provided on behalf of, officers,
directors, employees or consultants of the Company or any Restricted Subsidiary
as determined in good faith by a majority of the disinterested members of the
Company's Board of Directors and (iv) the TCW Tax Payments.
"Permitted Investments" means (i) Investments in the Company,
any Guarantor or any Restricted Subsidiary (including without limitation,
Guarantees of Indebtedness of any such Person); (ii) Investments in Cash
Equivalents; (iii) Investments in a Person, if as a result of such Investment
(a) such Person becomes a Restricted Subsidiary, or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Restricted
Subsidiary; (iv) Hedging Obligations; (v) 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; (vi) Investments as a result of consideration received in connection
with an Asset Sale made in compliance with the covenant described under the
caption "Limitation on Asset Sales"; (vii) Investments existing on the Issue
Date; (viii) accounts receivable owing to the Company or any Restricted
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; (ix) payroll,
travel and similar advances in the ordinary course of business; (x) loans or
advances to employees made in the ordinary course of business; and (xi)
Guarantees permitted to be made pursuant to "Limitation on Incurrence of
Indebtedness.
"Permitted Liens" means (i) Liens in favor of the Company
and/or its Restricted Subsidiaries other than with respect to intercompany
indebtedness; (ii) Liens on property of a Person existing at the time such
Person is acquired by, merged into or consolidated with the Company or any
Restricted Subsidiary, provided, that such Liens were not created in
contemplation of such acquisition and do not extend to assets other than those
subject to such Liens immediately prior to such acquisition; (iii) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary; provided, that such Liens were not created in
contemplation of such acquisition and do not extend to assets other than those
subject to such Liens immediately prior to such acquisition; (iv) Liens incurred
in the ordinary course of business in respect of Hedging Obligations; (v) Liens
incurred in the ordinary course of business to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations (exclusive of obligations constituting Indebtedness) of a like
nature, including, without limitation, cash retainages; (vi) Liens existing or
created on the Issue Date; (vii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested or
remedied in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided, that any reserve or other appropriate provision
as may be required in conformity with GAAP has been made therefor; (viii) Liens
arising by reason of any judgment, decree or order of any court with respect to
which the Company or any of its Restricted Subsidiaries is then in good faith
prosecuting an appeal or other proceedings for review, the existence of which
judgment, order or decree is not an Event of Default under the Indenture; (ix)
encumbrances consisting of zoning restrictions, survey exceptions, utility
easements, licenses, rights of way, easements of ingress or egress over property
of the Company or any of its Restricted Subsidiaries,
65
<PAGE> 73
rights or restrictions of record on the use of real property, minor defects in
title, landlord's and lessor's liens under leases on property located on the
premises rented, mechanics' liens, warehouse-man's liens, supplier's liens,
repairman's liens, vendor's liens, construction liens, and similar encumbrances,
rights or restrictions on personal or real property, in each case not
interfering in any material respect with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries; (x) Liens incidental to the
conduct of business or the ownership of properties incurred in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the performance of
tenders, bids, and government contracts and leases and subleases; (xi) Liens for
any interest or title of a lessor under any Capitalized Lease Obligation
permitted to be incurred under the Indenture; provided, that such Liens do not
extend to any property or asset that is not leased property subject to such
Capitalized Lease Obligation; (xii) any extension, renewal, or replacement (or
successive extensions, renewals or replacements), in whole or in part, of Liens
described in clauses (i) through (xi) above; (xiii) Liens securing the Exchange
Notes; and (xiv) Liens in addition to the foregoing, which in the aggregate, are
secured by assets with a fair market value not in excess of $100,000 at any
time.
"Permitted Tax Payments to Holdings" means payments made to
Holdings to enable Holdings to pay foreign, Federal, state, and local tax
liabilities imposed directly upon Holdings ("Tax Payments"); provided, however,
that (i) notwithstanding the foregoing, in the case of any Tax Payment that is
permitted to be made to Holdings in respect of its Federal income tax liability
for any taxable period during which Holdings is the parent company of an
affiliated group that includes the Company and each of its United States
subsidiaries as members and files a consolidated Federal income tax return, such
payment shall be determined on the basis of assuming that the Company is the
parent company of an affiliated group (the "Company Affiliated Group") filing a
consolidated Federal income tax return and that Holdings and each such United
States subsidiary is a member of the Company Affiliated Group and (ii) any Tax
Payment made to Holdings shall either be used by Holdings to pay such tax
liabilities to the applicable taxing authority within 10 days of Holdings'
receipt of such payment or refunded to the Company.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof, or any other entity.
"Purchase Money Liens" means Liens to secure or securing
Purchase Money Obligations permitted to be incurred under the Indenture.
"Purchase Money Obligations" means Indebtedness and Capital
Lease Obligations representing, or incurred to finance, the cost (i) of
acquiring or improving any assets; and (ii) of construction or build-out of
manufacturing, distribution or administrative facilities (including Purchase
Money Obligations of any other Person at the time such other Person is merged
with or into or is otherwise acquired by the Company), provided, that (a) the
principal amount of such Indebtedness does not exceed 100% of such cost,
including construction charges, (b) any Lien securing such Indebtedness does not
extend to or cover any other asset or property other than the asset or property
being so acquired or improved and (c) such Indebtedness is incurred, and any
Liens with respect thereto are granted within 180 days of the acquisition or
improvement of such property or asset.
"Qualified Capital Stock" means, with respect to any Person,
Capital Stock of such Person other than Disqualified Capital Stock.
"Qualified Equity Offering" means (i) an underwritten primary
public offering of Qualified Capital Stock of the Company pursuant to an
effective registration statement under the Securities Act or (ii) a private
offering of Qualified Capital Stock other than issuances of common stock
pursuant to employee benefit plans or as compensation to employees.
"Restricted Investment" means any Investment other than a
Permitted Investment.
"Restricted Subsidiary" means a Subsidiary other than an
Unrestricted Subsidiary.
"subsidiary" means, with respect to any Person (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Voting Stock thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the other
subsidiaries of that Person or a combination thereof; and (ii) any partnership
in which such Person or any of its subsidiaries is a general partner.
"Subsidiary" means any subsidiary of the Company.
66
<PAGE> 74
"TCW Directors" means members of the Board of Directors
nominated by Trust Company of the West pursuant to the Securityholders Agreement
(as defined herein).
"TCW Tax Payments" means the payments made to the TCW entities
in connection with any tax liability for withholding, which payments shall not
exceed $125,000 per year.
"transfer" means any direct or indirect sale, assignment,
transfer, lease, conveyance, or other disposition (including, without
limitation, by way of merger or consolidation).
"Unrestricted Subsidiary" means any Subsidiary that has been
designated by the Company (by written notice to the Trustee as provided below)
as an Unrestricted Subsidiary; provided, that a Subsidiary may not be designated
as an "Unrestricted Subsidiary" unless (i) such Subsidiary does not own any
Capital Stock of, or own or hold any Lien on any property of, the Company or any
Restricted Subsidiary (other than such Subsidiary), (ii) neither immediately
prior thereto nor after giving pro forma effect to such designation, would there
exist a Default or Event of Default, (iii) immediately after giving effect to
such designation on a pro forma basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Interest Coverage Ratio test set forth in the
covenant described under "--Limitation on Incurrence of Indebtedness" and (iv)
the creditors of such Subsidiary have no direct or indirect recourse (including,
without limitation, recourse with respect to the payment of principal or
interest on Indebtedness of such Subsidiary) to the assets of the Company or of
a Restricted Subsidiary (other than such Subsidiary). The Board of Directors of
the Company may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary only if (i) no Default or Event of Default is existing or will occur
as a consequence thereof; and (ii) immediately after giving effect to such
designation, on a pro forma basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Interest Coverage Ratio test set forth in the
covenant described under "--Limitation on Incurrence of Indebtedness." Each such
designation shall be evidenced by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions. The Company shall be deemed to make an Investment in each Subsidiary
designated as an "Unrestricted Subsidiary" immediately following such
designation in an amount equal to the Investment in such Subsidiary and its
subsidiaries immediately prior to such designation; provided, that if such
Subsidiary is subsequently redesignated as a Restricted Subsidiary, the amount
of such Investment shall be deemed to be reduced (but not below zero) by the
fair market value of the net consolidated assets of such Subsidiary on the date
of such redesignation.
"Voting Stock" means, with respect to any Person (i) one or
more classes of the Capital Stock of such Person having general voting power to
elect at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time Capital Stock of any
other class or classes have or might have voting power by reason of the
happening of any contingency); and (ii) any Capital Stock of such Person
convertible or exchangeable without restriction at the option of the holder
thereof into Capital Stock of such Person described in clause (i) above.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years (rounded to the nearest
one-twelfth) obtained by dividing (i) the then outstanding principal amount of
such Indebtedness into (ii) the total of the products obtained by multiplying
(x) the amount of each then remaining installment, sinking fund, serial maturity
or other required payments of principal, including payment at final maturity, in
respect thereof, by (y) the number of years (calculated to the nearest one
twelfth) that will elapse between such date and the making of such payment.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or one or more Wholly Owned Subsidiaries.
DESCRIPTION OF THE EXCHANGE PREFERRED STOCK
GENERAL
On February 24, 1998, the Company amended its certificate of
incorporation (the "Certificate of Incorporation") to authorize the issuance of
up to 160,000 shares of preferred stock. The Certificate of Incorporation of the
Company provides that the preferred stock may be issued from time to time in one
or more series and gives the Board of Directors broad authority to fix the
dividend and distribution rights, conversion and voting rights, if any,
redemption provisions and liquidation preferences of each series of preferred
stock.
67
<PAGE> 75
The issuance of preferred stock with special voting rights (or
Common Stock) could be used to deter attempts by a single stockholder or group
of stockholders to obtain control of the Company in transactions not approved by
the Board of Directors. The Company has no intention to issue preferred stock
(or Common Stock) for such purposes.
The following description of Exchange Preferred Stock sets
forth certain general terms and provisions of the Exchange Preferred Stock. The
statements below describing the Exchange Preferred Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Certificate of Incorporation, including the Certificate of
Designation and Bylaws of the Company.
RANKING
The Exchange Preferred Stock will, with respect to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company, rank senior to the Common Stock, any additional class of common
stock and any other series of preferred stock expressly made junior to the
Exchange Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the affairs of the Company. See "Risk
Factors--Ranking of Exchange Preferred Stock; Consequences of Holding Company
Structure."
DIVIDENDS
Dividends on the Exchange Preferred Stock will accrue at a
rate of 12% per annum of the liquidation preference. Dividends will be paid
semiannually, on February 15 and August 15 of each year commencing August 15,
1998. The Company may, at its option, pay dividends in cash or in additional
fully paid and non-assessable shares of Exchange Preferred Stock having an
aggregate liquidation preference at least equal to the amount of such dividends.
The Company intends to pay dividends by issuing additional shares of Exchange
Preferred Stock. Each such dividend shall be payable to holders of record as
they appear on the stock transfer books of the Company on such record dates as
shall be fixed by the Board of Directors.
MANDATORY REDEMPTION
On or prior to August 15, 2003, the Company shall (subject to
the legal availability of funds therefor) redeem all of the shares of
outstanding Exchange Preferred Stock at a price per share in cash equal to 110%
of the Liquidation Preference thereof, plus an amount equal to all accrued and
unpaid dividends (whether or not declared).
OPTIONAL REDEMPTION
The Exchange Preferred Stock will be redeemable at the option
of the Company, in whole or in part, at any time, at an amount in cash equal to
110% of the Liquidation Preference of the Exchange Preferred Stock, plus an
amount equal to all accrued and unpaid dividends to the date of redemption.
If fewer than all of the outstanding shares of Exchange
Preferred Stock offered hereby are to be redeemed, the number of shares to be
redeemed will be determined by the Company and such shares may be redeemed pro
rata from the holders of record of such shares in proportion to the number of
such shares held by such holders (with adjustments to avoid redemption of
fractional shares) or any other equitable method determined by the Company in
accordance with the Certificate of Incorporation.
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of record of
Exchange Preferred Stock of any series to be redeemed at the address shown on
the stock transfer books of the Company. Each notice shall state: (i) the
redemption date; (ii) the number of shares of the Exchange Preferred Stock to be
redeemed; (iii) the redemption price; (iv) the place or places where
certificates for such Exchange Preferred Stock are to be surrendered for payment
of the redemption price; and (v) that dividends on the shares to be redeemed
will cease to accrue on such redemption date. If fewer than all the shares of
Exchange Preferred Stock are to be redeemed, the notice mailed to each such
holder thereof shall also specify the number of shares of Exchange Preferred
Stock to be redeemed from each such holder and, upon redemption, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof. In order to facilitate the redemption of shares of Exchange
Preferred Stock, the Board of Directors may fix a record date for the
determination of shares of Exchange Preferred Stock to be redeemed, such record
date to be not less than 30 or more than 60 days prior to the date fixed for
such redemption.
Notice having been given as provided above, from and after the
date specified therein as the date of redemption, unless the Company defaults in
providing funds for the payment of the redemption price on such date, all
dividends on the Exchange Preferred Stock called for redemption will cease. From
and after the redemption date, unless the Company so
68
<PAGE> 76
defaults, all rights of the holders of the Exchange Preferred Stock as
stockholders of the Company, except the right to receive the redemption price
(but without interest), will cease.
Subject to applicable law and the limitation on purchases when
dividends on Exchange Preferred Stock are in arrears, the Company may, at any
time and from time to time, purchase any shares of Exchange Preferred Stock in
the open market, by tender or private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, then, before any distribution or
payment shall be made to the holders of any Common Stock or any other class or
series of capital stock of the Company ranking junior to the Exchange Preferred
Stock in the distribution of assets upon any liquidation, dissolution or winding
up of the Company (collectively, "Junior Securities"), the holders of Exchange
Preferred Stock shall be entitled to receive out of assets of the Company
legally available for distribution to stockholders liquidating distributions in
the amount of 110% of the Liquidation Preference, plus an amount equal to all
dividends accrued and unpaid thereon (whether or not declared). The liquidation
preference of each share of Exchange Preferred Stock shall initially be $1,000
per share (the "Liquidation Preference"). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Exchange Preferred Stock will have no right or claim to any of the remaining
assets of the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the legally available assets of the
Company are insufficient to pay the amount of the liquidating distributions on
all outstanding shares of Exchange Preferred Stock and the corresponding amounts
payable on all shares of other classes or series of capital stock of the Company
ranking on a parity with the Exchange Preferred Stock in the distributions of
assets upon liquidation, dissolution or winding up ("Parity Securities"), then
the holders of such Exchange Preferred Stock and all other such classes or
series of capital stock shall share ratably in any such distribution of assets
in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
If liquidating distributions shall have been made in full to
all holders of the Exchange Preferred Stock, the remaining assets of the Company
shall be distributed among the holders of any other classes or series of capital
stock ranking junior to such series of Exchange Preferred Stock upon
liquidating, dissolution or winding up, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Company with or into any other
corporation, or the sale, lease, transfer or conveyance of all or substantially
all of the property or business of the Company, shall not be deemed to
constitute a liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Exchange Preferred Stock offered hereby will
not have any voting rights, except as set forth below or as otherwise expressly
required by law.
The affirmative vote or consent of the holders of at least a
majority of the outstanding shares of Exchange Preferred Stock will be required
to issue any Parity Securities or to amend or repeal any provision of or add any
provision to, the Certificate of Incorporation, including the Certificate of
Designation, if such action would materially and adversely alter or change the
rights, preferences or privileges of the Exchange Preferred Stock. As a result
of the TCW Investors' ownership of the Exchange Preferred Stock, the TCW
Investors may have the ability to approve (without the vote of any other holder
of Exchange Preferred Stock) waivers or amendments to the terms of the Exchange
Preferred Stock.
The Company's Board of Directors will automatically increase
by two members and the holders of a majority of the then outstanding Exchange
Preferred Stock, voting as one class, will be entitled to elect two directors to
fill the vacancies created by such increase, any time that (i) dividends on the
Exchange Preferred Stock are in arrears and unpaid for any quarterly period,
(ii) the Company fails to discharge its obligation to redeem the Exchange
Preferred Stock on the mandatory redemption date or fails to otherwise discharge
any of its redemption obligations, (iii) the Company breaches any of the
covenants in the Certificate of Designation concerning sales of assets,
affiliate transactions, mergers and combinations, (iv) the Company breaches the
covenant concerning the Maintenance Test Ratio for a period of eight consecutive
fiscal quarters, or (v) a breach in any material respect of any other provision
of the Certificate of Designation occurs and continues for a period of 30 days
or more.
No consent or approval of the holders of Exchange Preferred
Stock offered hereby will be required for the issuance from the Company's
authorized but unissued preferred stock or Junior Securities.
69
<PAGE> 77
The foregoing voting provisions will not apply if, at or prior
to the time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of such series of Exchange
Preferred Stock shall have been redeemed or called for redemption upon proper
notice and sufficient funds shall have been deposited in trust to effect such
redemption.
COVENANTS
Limitation on Transactions with Affiliates. The Certificate of
Designation contains provisions substantially identical to those described under
"Description of the Exchange Notes--Limitation on Transactions with Affiliates."
Limitation on Asset Sales. The Certificate of Designation
contains provisions substantially identical to those described under
"Description of the Exchange Notes--Limitation on Asset Sales"; provided that an
offer to purchase Exchange Preferred Stock shall only be required if all Excess
Proceeds are not applied in the Excess Proceeds Offer or otherwise used to
retire indebtedness.
Merger, Consolidation and Sale of Assets. The Certificate of
Designation contains provisions substantially identical to those described under
"Description of the Exchange Notes--Merger, Consolidation and Sale of Assets."
Restrictions on Dividends, etc. So long as any shares of
Exchange Preferred Stock shall be outstanding, the Company shall not declare or
pay or set apart for payment any dividends or make any other distributions on,
or make payment on account of the purchase, redemption or other retirement of,
any Junior Securities (as defined herein), whether in cash, property or
otherwise (other than dividends or distributions payable in shares of a class or
series upon which such dividends or distributions are declared or paid, or
payable in shares of Common Stock with respect to Junior Securities other than
Common Stock, together with cash in lieu of fractional shares), nor shall the
Company make any distribution on any Junior Securities, nor shall any Junior
Securities be purchased or redeemed or otherwise acquired by the Company or any
of its Subsidiaries, nor shall any monies be paid or made available for sinking
fund for the purchase or redemption of any Junior Securities, unless with
respect to all of the foregoing, all dividends to which the holders of Exchange
Preferred Stock shall have been entitled, whether or not declared by the Board
of Directors, shall have been paid (in cash or by issuance of additional shares)
or declared and a sum of money (or shares) sufficient for payment thereof have
been set apart.
Maintenance Test Covenant. If at the end of any fiscal quarter
set forth below, the Maintenance Test Ratio of the Company exceeds the amount
(the "Maximum Test Ratio") set forth opposite such fiscal quarter, then for the
period during the immediately succeeding quarter, the Company shall pay
dividends on the Exchange Preferred Stock at the rate of 13.5% for the first two
quarters for which such test is exceeded (whether or not consecutive) and at the
rate of 15% for any other quarter thereafter for which such test is exceeded:
<TABLE>
<CAPTION>
MAINTENANCE
FISCAL QUARTER ENDED TEST RATIO
- ------------------------------------------------------------------ -----------
<S> <C>
June, September 1998 6.75
December 1998 6.50
March, June, September, December 1999 6.00
March, June, September, December 2000 5.50
March, June, September, December 2001 5.25
March, June, September, December 2002, and each quarter thereafter 5.00
</TABLE>
EXCHANGE
Subject to certain limitations, upon a resolution adopted by a
majority of the Board of Directors, the Company may, at its option, on not less
than 30 nor more than 60 days notice to holders of record of the Exchange
Preferred Stock, exchange on any February 15 or August 15 beginning February 15,
1999, its 12% Subordinated Debentures due 2003 (the "Exchange Debentures") for
all, but not less than all, of the shares of Exchange Preferred Stock then
outstanding. See "Description of Exchange Debentures" for a description of the
terms of the Exchange Debentures. In such event, shares of Exchange Preferred
Stock will be exchanged for Exchange Debentures with an aggregate principal
amount equal to the then aggregate Liquidation Preference plus accrued and
unpaid dividends of the Exchange Preferred Stock. Exchange Debentures may be
issued in denominations of $1,000 and integral multiples of $1,000 (or at the
option of the Company, in denominations of $100 and
70
<PAGE> 78
integral multiples of $100). In the event such exchange would result in issuance
of an Exchange Debenture in a principal amount which is not an integral multiple
of $1,000 (or such lesser amount), the difference between such amount and the
higher of zero and the highest integral multiple of $1,000 (or such lesser
amount) less than such amount shall be paid to such holder in cash. At the
exchange date, the rights of holders of Exchange Preferred Stock shall cease and
the person or persons entitled to receive the Exchange Debentures issuable upon
such exchange shall be treated as the registered holder or holders of Exchange
Debentures. The Company may not exchange Exchange Preferred Stock for Exchange
Debentures unless such Indebtedness is permitted to be incurred under its other
agreements, including the Indenture and the New Credit Facility.
CERTAIN DEFINITIONS
"Maintenance Test Ratio" means, at any time, the ratio of (i)
the result of (x) the aggregate amount of Indebtedness of the Company as of the
time of determination plus (y) 110% of the then applicable Liquidation
Preference of the Exchange Preferred Stock plus accrued and unpaid dividends as
of the time of determination, to (ii) the result of (a) the Consolidated EBITDA
of the Company for the last four fiscal quarters from the time of determination
less (b) the aggregate amount of the cash charges in such four-quarter period
against the reserve established by the Company relating to the elimination of
costs associated with restaurants closed in 1997 and prior years as set forth in
"Unaudited Selected Consolidated Pro Forma Condensed Financial Data" contained
elsewhere in this Prospectus plus (c) $2.2 million for the four-quarter period
ended June 1998 and $1.6 million for the four-quarter period ended September
1998.
"Public Company Date" means the date that is 45 days after the
date upon which underwritten primary public offerings of Common Stock of the
Company pursuant to effective registration statements under the Securities Act
have resulted in 35% of the Company's Common Stock (measured on a fully diluted
basis after giving effect to such offering) being sold to the public and in the
Company's Common Stock being listed for trading on any of the New York Stock
Exchange, the NASDAQ National Market or the American Stock Exchange.
DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures will be issued under an indenture (the
"Exchange Debenture Indenture"), to be dated as of the date of issuance (the
"Exchange Debenture Date") of the Exchange Debentures, between the Company and a
bank or trust company as trustee (the "Exchange Debenture Trustee") to be
selected by the Company prior to the Exchange Debenture Date. A copy of the
proposed form of the Exchange Debenture Indenture is annexed to the Certificate
of Designation of the Preferred Stock. The summaries of certain provisions of
the Exchange Debenture Indenture hereunder do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Exchange Debenture Indenture including the definitions therein
of certain terms and those terms made part of the Exchange Debenture Indenture
by reference to the Trust Indenture Act of 1939 as in effect on the date of the
Exchange Debenture Indenture. Except as set forth below, the terms of the
Exchange Debentures are substantially identical to the terms of the Notes
described above under "Description of the Exchange Notes." The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions."
The Exchange Debentures may be issued in denominations of
$1,000 and in integral multiples of $1,000 (or, at the option of the Company, in
denominations of $100 and integral multiples of $100).
PRINCIPAL, MATURITY AND INTEREST
The Exchange Debenture Indenture authorizes a maximum
aggregate principal amount of $80,000,000 of the Exchange Debentures. The
Exchange Debentures will be due on August 15, 2003. At maturity, the Company
shall pay a premium of 10% of the principal amount. The Exchange Debentures
will bear interest from the Exchange Debenture Date at a rate per annum equal
to 12%. Interest on the Exchange Debentures will be payable semi-annually on
February 15 and August 15 in each year to holders of record at the close of
business on the first day of the calendar month in which such interest payment
date occurs, commencing on the first interest payment date after issuance.
Alternatively, the Company may, at its option, issue new Exchange Debentures
having an aggregate principal amount equal to the amount of such interest
payments.
Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Exchange Debentures will be payable both
as to principal and interest at the office or agency of the Company maintained
for such purpose within The City of New York or, at the option of the Company,
payment of interest may be made by check mailed to the holders of the Exchange
Debentures at their respective addresses set forth in the register of holders of
Exchange
71
<PAGE> 79
Debentures. Until otherwise designated by the Company, such office or agency
will be the office of the Exchange Debenture Trustee maintained for such
purpose. If a payment date is a legal holiday, payment may be made at that place
on the next succeeding day that is not a legal holiday, and no interest shall
accrue for the intervening period.
OPTIONAL REDEMPTION
The Exchange Debentures are redeemable as a whole or from time
to time in part, at the option of the Company, at a redemption price equal to
110% of the principal amount, together with accrued interest to the Redemption
Date, but interest installments due on or prior to such Redemption Date will be
payable to the record holders of such Exchange Debentures on the relevant Record
Dates referred to on the face thereof.
GUARANTORS
The Exchange Debentures will not be guaranteed by the
Guarantors.
COLLATERAL
The Exchange Debentures will not be secured by the Collateral,
or any other property of the Company or its subsidiaries.
SUBORDINATION
The Exchange Debentures will be general, unsecured obligations
of the Company, subordinated in right of payment to all Senior Debt of the
Company. Such subordination will not prevent the occurrence of an Event of
Default.
No payment (other than payments made with Junior Securities)
may be made by the Company or on behalf of the Company on account of principal
of or interest on the Exchange Debentures or to acquire or repurchase any of the
Exchange Debentures on account of the redemption provisions of the Exchange
Debentures (i) upon the maturity of any Senior Debt by lapse of time,
acceleration or otherwise, unless and until all such Senior Debt is first paid
in full or (ii) upon the happening of any default in payment of any principal of
or interest on any Senior Debt when the same becomes due and payable (a "Payment
Default"), unless and until such Payment Default shall have been cured or waived
or shall have ceased to exist.
Upon (i) the happening of an event of default (other than a
Payment Default) that permits the holders of Senior Debt to declare such Senior
Debt to be due and payable (or, in the case of letters of credit, require cash
collateralization thereof) and (ii) written notice of such event of default
given to the Company and the Exchange Debenture Trustee, by the lenders' agent
under the New Credit Facility or holders of an aggregate of at least $15 million
principal amount outstanding of any Senior Debt or their representative (a
"Payment Notice"), then, unless and until such event of default has been cured
or waived or otherwise has ceased to exist, no payment (by set-off or otherwise)
may be made by or on behalf of the Company on account of any Obligation in
respect of the Exchange Debentures, including the principal of, premium, if any,
or interest on the Exchange Debentures, or to repurchase any of the Exchange
Debentures, or on account of the redemption provisions of the Exchange
Debentures, in any such case, other than payments made with Junior Securities.
Notwithstanding the foregoing, unless the Senior Debt in respect of which such
event of default exists has been declared due and payable in its entirety within
179 days after the Payment Notice is delivered as set forth above (the "Payment
Blockage Period") (and such declaration has not been rescinded or waived), at
the end of the Payment Blockage Period, the Company shall be required to pay all
sums not paid to the holders of the Exchange Debentures during the Payment
Blockage Period due to the foregoing prohibitions and to resume all other
payments as and when due on the Exchange Debentures. Any number of Payment
Notices may be given; provided, however, that (i) not more than one Payment
Notice shall be given within a period of any 360 consecutive days, and (ii) no
default that existed upon the date of such Payment Notice or the commencement of
such Payment Blockage Period (whether or not such event of default is on the
same issue of Senior Debt) shall be made the basis for the commencement of any
other Payment Blockage Period unless such other Payment Blockage Period is
commenced by a Payment Notice and such event of default shall have been cured or
waived for a period of at least 90 consecutive days.
In the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company (other than Junior Securities) shall be
received by the Exchange Debenture Trustee or the holders at a time when such
payment or distribution is prohibited by the foregoing provisions, such payment
or distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Exchange Debenture Trustee or
such holders, as the case
72
<PAGE> 80
may be, to the holders of such Senior Debt remaining unpaid or unprovided for or
to their representative or representatives, or to the trustee or trustees under
any indenture pursuant to which any instruments evidencing any of such Senior
Debt may have issued, ratably according to the aggregate principal amounts
remaining unpaid on account of such Senior Debt held or represented by each, for
application to the payment of all such Senior Debt remaining unpaid, to the
extent necessary to pay or to provide for the payment of all such Senior Debt in
full in cash or Cash Equivalents or otherwise to the extent holders accept
satisfaction of amounts due by settlement in other than cash or Cash Equivalents
after giving effect to any concurrent payment or distribution to the holders of
such Senior Debt.
Upon any distribution of assets of the Company, upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshalling of assets or liabilities, (i) the holders of all
Senior Debt of the Company will first be entitled to receive payment in full in
cash or Cash Equivalents or otherwise to the extent holders accept satisfaction
of amounts due by settlement in other than cash or Cash Equivalents (or have
such payment duly provided for) before the holders are entitled to receive any
payment on account of any Obligation in respect of the Exchange Debentures
including the principal of, premium, if any, and interest on the Exchange
Debentures (other than Junior Securities) and (ii) any payment or distribution
of assets of the Company of any kind or character from any source, whether in
cash, property or securities (other than Junior Securities) to which the holders
or the Exchange Debenture Trustee on behalf of the holders would be entitled (by
set-off or otherwise) but for the subordination provisions contained in the
Exchange Debenture Indenture, will be paid by the liquidating trustee or agent
or other person making such a payment or distribution directly to the holders of
such Senior Debt or their representative to the extent necessary to make payment
in full in Cash or Cash Equivalents (or have such payment duly provided for) on
all such Senior Debt remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Debt.
Because of these subordination provisions, creditors of the
Company who are holders of Senior Debt may recover more, ratably, than the
holders of the Exchange Debentures. The subordination provisions described above
will cease to be applicable to the Exchange Debentures upon any legal defeasance
or covenant defeasance of the Exchange Debentures as described under
"--Defeasance and Discharge of the Exchange Debenture Indenture and the Exchange
Debentures."
COVENANTS
Limitation on Restricted Payments. The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly
(i) declare or pay any dividend or make any distribution on account of any
Equity Interests of the Company or any of its Restricted Subsidiaries (other
than (A) dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or (B) dividends or distributions payable to
the Company or any Restricted Subsidiary or (C) if the Subsidiary making such a
dividend or distribution is not a Wholly Owned Subsidiary, dividends to its
shareholders on a pro rata basis); (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interest of the Company, any Subsidiary or any other
Affiliate of the Company (other than any such Equity Interest owned by the
Company or any Wholly Owned Subsidiary); (iii) make any principal payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness of the Company or any Guarantor that is subordinated in right of
payment to the Exchange Debentures or such Guarantor's Guarantee thereof, as the
case may be; (iv) make any Restricted Investment; or (v) make any payment or
transfer any assets to, or on behalf of, Holdings or any of its Affiliates (all
such payments and other actions set forth in clauses (i) through (v) above being
collectively referred to as "Restricted Payments") unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default has
occurred and is continuing or would occur as a consequence
thereof;
(b) immediately after giving effect thereto
on a pro forma basis, the Company could incur at least $1.00
of additional Indebtedness under the Interest Coverage Ratio
test set forth in the covenant described under "Limitation on
Incurrence of Indebtedness"; and
(c) such Restricted Payment (the value of
any such payment, if other than cash, being determined in good
faith by the Board of Directors and evidenced by a resolution
set forth in an Officers' Certificate delivered to the
Exchange Debenture Trustee), together with the aggregate of
all other Restricted Payments made after the date of the
Exchange Debenture Indenture (including Restricted Payments
permitted by clauses (i), (v) (to the extent made in cash) and
(vi) of the next following paragraph and excluding Restricted
Payments permitted by the other clauses therein) is less than
the sum of (1) 50% of the Consolidated Net Income of the
Company for the period (taken as
73
<PAGE> 81
one accounting period) from the beginning of the first quarter
commencing immediately after the Issue Date to the end of the
Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, 100% of such deficit), plus (2)
100% of the aggregate net cash proceeds (or of the net cash
proceeds received upon the conversion of non-cash proceeds
into cash) received by the Company from the issuance or sale,
other than to a Subsidiary, of Equity Interests of the Company
(other than Disqualified Stock) after the Issue Date and on or
prior to the time of such Restricted Payment, plus (3) 100% of
the aggregate net cash proceeds (or of the net cash proceeds
received upon the conversion of non-cash proceeds into cash)
received by the Company from the issuance or sale, other than
to a Subsidiary, of any convertible or exchangeable debt
security of the Company that has been converted or exchanged
into Equity Interests of the Company (other than Disqualified
Stock) pursuant to the terms thereof after the Issue Date and
on or prior to the time of such Restricted Payment (including
any additional net cash proceeds not included in clause (2)
above received by the Company upon such conversion or
exchange). The aggregate amount of each Investment
constituting a Restricted Payment since the date of the
Exchange Debenture Indenture shall be reduced by the aggregate
after- tax amount of all payments made to the Company and its
Restricted Subsidiaries with respect to such Investments;
provided, that (a) the maximum amount of such payments shall
not exceed the original amount of such Investment and (b) such
payments shall also be excluded from the calculations
contemplated by clauses (c)(1) through (3) above.
The foregoing provisions will not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would not have been prohibited by the
provisions of the Exchange Debenture Indenture; (ii) the redemption, purchase,
retirement or other acquisition of any Equity Interests of the Company or
Indebtedness of the Company or any Restricted Subsidiary solely in exchange for
Equity Interests of the Company (other than Disqualified Stock); (iii) the
redemption, repurchase or payoff of any Indebtedness with proceeds of any
Refinancing Indebtedness permitted to be incurred pursuant to the provision
described under "--Limitation on Incurrence of Indebtedness"; (iv) payments by
the Company to Holdings in respect of Permitted Tax Payments to Holdings; (v)
the redemption of the Exchange Preferred Stock with the proceeds of a Qualified
Equity Offering; (vi) Permitted Affiliate Transactions; (vii) Exchange Preferred
Stock Repurchases; (viii) the TCW Tax Payments; (ix) payments of dividends on
Disqualified Stock issued in accordance with the Interest Coverage Ratio test or
(x) other Restricted Payments in an aggregate amount not to exceed $2.0 million.
Not later than the date of making any Restricted Payment, the
Company will deliver to the Exchange Debenture Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this covenant were computed, which
calculations may be based upon the Company's latest available financial
statements.
Limitation on Incurrence of Indebtedness. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, (1) create, incur, issue, assume, guaranty or otherwise become
directly or indirectly liable with respect to, contingently or otherwise
(collectively, "incur"), any Indebtedness (including Acquired Debt) or (2) issue
any Disqualified Stock; provided, that the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock, any Guarantor
may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and
any Restricted Subsidiary may incur Acquired Debt, in each case if (x) no
Default or Event of Default shall have occurred and be continuing at the time
of, or would occur after giving effect on a pro forma basis to such incurrence
or issuance, and (y) the Interest Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least equal
to 2:1, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness (including
Acquired Debt) had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The foregoing limitations will not prohibit the incurrence of:
(a) Indebtedness under the New Credit
Facility, provided, that the aggregate principal amount of
Indebtedness so incurred on any date, together with all other
Indebtedness incurred pursuant to this clause (a) and
outstanding on such date, shall not exceed $15 million, less
(i) any repayments thereunder pursuant to the provisions under
"Limitation on Asset Sales" and (ii) any outstanding
Indebtedness represented by letters of credit or reimbursement
obligations with respect thereto, provided, that at the time
of any incurrence under this clause (a),
74
<PAGE> 82
the aggregate principal amount of Indebtedness outstanding
under this clause (a) that is not evidenced by a letter of
credit or reimbursement obligation with respect thereto shall
not exceed $10 million;
(b) performance bonds, appeal bonds, surety
bonds, insurance obligations or bonds and other similar bonds
or obligations incurred in the ordinary course of business;
(c) obligations incurred to fix the interest
rate on any variable rate Indebtedness otherwise permitted by
the Exchange Debenture Indenture (collectively, "Hedging
Obligations");
(d) Indebtedness owed by (i) a Restricted
Subsidiary to the Company or to a Wholly Owned Subsidiary; or
(ii) the Company to a Wholly Owned Subsidiary;
(e) Indebtedness outstanding on the Issue
Date, including the Exchange Debentures and the Guarantees;
(f) Indebtedness arising from the honoring
by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of
daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided that such Indebtedness
is extinguished within three business days of incurrence;
(g) Indebtedness represented by Guarantees
by the Company of Indebtedness otherwise permitted to be
Incurred pursuant to this covenant and Indebtedness
represented by Guarantees by a Restricted Subsidiary of
Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this
covenant;
(h) obligations with respect to customary
provisions regarding post-closing purchase price adjustments
and indemnification in agreements for the purchase or sale of
a business or assets otherwise permitted by the Exchange
Debenture Indenture;
(i) other Indebtedness in an aggregate
principal amount at any one time outstanding not to exceed
$5.0 million; and
(j) Indebtedness issued in exchange for, or
the proceeds of which are contemporaneously used to extend,
refinance, renew, replace, or refund (collectively,
"Refinance") Indebtedness referred to in clauses (a) or (e)
above or this clause (j) or Indebtedness incurred pursuant to
the Interest Coverage Ratio test set forth in the immediately
preceding paragraph ("Refinancing Indebtedness"); provided,
that (1) the principal amount of such Refinancing Indebtedness
does not exceed the principal amount of Indebtedness so
Refinanced (plus the premiums required to be paid, and the
out-of-pocket expenses (other than those payable to an
Affiliate of the Company) reasonably incurred, in connection
therewith), (2) the Refinancing Indebtedness has a final
scheduled maturity that exceeds the final stated maturity, and
a Weighted Average Life to Maturity that is equal to or
greater than the Weighted Average Life to Maturity, of the
Indebtedness being Refinanced and (3) the Refinancing
Indebtedness ranks, in right of payment, no more favorable to
the Exchange Debentures as the Indebtedness being Refinanced.
Limitation on Asset Sales. The Company will not, and will not
permit any Restricted Subsidiary to, make any Asset Sale unless (i) the Company
or such Restricted Subsidiary receives consideration at the time of such Asset
Sale at least equal to the fair market value (as determined in good faith by the
Board of Directors as evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Exchange Debenture Trustee)
of the assets subject to such Asset Sale; (ii) at least 75% of the consideration
for such Asset Sale is in the form of cash, Cash Equivalents or liabilities of
the Company or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Exchange Debentures or any Guarantee of the
Exchange Debentures) that are assumed by the transferee of such assets
(provided, that following such Asset Sale there is no further recourse to the
Company and its Restricted Subsidiaries with respect to such liabilities); and
(iii) within 12 months of such Asset Sale, the Net Proceeds thereof, at the
Company's election, are (a) invested in assets related to the business of the
Company or its Restricted Subsidiaries, or (b) used to repay, purchase or
otherwise acquire Indebtedness under the New Credit Facility or (c) to the
extent not used as provided in clause (a) or (b), applied to make an offer to
purchase Exchange Debentures as described below (an "Excess Proceeds Offer");
provided, that if the amount of Net Proceeds from any Asset Sale not invested or
used pursuant to clause (a) or clause (b) above is less than $5.0 million, the
Company will not be required to make an offer pursuant to clause (c) until the
aggregate amount of Excess Proceeds from all Asset Sales exceeds $5.0 million.
Pending the final application of any such Net Proceeds, the Company or any
Restricted Subsidiary may temporarily reduce Indebtedness under the New Credit
Facility or temporarily invest such Net Proceeds in Cash Equivalents.
75
<PAGE> 83
For the purposes of this covenant, the following are deemed to
be cash: (y) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash and (z) assets related to the business of the
Company or its Restricted Subsidiaries received in an exchange of assets
transaction; provided that (i) in the event such exchange of assets transaction
or series of related exchange of assets transactions (each an "Exchange
Transaction") involves an aggregate value in excess of $2.5 million, the terms
of such Exchange Transaction shall have been approved by a majority of the
disinterested members of the Board of Directors, (ii) in the event such Exchange
Transaction involves an aggregate value in excess of $5.0 million, the Company
shall have received a written opinion from a nationally recognized independent
investment banking firm that the Company has received consideration equal to the
fair market value of the assets disposed of and (iii) any assets to be received
shall be comparable to those being exchanged as determined in good faith by the
Board of Directors.
The amount of Net Proceeds not invested, used or applied as
set forth in the preceding clauses (a), (b) and (c) constitutes "Excess
Proceeds." If the Company elects, or becomes obligated to make an Excess
Proceeds Offer, the Company will offer to purchase Exchange Debentures having an
aggregate principal amount equal to the Excess Proceeds (the "Purchase Amount"),
at a purchase price equal to 100% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the purchase date. The Company must
commence such Excess Proceeds Offer not later than 30 days after the expiration
of the 12-month period following the Asset Sale that produced Excess Proceeds.
If the aggregate purchase price for the Exchange Debentures tendered pursuant to
the Excess Proceeds Offer is less than the Excess Proceeds, the Company and its
Restricted Subsidiaries may use the portion of the Excess Proceeds remaining
after payment of such purchase price for general corporate purposes.
Each Excess Proceeds Offer will remain open for a period of 20
business days and no longer, unless a longer period is required by law (the
"Excess Proceeds Offer Period"). Promptly after the termination of the Excess
Proceeds Offer Period (the "Excess Proceeds Payment Date"), the Company will
purchase and mail or deliver payment for the Purchase Amount for the Exchange
Debentures or portions thereof tendered, pro rata or by such other method as may
be required by law, or, if less than the Purchase Amount has been tendered, all
Exchange Debentures tendered pursuant to the Excess Proceeds Offer. The
principal amount of Exchange Debentures to be purchased pursuant to an Excess
Proceeds Offer may be reduced by the principal amount of Exchange Debentures
acquired by the Company through purchase or redemption (other than pursuant to a
Change of Control Offer) subsequent to the date of the Asset Sale and
surrendered to the Exchange Debenture Trustee for cancellation.
Each Excess Proceeds Offer will be conducted in compliance
with applicable regulations under the federal securities laws, including
Exchange Act Rule 14e-1. To the extent that the provisions of any securities
laws or regulations conflict with the "Asset Sale" provisions of the Exchange
Debenture Indenture, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the "Asset Sale" provisions of the Exchange Debenture Indenture by virtue
thereof.
There can be no assurance that sufficient funds will be
available at the time of any Excess Proceeds Offer to make required repurchases.
Limitation on Liens. The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset (including, without limitation, all real,
tangible or intangible property) of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or on any income or profits therefrom,
or assign or convey any right to receive income therefrom, securing any
obligation, except (i) Liens in favor of the Collateral Agent securing the
Exchange Debentures and Indebtedness permitted to be incurred under the New
Credit Facility; (ii) Purchase Money Liens; and (iii) Permitted Liens.
Limitation on Restrictions on Subsidiary Dividends. The
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary (a) to
(1) pay dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (A) on such Restricted Subsidiary's Capital Stock or (B)
with respect to any other interest or participation in, or measured by, such
Restricted Subsidiary's profits or (2) pay any indebtedness owed to the Company
or any of its Restricted Subsidiaries, or (b) make loans or advances to the
Company or any of its Restricted Subsidiaries, or (c) transfer any of its assets
to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (i) agreements
existing on the Issue Date and the New Credit Facility, as in effect on the
Closing Date, or any refinancings, amendments, modifications or supplements
thereof containing dividend and other payment
76
<PAGE> 84
restrictions that are not materially more restrictive than those contained in
agreements existing on the Issue Date and the New Credit Facility on the Closing
Date; (ii) the Exchange Debenture Indenture, the Security Documents and the
Exchange Debentures; (iii) applicable law; (iv) restrictions with respect to a
Subsidiary that was not a Subsidiary on the Closing Date in existence at the
time such Person becomes a Subsidiary (but not created as a result of or in
anticipation of such Person becoming a Subsidiary); provided, that such
restrictions are not applicable to any other Person or the properties or assets
of any other Person; (v) customary nonassignment and net worth provisions of any
contract or lease entered into in the ordinary course of business; (vi)
customary restrictions on the transfer of assets subject to a Lien permitted
under the Exchange Debenture Indenture imposed by the holder of such Lien; (vii)
restrictions imposed by any agreement to sell assets or Capital Stock to any
Person pending the closing of such sale; and (viii) permitted Refinancing
Indebtedness (including Indebtedness Refinancing Acquired Debt), provided, that
such restrictions contained in any agreement governing such Refinancing
Indebtedness are not materially more restrictive than those contained in any
agreements governing the Indebtedness being Refinanced.
Merger, Consolidation or Sale of Assets. The Company may not
consolidate or merge with or into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets (determined on a
consolidated basis for the Company and its Restricted Subsidiaries) in one or
more related transactions to, any other Person unless (i) the Company is the
surviving Person or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition has been made is a corporation organized
and existing under the laws of the United States, any state thereof or the
District of Columbia, (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition has been made
assumes all the Obligations of the Company, pursuant to a supplemental indenture
in a form reasonably satisfactory to the Exchange Debenture Trustee, under the
Exchange Debentures, the Exchange Debenture Indenture, the Collateral Agreements
and the Registration Rights Agreement; (iii) immediately after such transaction,
no Default or Event of Default exists; and (iv) the Company, or any Person
formed by or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been made, (A)
has a Consolidated Net Worth (immediately after the transaction but prior to any
purchase accounting adjustments resulting from the transaction) not less than
100% of the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will be permitted, at the time of such transaction and after
giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, to incur at least $1.00 of
additional Indebtedness pursuant to the Interest Coverage Ratio test set forth
in the covenant described under "Incurrence of Indebtedness."
In the event of any transaction (other than a lease) complying
with the conditions listed in the immediately preceding paragraph in which the
Company is not the surviving Person, such surviving Person or transferee shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from its Obligations under, the
Exchange Debenture Indenture, the Exchange Debentures, the Collateral Agreements
and the Registration Rights Agreement.
Limitation on Transactions with Affiliates. The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, sell, lease, transfer or otherwise dispose of any of its properties
or assets to, or purchase any property or assets from, or enter into any
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
except for (i) Affiliate Transactions, which together with all Affiliate
Transactions that are part of a common plan, have an aggregate value of not more
than $1.0 million; provided, that such transactions are conducted in good faith
and on terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction at such time on an arms-length basis from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary; (ii) Affiliate
Transactions, which together with all Affiliate Transactions that are part of a
common plan, have an aggregate value of not more than $2.5 million; provided,
that a majority of the disinterested members of the Board of Directors of the
Company determine that such transactions are conducted in good faith and on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
at such time on an arms-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary; (iii) Affiliate Transactions for
which the Company delivers to the Exchange Debenture Trustee an opinion as to
the fairness to the Company or such Restricted Subsidiary from a financial point
of view, issued by an investment banking firm of national standing; and (iv)
Permitted Affiliate Transactions and other Restricted Payments permitted by the
provisions described above under "Limitations on Restricted Payments."
77
<PAGE> 85
Line of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any type of business other than the type
of business conducted or proposed to be conducted by the Company and the
Restricted Subsidiaries on the Closing Date and businesses reasonably related
thereto.
Restrictions on Sale and Issuance of Subsidiary Stock. The
Company shall not sell, and shall not permit any of its Restricted Subsidiaries
to issue or sell, any shares of Capital Stock of any Restricted Subsidiary to
any Person other than the Company or a Wholly Owned Subsidiary, other than
directors' qualifying shares; provided, however, that this provision shall not
prohibit the sale of all of the Capital Stock of any Restricted Subsidiary owned
by the Company and its Restricted Subsidiaries if the Net Proceeds from such
sale or issuance are used in accordance with the terms of the covenant described
under "--Limitation on Asset Sales.
Guarantors. The Exchange Debenture Indenture will provide that
so long as any Exchange Debentures remain outstanding, any Restricted Subsidiary
(other than a foreign Restricted Subsidiary, if any) shall (a) execute and
deliver to the Exchange Debenture Trustee a supplemental indenture in form
reasonably satisfactory to the Exchange Debenture Trustee pursuant to which such
Restricted Subsidiary shall unconditionally guarantee all of the Company's
obligations under the Exchange Debentures and the Exchange Debenture Indenture
on terms set forth in the Exchange Debenture Indenture and (b) deliver to the
Exchange Debenture Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation of
such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Guarantor for all purposes of the Exchange Debenture Indenture.
If all of the Capital Stock of any Guarantor is sold to a
Person (other than the Company or any of its Restricted Subsidiaries) and the
Net Proceeds from such Asset Sale are used in accordance with the terms of the
covenants described under "--Limitation on Asset Sales," then such Guarantor
will be released and discharged from all of its obligations under its Guarantee
of the Exchange Debentures and the Exchange Debenture Indenture.
The obligations of each Guarantor will be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other guarantor under its Guarantee of the Exchange
Debentures, result in the obligations of such Guarantor under its Guarantee of
the Exchange Debentures not constituting a fraudulent conveyance or fraudulent
transfer under Federal or state law.
Reports. Whether or not required by the rules and regulations
of the Commission, so long as any Exchange Debentures are outstanding, the
Company will furnish to the Exchange Debenture Trustee, and deliver or cause to
be delivered to the holders of Exchange Debentures (i) 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 for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's independent certified public
accountants; and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports. From
and after the time a registration statement with respect to the Exchange
Debentures is declared effective by the Commission, the Company will file such
information with the Commission, provided that the Commission will accept such
filing.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will constitute an Event of Default
under the Exchange Debenture Indenture (i) default for 30 days in the payment
when due of interest on the Exchange Debentures; (ii) default in payment of
principal (or premium, if any) on the Exchange Debentures when due at maturity,
redemption, by acceleration or otherwise; (iii) default in the performance or
breach of the provisions of "Repurchase Upon Change of Control," "Limitation on
Asset Sales," and "--Merger, Consolidation or Sale of Assets"; (iv) default in
the performance or breach of the provisions of "Limitation on Restricted
Payments" and "Limitation on Incurrence of Indebtedness," and the continuance of
such default for a period of 30 days; (v) failure by the Company or any
Guarantor for 30 days after notice to comply with certain other agreements in
the Exchange Debenture Indenture or the Exchange Debentures; (vi) default under
(after giving effect to any waivers, amendments, applicable grace periods or any
extension of any maturity date) any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any Restricted Subsidiary (or
the payment of which is guaranteed by the Company or any Restricted Subsidiary),
whether such Indebtedness or guarantee now exists or is created after the date
of the Exchange Debenture Indenture, if (a)
78
<PAGE> 86
either (1) such default results from the failure to pay principal on such
Indebtedness or (2) as a result of such default the maturity of such
Indebtedness has been accelerated, and (b) the principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
with respect to which such a payment default (after the expiration of any
applicable grace period or any extension of the maturity date) has occurred, or
the maturity of which has been so accelerated, exceeds $2.5 million in the
aggregate; (vii) failure by the Company or any Restricted Subsidiary to pay
final non-appealable judgments (other than any judgment as to which a reputable
insurance company has accepted full liability) aggregating in excess of $2.5
million which judgments are not discharged, bonded or stayed within 60 days
after their entry; (viii) breach by the Company or any Guarantor of any
provision of the Collateral Agreements to which it is a party after giving
effect to applicable cure periods and notice provisions; (ix) written assertion
by the Company or any of the Guarantors of the unenforceability of its
obligations under the Exchange Debenture Indenture, the Collateral Documents,
the Exchange Debentures or the Guarantee to which it is a party; and (x) certain
events of bankruptcy or insolvency with respect to the Company or any Material
Subsidiary.
If any Event of Default occurs and is continuing, the Exchange
Debenture Trustee or the holders of at least 25% in principal amount of the then
outstanding Exchange Debentures may declare by written notice to the Company and
the Exchange Debenture Trustee all of the Exchange Debentures to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency, all outstanding
Exchange Debentures will become due and payable without further action or
notice. Holders of the Exchange Debentures may not enforce the Exchange
Debenture Indenture or the Exchange Debentures except as provided in the
Exchange Debenture Indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Exchange Debentures may
direct the Exchange Debenture Trustee in its exercise of any trust or power.
The holders of a majority in aggregate principal amount of the
Exchange Debentures then outstanding, by written notice to the Company and the
Exchange Debenture Trustee, may on behalf of the holders of all of the Exchange
Debentures (i) waive any existing Default or Event of Default and its
consequences under the Exchange Debenture Indenture except a continuing Default
or Event of Default in the payment of interest on, or the principal of, the
Exchange Debentures or a Default or an Event of Default with respect to any
covenant or provision which cannot be modified or amended without the consent of
the holder of each outstanding Note affected; and/or (ii) rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default (except nonpayment of
principal or interest that has become due solely because of the acceleration)
have been cured or waived.
The Company is required upon becoming aware of any Default or
Event of Default, to deliver to the Exchange Debenture Trustee a statement
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, stockholder or
controlling person of the Company, as such, will have any liability for any
obligations of the Company under the Exchange Debentures or the Exchange
Debenture Indenture for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of the Exchange Debentures by
accepting an Exchange Debenture waives and releases all such liability. The
waiver and release will be part of the consideration for issuance of the
Exchange Debentures. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that a waiver
is against public policy.
DEFEASANCE AND DISCHARGE OF THE EXCHANGE DEBENTURE INDENTURE AND THE EXCHANGE
DEBENTURES
The Exchange Debenture Indenture provides that the Company (i)
will be discharged from any and all obligations in respect of the Exchange
Debentures, other than the obligation to duly and punctually pay the principal
of, and premium, if any, and interest on, the Exchange Debentures in accordance
with the terms of the Exchange Debentures and the Exchange Debenture Indenture
or (ii) will be released from compliance with the restrictive covenants and
certain Events of Default, upon irrevocable deposit with the Exchange Debenture
Trustee, in trust, of money and/or U.S. government obligations that will provide
money in an amount sufficient in the opinion of a nationally recognized
accounting firm to pay the principal of and premium, if any, and each
installment of interest, if any, on the due dates thereof on the Exchange
Debentures. Such trust may only be established if, among other things (i) the
Company has delivered to the Exchange Debenture Trustee an opinion of
independent counsel to the effect that the holders of the Exchange Debentures
will not recognize income, gain or loss for
79
<PAGE> 87
federal income tax purposes as a result of such deposit and defeasance and will
be subject to federal income tax on the same amount, in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred; (ii) no Default or Event of Default shall have occurred or be
continuing; and (iii) certain customary conditions precedent are satisfied.
The Company may satisfy and discharge its Obligations under
the Exchange Debenture Indenture to holders of the Exchange Debentures by
delivering to the Exchange Debenture Trustee for cancellation all outstanding
Exchange Debentures or by depositing with the Exchange Debenture Trustee or the
Paying Agent, if applicable, after the Exchange Debentures have become due and
payable, cash sufficient to pay all amounts due under all of the outstanding
Exchange Debentures and paying all other sums payable under the Exchange
Debenture Indenture by the Company. If the Company has so deposited such cash,
the Guarantors will be discharged from their Obligations under their Guarantees
of the Exchange Debentures and the Exchange Debenture Indenture.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Exchange Debentures in
accordance with the Exchange Debenture Indenture. The Registrar and the Exchange
Debenture Trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
holder to pay any taxes and fees required by law or permitted by the Exchange
Debenture Indenture. The Company is not required to transfer or exchange any
Note selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Exchange
Debentures to be redeemed. The registered holder of a Note will be treated as
the owner of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the two succeeding paragraphs, the
Exchange Debenture Indenture and the Exchange Debentures may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the Exchange Debentures then outstanding (including consents obtained
in connection with a tender offer or exchange offer for Exchange Debentures) and
any existing Default or Event of Default or compliance with any provision of the
Exchange Debenture Indenture or the Exchange Debentures may be waived with the
consent of the holders of a majority in principal amount of the then outstanding
Exchange Debentures (including consents obtained in connection with a tender
offer or exchange offer for Exchange Debentures).
Without the consent of each holder affected, an amendment or
waiver may not (with respect to any Exchange Debentures held by a non-consenting
holder of Exchange Debentures) (i) reduce the principal amount of Exchange
Debentures whose holders must consent to an amendment, supplement or waiver;
(ii) reduce the principal of, or the premium on, or change the fixed maturity of
any Note, alter the provisions with respect to the redemption of the Exchange
Debentures in a manner adverse to the holders of the Exchange Debentures, or
alter the price at which repurchases of the Exchange Debentures may be made
pursuant to an Excess Proceeds Offer or Change of Control Offer; (iii) reduce
the rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Exchange Debentures; (v) make any Note payable in money other
than that stated in the Exchange Debentures; (vi) make any change in the
provisions of the Exchange Debenture Indenture relating to waivers of past
Defaults or the rights of holders of Exchange Debentures to receive payments of
principal of or interest on the Exchange Debentures; (vii) waive a redemption
payment with respect to any Note; (viii) adversely affect the contractual
ranking of the Exchange Debentures or Guarantees of the Exchange Debentures; or
(ix) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of the
holders of Exchange Debentures, the Company, the Guarantors and the Exchange
Debenture Trustee may amend or supplement the Exchange Debenture Indenture or
the Exchange Debentures to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Exchange Debentures in addition to or in place of
certificated Exchange Debentures, to provide for the assumption of the Company's
obligations to holders of the Exchange Debentures or any Guarantor's obligation
under its Guarantee of the Exchange Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of the Exchange Debentures or that does not adversely
affect the legal rights under the Exchange Debenture Indenture of any such
holder, to release any Guarantee of the Exchange Debentures permitted to be
released under the terms of the Exchange
80
<PAGE> 88
Debenture Indenture, or to comply with requirements of the Commission in order
to effect or maintain the qualification of the Exchange Debenture Indenture
under the Trust Exchange Debenture Indenture Act.
CONCERNING THE EXCHANGE DEBENTURE TRUSTEE
The Exchange Debenture Indenture contains certain limitations
on the rights of the Exchange Debenture Trustee, should it become a creditor of
the Company, to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or otherwise.
The Exchange Debenture Trustee will be permitted to engage in other
transactions; provided, that if the Exchange Debenture Trustee acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then
outstanding Exchange Debentures will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the Exchange Debenture Trustee, subject to certain exceptions. The Exchange
Debenture Indenture provides that in case an Event of Default occurs (and is not
cured), the Exchange Debenture Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Exchange Debenture Trustee will be
under no obligation to exercise any of its rights or powers under the Exchange
Debenture Indenture at the request of any holder of Exchange Debentures, unless
such holder shall have offered to the Exchange Debenture Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Any person who receives this Prospectus may obtain a copy of
the form of Exchange Debenture Indenture without charge by writing to the
Company at 450 Newport Center Drive, 6th Floor, Newport Beach, California 92660.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Exchange
Debenture Indenture. Reference is made to the Exchange Debenture Indenture for a
full definition of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Cash Equivalents" has a substantially identical meaning to
that described in "Description of the Exchange Notes--Certain Definitions."
"Indebtedness" has a substantially identical meaning to that
described in "Description of the Exchange Notes--Certain Definitions."
"Junior Securities" means any Qualified Capital Stock and
Indebtedness of the Company that is subordinated in right of payment to the
Exchange Debentures, and has no scheduled installments of principal due, by
redemption, sinking fund payment or otherwise, on or prior to August 15, 2003.
"Qualified Capital Stock" has a substantially identical
meaning to that described in "Description of the Exchange Notes--Certain
Definitions."
"Senior Debt" means all Indebtedness of the Company, unless
the instrument governing such Indebtedness expressly provides that such
Indebtedness is not senior or superior in right of payment to the Exchange
Debentures. Notwithstanding the foregoing, Senior Debt of the Company shall not
include: (i) Indebtedness evidenced by the Exchange Debentures, (ii)
Indebtedness of the Company to any Subsidiary of the Company, or (iii) any
amounts payable or other Indebtedness to trade creditors created, incurred,
assumed or guaranteed by the Company or any Subsidiary of the Company in the
ordinary course of business in connection with obtaining goods or services.
81
<PAGE> 89
DESCRIPTION OF THE NOTES
The terms of the Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Exchange Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Notes are not freely transferable by holders thereof and were
issued subject to certain covenants regarding registration as provided therein
and in the Registration Rights Agreement (which covenants will terminate and be
of no further force or effect upon completion of this Exchange Offer).
DESCRIPTION OF THE PREFERRED STOCK
The form and terms of the Preferred Stock are substantially identical
in all respects to the terms of the Exchange Preferred Stock for which they may
be exchanged pursuant to this Exchange Offer, except that the Preferred Stock is
not freely transferable by holders thereof and was issued subject to certain
covenants regarding registration as provided therein and in the Registration
Rights Agreement (which covenants will terminate and be of no further force or
effect upon completion of this Exchange Offer).
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation was amended to authorize
1,000,000 shares of Common Stock, $.01 par value per share, 160,000 shares of
preferred stock, $.01 par value per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on each
matter to be decided by the stockholders and do not have cumulative voting
rights. Accordingly, but subject to the Securityholders Agreement, the holders
of a majority of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. The holders of Common Stock
have no preemptive, redemption or conversion rights. The holders of the Common
Stock are entitled to receive ratably such dividends, if any, as the Board of
Directors may declare from time to time out of funds legally available for such
purpose. In the event of liquidation, dissolution or winding up of the affairs
of the Company, after payment or provision for payment of all of the Company's
debts and obligations and any preferential distributions to holders of Preferred
Stock, if any, the holders of the Common Stock are entitled to share ratably in
the Company's remaining assets. All outstanding shares of Common Stock are
validly issued, fully paid and nonassessable. Holders of Warrants and the Common
Stock have certain rights and limitations with respect to their securities. See
"Security Ownership of Certain Beneficial Owners and Management--Securityholders
Agreement."
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
stockholders, to provide for the issuance of shares of preferred stock as a
class without series or in one or more series, to establish the number of
shares in each class or series and to fix the designation, powers, preferences
and rights of each such class or series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of preferred stock, the
Board of Directors may afford the holders of any class or series of preferred
stock preferences, powers and rights, voting or otherwise, senior to the rights
of holders of Common Stock. The issuance of preferred stock could have the
effect of delaying or preventing a change in control of the Company. The
Company issued the Preferred Stock and will issue the Exchange Preferred Stock
offered hereby pursuant to these provisions. See "Description of the Exchange
Preferred Stock" and "Description of the Preferred Stock."
DESCRIPTION OF THE WARRANTS
The Warrants were issued pursuant to a warrant agreement (the "Warrant
Agreement") dated as of February 25, 1998 between the Company and U.S. Trust
Company of California, N.A., as the warrant agent (the "Warrant Agent"). The
following summary of certain provisions of the Warrant Agreement and the
Warrants does not purport to be complete and is qualified in its entirety by
reference to the Warrant Agreement and the Warrants, including the definitions
therein of certain terms. The Warrant Agent may resign at any time, in which
case a successor warrant agent is to be appointed pursuant to the terms of the
Warrant Agreement.
The Warrants are not being exchanged as part of the Exchange Offer.
GENERAL
The Company issued Warrants as part of the Units. Each Warrant, when
exercised, entitles the holder thereof to receive 2.66143 shares of Common Stock
of the Company (each, a "Warrant Share") at an initial exercise price of $.01
per share (the "Exercise Price"). The Exercise Price and the number of Warrant
Shares issuable upon exercise of a Warrant are both subject to adjustment in
certain cases. See "Adjustments" below. The Warrants are immediately
exercisable. Unless exercised, the Warrants will automatically expire on the
earlier of the Public Company Date and August 15, 2008 (the "Expiration Date").
The Company will give notice of expiration not less than 90 nor more than 120
days prior to the Expiration Date to the registered holders of the then
outstanding Warrants. The Warrants entitle the holders thereof to purchase in
the aggregate 93,150 shares of Common Stock, or approximately 40% of the Common
Stock of the Company
82
<PAGE> 90
on a diluted basis (including the Common Stock issuable upon exercise of the
Warrants and any other warrants to purchase Common Stock) as of the date of
issuance of the Warrants.
The Warrants may be exercised at any time by surrendering to the
Company the Warrant certificates evidencing such Warrants, if any, with the
accompanying form of election to purchase, properly completed and executed,
together with payment of the Exercise Price. Holders of Warrants, however, are
not entitled to exercise such Warrants, unless (i) a registration statement
filed under the Securities Act in respect of the issuance of the Warrant Shares
is then effective or (ii) an exemption from the registration requirements is
available under the Securities Act for the issuance of the Warrant Shares at the
time of such exercise and, if requested by the Company, an opinion of counsel
addressed to the Warrant Agent (as defined) and the Company confirms such
exemption. Payment of the Exercise Price may be made in the form of cash or a
certified or official bank check payable to the order of the Company. Upon
surrender of the Warrant certificate and payment of the Exercise Price, the
Warrant Agent will deliver or cause to be delivered, to or upon the written
order of such holder, stock certificates representing the number of whole
Warrant Shares or other securities or property to which such holder is entitled
under the Warrants and Warrant Agreement, including, without limitation, any
cash payable to adjust for fractional interests in Warrant Shares issuable upon
such exercise. If fewer than all of the Warrants evidenced by a Warrant
certificate are to be exercised, a new Warrant certificate will be issued for
the remaining number of Warrants. In addition, a holder may exchange a Warrant
for that number of Warrant Shares with an aggregate Current Market Value equal
to the difference between (i) the Current Market Value of the Warrant Shares
issuable upon exercise of such Warrant minus (ii) the aggregate Exercise Price
for such Warrant Shares.
No fractional Warrant Shares will be issued upon exercise of the
Warrants. If any fraction of a Warrant Share would, except for the foregoing
provision, be issuable upon the exercise of the Warrants (or specified portion
thereof), the Company will, in lieu of issuing a fraction of a Warrant Share,
pay to the holder of the Warrant at the time of exercise an amount in cash equal
to the same fraction of the Current Market Value (as defined) of a share of
Common Stock less the portion of the Exercise Price attributable thereto.
After the Warrants are separately transferable, certificates for
Warrants will be issued in global form or registered form as definitive warrant
certificates and no service charge will be made for registration of transfer or
exchange upon surrender of any Warrant certificate at the office of the Warrant
Agent maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charges that may be imposed in
connection with any registration of transfer or exchange of Warrant
certificates.
The holders of the Warrants have no right to vote on matters submitted
to the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants are not entitled to share in the assets of the Company
in the event of the liquidation, dissolution or winding up of the Company's
affairs.
ADJUSTMENTS
Each of the number of Warrant Shares purchasable upon the exercise of
the Warrants and the Exercise Price is subject to adjustment in certain events,
including: (i) the payment by the Company of dividends (or other distributions)
on the Common Stock of the Company payable in shares of such Common Stock or
other shares of the Company's capital stock, (ii) subdivisions, combinations and
reclassification of the Common Stock, (iii) the distribution to all holders of
the Common Stock of any of the Company's assets, debt securities or any rights
or warrants to purchase securities (excluding cash dividends or other cash
distributions from current or retained earnings); and (iv) if the Company issues
(x) shares of Common Stock for a consideration per share without deduction for
commissions and fees less than the Current Market Value per share or (y) any
securities convertible into or exchangeable for Common Stock for a consideration
per share without deduction for commissions and fees of Common Stock initially
deliverable upon conversion or exchange of such securities that is less than the
Current Market Value per share on the date of issuance of such securities.
Notwithstanding the foregoing, no adjustment or action need be made for
(i) a change solely in the par value or no par value of the Common Stock,
provided that the Company shall not increase the par value to exceed the
Exercise Price, (ii) the conversion or exchange (other than pursuant to a
reclassification), in any case on a share-for-share basis, of Common Stock for
non-voting or light voting common stock that has rights (other than voting
rights) identical to the Common Stock, or of such non-voting or light voting
stock for Common Stock, (iii) the issuance to employees of the Company or any of
its Subsidiaries of stock or stock options in an amount which, upon purchase or
exercise, as the case may be, would represent in the aggregate, less than 15% of
the Company's common stock on a fully diluted basis, (iv) exercise of options,
warrants or convertible securities, (v) any exercise of the Warrants or (vi) any
bona fide firm commitment underwriting.
83
<PAGE> 91
As used herein, the term "Current Market Value" per share of Common
Stock or any other security at any date means, on any date of determination (a)
the average of the daily closing sale prices for each of 15 trading days
immediately preceding such date (or such shorter number of days during which
such security has been listed or traded), if the security has been listed on the
New York Stock Exchange, the American Stock Exchange or other national
securities exchange or the NASDAQ National Market for at least 10 trading days
prior to such date, (b) if such security is not so listed or traded, the average
of the daily closing bid prices for each of the 15 trading days immediately
preceding such date (or such shorter number of days during which such security
had been quoted), if the security has been quoted on a national over-the-counter
market for at least 10 trading days, (c) in the case of an underwritten public
offering, the bona fide price and (d) otherwise, the value of the security most
recently determined as of a date within the six months preceding such day by the
Company's Board of Directors.
In case of certain reclassifications, redesignations, reorganizations
or changes in the number of outstanding shares of Common Stock or consolidations
or mergers of the Company or the sale of all or substantially all of the assets
of the Company, each Warrant shall thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which such holder would have been entitled as a result of such consolidation,
merger or sale had the Warrants been exercised immediately prior thereto.
The holders of unexercised Warrants are not entitled, as such, to
receive dividends or other distributions with respect to the Common Stock,
receive notice of any meeting of the stockholders of the Company, consent to any
action of the stockholders of the Company, receive notice of any other
stockholder proceedings, or to any other rights as stockholders of the Company.
REGISTRATION RIGHTS
Holders of the Warrant Shares have certain demand and piggy-back rights
to cause the Company to register such Warrant Shares.
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS
The discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoted or modified so as to result in federal income tax consequences
different from these discussed below.
The exchange of Notes or Preferred Stock for Exchange Notes or Exchange
Preferred Stock will not constitute a taxable transaction to holders for federal
income tax purposes. Consequently, no gain or loss will be recognized by holders
upon receipt of the Exchange Notes or Exchange Preferred Stock, the holding
period of the Exchange Notes or Exchange Preferred Stock will include the
holding period of the Notes or Preferred Stock and the basis of the Exchange
Notes or Exchange Preferred Stock will be the same as the basis of the Notes or
Preferred Stock immediately before the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF NOTES OR PREFERRED
STOCK FOR EXCHANGE NOTES OR EXCHANGE PREFERRED STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN
LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER
THE LAWS OF ANY OTHER TAXING JURISDICTION.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus with any resale of such Exchange Securities. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Securities received in exchange for Notes
where such Exchange Securities were acquired as a result of market-making
activities or other trading activities. The Company will, for a period of 180
days after the Expiration Date, make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
84
<PAGE> 92
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Securities 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 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 purchaser of any such
Exchange Securities. Any broker-dealer that resells Exchange Securities 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 Securities
may be deemed to be an "underwriter" within the meaning of the Act and any
profit on any such resale of Exchange Securities and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the 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 Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed in the Registration Rights
Agreement to pay all expenses incident to the Exchange Offer, other than
commissions or concessions of any brokers or dealers, and will indemnify the
holders of the Notes or the Preferred Stock (including any broker-dealers)
against certain liabilities, including under the Securities Act.
Prior to the offering contemplated hereby, there has been no active
market for the Exchange Securities. The Initial Purchaser has advised the
Company that it currently intends to make a market in the Exchange Securities,
but it is not obligated to do so and may discontinue any such market making at
any time without notice. Accordingly, there can be no assurance that an active
market will develop for the Exchange Securities.
LEGAL MATTERS
The validity of the Exchange Securities under New York law and certain
tax matters will be passed upon for the Company by Simpson Thacher & Bartlett,
New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in
the Registration Statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
85
<PAGE> 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 30, 1996, December 29,
1997 and March 30, 1998.............................................. F-3
Consolidated Statements of Operations for the Years Ended December 25,
1995, December 30, 1996 and December 29, 1997 and for the
Thirteen Weeks Ended March 31, 1997 and March 30, 1998............... F-5
Consolidated Statements of Common Stockholders' Equity for the
Years Ended December 25, 1995, December 30, 1996 and December
29, 1997 and for the Thirteen Weeks Ended March 30, 1998............. F-6
Consolidated Statements of Cash Flows for the Years Ended December 25,
1995, December 30, 1996 and December 29, 1997 and for the
Thirteen Weeks Ended March 31, 1997 and March 30, 1998............... F-7
Notes to Consolidated Financial Statements................................ F-8
F-1
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN
RESTAURANT GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December
30, 1996 and December 29, 1997, and the related consolidated statements of
operations, common stockholders' equity (deficit) and cash flows for the years
ended December 25, 1995, December 30, 1996 and December 29, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Restaurant Group, Inc.
and subsidiaries as of December 30, 1996 and December 29, 1997, and the results
of their operations and their cash flows for the years ended December 25, 1995,
December 30, 1996 and December 29, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 27, 1998
F-2
<PAGE> 95
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1996, DECEMBER 29, 1997 AND MARCH 30, 1998
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 7,493,000 $ 5,737,000 $ 6,209,000
Accounts receivable, net of reserve of $1,041,000, $916,000
and $927,000 at December 30, 1996, December 29, 1997
and March 30, 1998, respectively 7,465,000 5,606,000 $ 5,216,000
Notes receivable -- 1,000,000 650,000
Inventories 6,818,000 5,893,000 5,703,000
Prepaid expenses 4,485,000 3,142,000 2,708,000
------------ ------------ ------------
Total current assets 26,261,000 21,378,000 20,486,000
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Land and land improvements 6,158,000 5,610,000 5,611,000
Buildings and leasehold improvements 110,071,000 110,800,000 111,147,000
Fixtures and equipment 84,162,000 85,603,000 86,168,000
Property held under capital leases 12,375,000 12,375,000 12,375,000
Construction in progress 6,487,000 1,827,000 3,077,000
------------ ------------ ------------
219,253,000 216,215,000 218,378,000
Less-Accumulated depreciation 118,084,000 123,893,000 126,406,000
------------ ------------ ------------
101,169,000 92,322,000 91,972,000
------------ ------------ ------------
OTHER ASSETS:
Intangible assets 13,039,000 12,375,000 12,376,000
Deferred debt costs 20,168,000 21,692,000 10,351,000
Leasehold interests 9,946,000 9,666,000 9,667,000
Franchise rights 6,876,000 6,024,000 6,024,000
Liquor licenses and other 6,259,000 6,857,000 6,942,000
Cost in excess of net assets acquired 13,305,000 12,332,000 12,332,000
------------ ------------ ------------
69,593,000 68,946,000 57,692,000
Less-Accumulated amortization 24,894,000 30,635,000 14,435,000
------------ ------------ ------------
44,699,000 38,311,000 43,257,000
------------ ------------ ------------
Total assets $172,129,000 $152,011,000 $155,715,000
============ ============ ============
</TABLE>
(consolidated balance sheets continued on following page)
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 96
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 33,394,000 $ 29,420,000 $ 24,494,000
Accrued liabilities 14,315,000 18,021,000 12,962,000
Accrued insurance 15,848,000 11,251,000 4,109,000
Accrued interest 1,016,000 7,514,000 1,843,000
Accrued payroll costs 11,059,000 10,861,000 10,017,000
Current portion of obligations under
capital leases 902,000 926,000 929,000
Current portion of long-term debt 41,532,000 537,000 1,109,000
------------- ------------- -------------
Total current liabilities 118,066,000 78,530,000 55,463,000
------------- ------------- -------------
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases 8,443,000 7,517,000 7,280,000
Long-term debt 131,260,000 172,419,000 159,244,000
------------- ------------- -------------
Total long-term liabilities 139,703,000 179,936,000 166,524,000
------------- ------------- -------------
DEFERRED GAIN 5,806,000 5,283,000 5,186,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE PREFERRED STOCK, MANDATORILY
REDEEMABLE -- -- 33,239,000
REDEEMABLE CUMULATIVE PREFERRED STOCK:
Redeemable cumulative senior preferred
stock, $0.01 par value; 1,400,000
shares authorized, no shares issued or
outstanding -- -- --
Redeemable cumulative junior preferred
stock, $0.01 par value; 100,000 shares
authorized, no shares issued or
outstanding -- -- --
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value; 1,000,000 shares authorized,
93,150 shares issued and outstanding at December 30, 1996
and December 29, 1997, 128,081 shares issued and
outstanding at March 30, 1998 1,000 1,000 1,000
Paid-in capital 63,246,000 63,246,000 59,646,000
Accumulated deficit (154,693,000) (174,985,000) (164,344,000)
------------- ------------- -------------
Total common stockholders' deficit (91,446,000) (111,738,000) (104,697,000)
------------- ------------- -------------
Total liabilities and common stockholders' equity $ 172,129,000 $ 152,011,000 $ 155,715,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 97
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 25, 1995,
DECEMBER 30, 1996 AND DECEMBER 29, 1997
AND FOR THE THIRTEEN WEEKS ENDED
MARCH 31, 1997 AND MARCH 30, 1998
<TABLE>
<CAPTION>
YEAR ENDED THIRTEEN WEEKS ENDED
----------------------------------------------- ------------------------------
DECEMBER 25, DECEMBER 30, DECEMBER 29, MARCH 31, MARCH 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES ........................... $ 445,966,000 $ 445,424,000 $ 440,039,000 $ 114,110,000 $ 112,122,000
RESTAURANT COSTS:
Food and beverage ................ 138,270,000 141,032,000 140,015,000 36,350,000 35,605,000
Payroll .......................... 134,532,000 137,104,000 133,732,000 34,694,000 33,202,000
Direct operating ................. 110,399,000 114,589,000 110,502,000 28,306,000 27,234,000
Depreciation and amortization .... 22,819,000 20,386,000 19,627,000 4,823,000 3,749,000
GENERAL AND ADMINISTRATIVE
EXPENSES ......................... 31,360,000 28,086,000 29,360,000 6,137,000 5,309,000
NON-CASH CHARGE FOR
IMPAIRMENT OF LONG-LIVED
ASSETS ........................... 20,178,000 13,205,000 3,047,000 -- --
------------- ------------- ------------- ------------- -------------
Operating profit (loss) ............ (11,592,000) (8,978,000) 3,756,000 3,800,000 7,023,000
INTEREST EXPENSE, net .............. 28,004,000 27,714,000 23,985,000 5,925,000 5,521,000
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes and extraordinary
loss ........................... (39,596,000) (36,692,000) (20,229,000) (2,125,000) 1,502,000
PROVISION FOR INCOME TAXES ......... 66,000 81,000 63,000 3,000 4,000
------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary
loss ........................... (39,662,000) (36,773,000) (20,292,000) (2,128,000) 1,498,000
EXTRAORDINARY GAIN(LOSS)
ON EXTINGUISHMENT OF DEBT ........ -- (1,688,000) -- -- 9,562,000
------------- ------------- ------------- ------------- -------------
Net Income (loss) .............. $ (39,662,000) $ (38,461,000) $ (20,292,000) $ (2,128,000) $ 11,060,000
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 98
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 25, 1995,
DECEMBER 30, 1996 AND DECEMBER 29, 1997
AND FOR THE THIRTEEN WEEKS ENDED MARCH 30, 1998
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK PAID-IN CAPITAL DEFICIT TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 26, 1994 $ 1,000 $ 56,132,000 $ (76,570,000) $ (20,437,000)
Net loss ............ -- -- (39,662,000) (39,662,000)
------------- ------------- ------------- -------------
BALANCE, December 25, 1995 1,000 56,132,000 (116,232,000) (60,099,000)
Net loss ............ -- -- (38,461,000) (38,461,000)
Cash contribution
from parent ......... -- 7,114,000 -- 7,114,000
------------- ------------- ------------- -------------
BALANCE, December 30, 1996 1,000 63,246,000 (154,693,000) (91,446,000)
Net loss ............ -- -- (20,292,000) (20,292,000)
------------- ------------- ------------- -------------
BALANCE, December 29, 1997 1,000 63,246,000 (174,985,000) (111,738,000)
Net income .......... -- -- 11,060,000 11,060,000
Contribution to
Parent .............. -- (3,600,000) -- (3,600,000)
Dividends on Cumulative
Preferred Stock,
Mandatorily
Redeemable ...... -- -- (419,000) (419,000)
------------- ------------- ------------- -------------
BALANCE, March 30, 1998
(unaudited) ......... $ 1,000 $ 59,646,000 $(164,344,000) $(104,697,000)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 99
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 25, 1995,
DECEMBER 30, 1996 AND DECEMBER 29, 1997
AND FOR THE THIRTEEN WEEKS ENDED MARCH 31, 1997 AND MARCH 30, 1998
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
DECEMBER 25, DECEMBER 30, DECEMBER 29,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 446,355,000 $ 445,678,000 $ 440,695,000
Cash paid to suppliers and employees (413,206,000) (415,662,000) (417,714,000)
Interest paid, net (27,912,000) (32,524,000) (17,358,000)
Income taxes paid (86,000) (74,000) (30,000)
------------- ------------- -------------
Net cash provided by (used in) operating activities 5,151,000 (2,582,000) 5,593,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,277,000) (13,279,000) (4,650,000)
Net (increase) decrease in other assets 181,000 (2,455,000) (945,000)
Proceeds from disposition of assets 29,000 64,560,000 620,000
Sale/leaseback costs included in deferred gain -- (1,112,000) --
------------- ------------- -------------
Net cash provided by (used in) investing activities (16,067,000) 47,714,000 (4,975,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (3,949,000) (51,907,000) (1,334,000)
Borrowings on indebtedness 11,000,000 1,791,000 186,000
Net increase in deferred debt costs (5,000) (4,165,000) (324,000)
Cost included in extraordinary gain on extinguishment of debt -- -- --
Issuance of cumulative preferred stock -- -- --
Cost related to issuance of cumulative preferred stock -- -- --
Payments on insurance related financing -- -- --
Payments on capital lease obligations (777,000) (857,000) (902,000)
Contribution from Parent -- 7,114,000 --
------------- ------------- -------------
Net cash provided by (used in) financing activities 6,269,000 (48,024,000) (2,374,000)
------------- ------------- -------------
NET DECREASE IN CASH (4,647,000) (2,892,000) (1,756,000)
CASH, at beginning of period 15,032,000 10,385,000 7,493,000
------------- ------------- -------------
CASH, at end of period $ 10,385,000 $ 7,493,000 $ 5,737,000
============= ============= =============
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $ (39,662,000) $ (38,461,000) $ (20,292,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary (gain) loss on extinguishment of debt -- 1,688,000 --
Loss on impairment of long-lived assets 20,178,000 13,205,000 3,047,000
Depreciation and amortization 22,819,000 20,386,000 19,627,000
Loss on disposition of assets 684,000 1,610,000 4,806,000
Amortization of deferred gain -- (123,000) (523,000)
Accretion on indebtedness 87,000 99,000 110,000
(Gain) loss in value of interest rate swap 98,000 -- --
(Increase) decrease in current assets:
Accounts receivable, net 389,000 254,000 1,656,000
Notes receivable -- -- (1,000,000)
Inventories 1,483,000 (221,000) 925,000
Prepaid expenses (1,288,000) (467,000) (766,000)
Increase (decrease) in current liabilities:
Accounts payable (1,706,000) 4,155,000 (3,974,000)
Accrued liabilities 856,000 160,000 255,000
Accrued insurance 2,167,000 (846,000) (4,597,000)
Accrued interest (93,000) (4,909,000) 6,517,000
Accrued payroll costs (861,000) 888,000 (198,000)
------------- ------------- -------------
Net cash provided by (used in) operating activities $ 5,151,000 $ (2,582,000) $ 5,593,000
============= ============= =============
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------
MARCH 31, MARCH 30,
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 114,669,000 $ 112,862,000
Cash paid to suppliers and employees (111,718,000) (111,532,000)
Interest paid, net (4,660,000) (11,171,000)
Income taxes paid (4,000) (4,000)
------------- -------------
Net cash provided by (used in) operating activities (1,713,000) (9,845,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,272,000) (2,256,000)
Net (increase) decrease in other assets 342,000 (53,000)
Proceeds from disposition of assets 9,000 --
Sale/leaseback costs included in deferred gain (61,000) --
------------- -------------
Net cash provided by (used in) investing activities (1,982,000) (2,309,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (100,000) (155,689,000)
Borrowings on indebtedness 1,199,000 155,215,000
Net increase in deferred debt costs (1,302,000) (10,351,000)
Cost included in extraordinary gain on extinguishment of debt -- (1,686,000)
Issuance of cumulative preferred stock -- 35,000,000
Cost related to issuance of cumulative preferred stock -- (2,179,000)
Payments on insurance related financing -- (7,450,000)
Payments on capital lease obligations (218,000) (234,000)
Contribution from Parent -- --
------------- -------------
Net cash provided by (used in) financing activities (421,000) 12,626,000
------------- -------------
NET DECREASE IN CASH (4,116,000) 472,000
CASH, at beginning of period 7,493,000 5,737,000
------------- -------------
CASH, at end of period $ 3,377,000 $ 6,209,000
============= =============
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $ (2,128,000) $ 11,060,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary (gain) loss on extinguishment of debt -- (9,562,000)
Loss on impairment of long-lived assets -- --
Depreciation and amortization 4,823,000 3,749,000
Loss on disposition of assets 13,000 --
Amortization of deferred gain (123,000) (97,000)
Accretion on indebtedness 27,000 21,000
(Gain) loss in value of interest rate swap
(Increase) decrease in current assets:
Accounts receivable, net 559,000 390,000
Notes receivable -- 350,000
Inventories (116,000) 190,000
Prepaid expenses 90,000 246,000
Increase (decrease) in current liabilities:
Accounts payable (282,000) (4,926,000)
Accrued liabilities (4,324,000) (5,059,000)
Accrued insurance (1,486,000) 308,000
Accrued interest 1,238,000 (5,671,000)
Accrued payroll costs (4,000) (844,000)
------------- -------------
Net cash provided by (used in) operating activities $ (1,713,000) $ (9,845,000)
============= =============
</TABLE>
F-7
<PAGE> 100
AMERICAN RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 1995, DECEMBER 30, 1996, DECEMBER 29, 1997 AND MARCH 30, 1998
(INFORMATION FOR THE THIRTEEN WEEKS ENDED MARCH 31, 1997 AND MARCH 30, 1998 IS
UNAUDITED)
1. Background and Summary of Significant Accounting Policies
a. Company
American Restaurant Group, Inc., (the "Company") a Delaware
corporation, through its subsidiaries, operates middle and
upper price full-service restaurants, casual-style restaurants
and quick-service restaurants primarily in California and
Texas. The Company is a subsidiary of American Restaurant
Group Holdings, Inc. ("Holdings"), also a Delaware
corporation. At year end 1995, 1996 and 1997, the Company and
its subsidiaries, collectively referred to herein as the
Company, operated 248, 247 and 231 restaurants, respectively.
b. Operations
The Company's operations are affected by local and regional
economic conditions, including competition in the restaurant
industry. The Company has had recurring operating losses in
recent years and was unable to meet a required debt principal
payment during 1997. A recapitalization plan was consummated
subsequent to year end 1997 (see Note 9, "Subsequent Events").
This plan substantially eliminated debt principal payments
until the year 2003.
Management believes the recapitalization will also allow it to
effect changes in its operations and has already implemented
measures to reduce overhead costs. However, the Company does
not expect to generate sufficient cash flow from operations in
the future to make principal payments on long-term debt upon
maturity in the year 2003 and, accordingly, it expects to
refinance all or a portion of such debt, obtain new financing
or possibly sell assets.
c. Interim Financial Statements
The Company's consolidated financial statements for the
interim period included herein have been prepared by the
Company, without audit, in accordance with Securities and
Exchange Commission Regulation S-X. In the opinion of
management of the Company, these consolidated financial
statements contain all adjustments (all of which are of a
normal recurring nature) necessary to present fairly the
Company's financial position as of March 30, 1998, and the
results of its operations and its cash flows for the thirteen
weeks ended March 31, 1997 and March 30, 1998. The Company's
results for an interim period are not necessarily indicative
of the results that may be expected for the year.
d. Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
e. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions which affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those
estimates.
f. Inventories and Prepaid Expenses
Inventories consist of food, beverages and supplies and are
valued at the lower of cost (first-in, first-out method) or
market value. When a restaurant is opened, the initial
purchase of expendable equipment, such as china, glassware and
silverware, is recorded as prepaid supplies and is not
depreciated; however, all replacements are expensed.
F-8
<PAGE> 101
g. Advertising Costs
Advertising costs are accrued as a percentage of sales and
expensed during the year. Production costs are allocated to
the related advertisements. At year end, production costs for
advertisements which have not been aired are included in
prepaid expenses. Prepaid advertising costs of $1,215,000 and
$912,000 were included in prepaid expenses at December 30,
1996 and December 29, 1997, respectively. Advertising expenses
included in net loss were $16,768,000, $20,870,000 and
$16,995,000 in fiscal years 1995, 1996 and 1997, respectively.
h. Preopening Costs
Costs incurred in connection with opening a new restaurant,
principally occupancy and staff training, are accumulated as
prepaid expenses and amortized over the initial year of
operations.
In April 1998, the AICPA issued Statement of Position Number
98-5 "Reporting on the Costs of Start-Up Activities" (SOP
98-5) which will require that all such preopening costs be
expensed as incurred effective for fiscal year 1999. The
impact to the Company of adopting SOP 98-5 will depend on the
number and timing of restaurant openings in the future.
i. Property and Equipment
Property and equipment is carried at the lower of cost or, if
impaired, at the estimated fair value of the asset (see Note
2, "Impairment of Long-Lived Assets"). The Company provides
for depreciation and amortization based upon the estimated
useful lives of depreciable assets using the straight-line
method. Estimated useful lives are as follows:
Land improvements 20 years
Buildings 30 to 35 years
Leasehold improvements Life of lease
Fixtures and equipment 3 to 10 years
Property held under capital
leases Life of lease
Substantially all of the Company's assets, including property
and equipment, are pledged as collateral on the senior debt of
the Company.
j. Interest Costs
Interest costs incurred during the construction period of
restaurants are capitalized. The Company capitalized
approximately $130,000, $168,000 and $90,000 for the years
ended 1995, 1996 and 1997, respectively.
k. Other Assets
Other assets include intangible assets, leasehold interests,
franchise rights, liquor licenses and cost in excess of net
assets acquired. These costs are amortized using the
straight-line method over the periods estimated to be
benefited, not greater than 40 years.
Deferred debt costs are amortized using the effective interest
method over the related debt term.
Estimated useful lives are as follows:
Intangible assets 3 to 40 years
Deferred debt costs Term of debt
Leasehold interests Life of lease
Franchise rights 35 years
Liquor licenses 40 years
Cost in excess of net
assets acquired 40 years
The following table details the components of intangible
assets included in the accompanying consolidated balance
sheets (in thousands):
F-9
<PAGE> 102
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Assembled workforce .................. $ 5,109 $ 4,862 $ 4,862
Goodwill ............................. 3,502 3,295 3,295
Trademark/service marks .............. 2,769 2,632 2,632
Acquisition costs .................... 1,209 1,143 1,143
Other ................................ 450 443 444
------- ------- -------
Total ................................ $13,039 $12,375 $12,376
======= ======= =======
</TABLE>
l. Insurance
The Company self-insures the first $100,000 of its annual
medical and dental benefits per family. The Company also
self-insures up to the first $350,000 per incident for
property and casualty risks inherent in its operations.
Reserves for losses are established currently based upon
estimated obligations.
m. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash,
accounts receivable and payable and debt instruments. The
carrying values of all financial instruments, other than debt
instruments, are representative of their fair value due to
their short-term maturity. The fair value of the Company's
long-term debt instruments is estimated based on the current
rates offered to the Company.
n. Franchise Income
The Company franchises Grandy's quick-service restaurants.
Franchise fees are recognized as income as services are
rendered. Franchise royalties based upon a percentage of the
franchisees' gross sales are accrued currently. Revenues
include franchise royalties and franchise fees of $2,176,000,
$1,995,000, and $2,586,000, respectively, for the years ended
1995, 1996 and 1997. There were 55, 56 and 61 franchised
restaurants at year end 1995, 1996 and 1997, respectively.
o. Accounting Period
The Company's fiscal year ends on the last Monday in December.
The years ended 1995 and 1997 included 52 weeks while 1996
included 53 weeks.
p. Reclassifications
Certain prior year accounts have been reclassified to conform
with the current year presentation.
2. Impairment of Long-Lived Assets
Effective December 25, 1995, the Company adopted the provisions of
Financial Accounting Standards Number 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS 121). This statement changed the method of
evaluating the impairment of the Company's long-lived assets, including
intangible assets. Various assumptions and estimates are used to
determine fair value. The calculation of the impairment loss is based
on estimated future cash flows. The estimates used to determine the
impairment adjustment can change in the near term as the economy and
operations of specific restaurants change. The adoption of SFAS 121,
together with the effects of continuing adverse operations of certain
restaurants, resulted in pre-tax non-cash charges of $20,178,000,
$13,205,000 and $3,047,000 for the years ended 1995, 1996 and 1997,
respectively.
3. Lease Obligations
The Company leases certain of its operating facilities under terms
ranging up to 40 years. These leases are classified as both operating
and capital leases. Certain of the leases contain provisions calling
for additional rentals based on sales or other provisions obligating
the Company to pay related property taxes and certain other expenses.
The following is a summary of property held under leases that have been
capitalized and included in the accompanying consolidated balance
sheets (in thousands):
F-10
<PAGE> 103
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Property.............................................. $12,375 $12,375 $12,375
Less-- Accumulated depreciation............... 7,066 7,687 7,835
------- ------- -------
$5,309 $4,688 $4,540
======= ======= =======
</TABLE>
The following represents the minimum lease payments remaining under
noncancelable operating leases and capitalized leases as of December 29,
1997 (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
FISCAL YEARS ENDING LEASES LEASES
------------ -------------
<S> <C> <C>
1998 $ 27,602 $ 1,881
1999 26,483 1,791
2000 25,220 1,694
2001 23,669 1,694
2002 1,691 1,612
Thereafter 236,239 5,026
-------- --------
Total minimum lease payments $360,904 $ 13,698
======== ========
Less--Imputed interest
(8.75% to 15.5%) 5,255
Present value of minimum lease payments 8,443
Less--Current portion 926
--------
Long-term portion $ 7,517
========
</TABLE>
Rental expense (including $1,019,000, $895,000 and $802,000,
respectively, for contingent rents under operating leases) was
$22,863,000, $24,814,000 and $30,676,000 during 1995, 1996 and 1997,
respectively.
4. Long-Term Debt
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Senior secured notes, interest
only due semi-annually beginning
September 15, 1992 at 12%, amended
beginning August 28, 1996 to 13% due
quarterly, principal due
September 15, 1998, paid
February 25, 1998 $ 84,270 $ 84,356 --
Senior secured notes, interest
only due semi-annually beginning
March 15, 1994 at 12%, amended
beginning August 28, 1996 to 13% due
quarterly, principal due September 15,
1998, paid February 25, 1998 41,584 41,906 --
Senior secured notes, interest
only due semi-annually beginning
February 24, 1998 at 11.5%, principal
due February 15, 2003 -- -- 158,600
</TABLE>
F-11
<PAGE> 104
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated notes payable, quarterly
principal payments of $5,625,000
due beginning December 31, 1998,
interest only due quarterly at 10.25%,
redeemed February 25, 1998 45,000 45,000 --
Other 1,938 1,694 1,753
------- ------- -------
172,792 172,956 160,353
Less--Current portion 41,532 537 1,109
------- ------- -------
Long-term portion $131,260 $172,419 $159,244
======== ======== ========
</TABLE>
Subsequent to year end 1997, the Company refinanced the senior secured
notes and subordinated notes payable with no principal payments due until
2003 and, therefore, this debt is classified as long-term on the balance
sheet (see Note 9, "Subsequent Events"). Maturities of the remaining
long-term debt during each of the five fiscal years subsequent to year
end 1997 are $537,000, $250,000, $281,000, $315,000 and $311,000.
In March 1996, Holdings completed a private placement of its 14% senior
discount debentures due 2005 with a face value of $17,000,000 producing
aggregate proceeds of approximately $7,114,000. Substantially all of the
net proceeds of the offering were contributed by Holdings to the Company.
The net proceeds were used by the Company for general corporate purposes.
In the second half of 1996, the Company completed sale/leaseback
transactions, under which it sold certain land, buildings, and other
improvements relating to 24 Black Angus restaurants, 30 Grandy's
restaurants and two Spoons restaurants for an aggregate sales price of
$63,358,000 and simultaneously executed long-term leases under which it
will continue to operate the restaurants. The proceeds of the
transactions were used to redeem at par a portion of its senior secured
notes in the amount of $45,403,000, representing principal and interest
thereon; to repay bank debt and interest thereon and to partially cash
collateralize outstanding letters of credit in a combined amount of
$7,408,000; and for fees and expenses of such transactions as well as a
consent solicitation relating to the senior secured notes, with the
balance used by the Company to make capital expenditures and to purchase
other assets. The Company recorded an extraordinary loss on
extinguishment of debt relating to the write-off of capitalized debt
costs in the amount of $1,646,000 and a loss of $2,230,000 on disposition
of assets underlying certain leases. In addition, a gain of $5,929,000
related to the Black Angus sale/leasebacks was deferred and will be
amortized over the initial term of the underlying leases.
In March 1997, the Company's senior secured noteholders consented to an
amendment which provided for an increase of $10 in the stated principal
amount for each $1,000 in stated principal amount of consenting
noteholders. This resulted in an increase of approximately $1,617,000 in
the stated principal amount of the senior secured notes and $1,200,000 in
the actual outstanding principal amount of the senior secured notes.
In September 1997, the Company failed to make the $40,531,000 payment
that was due under the sinking fund provisions of its senior secured
notes. The Company was late, but within the grace period, in paying the
quarterly interest of $4,124,000 on its senior secured notes which was
due
September 15, 1997. The Company was restricted from paying the quarterly
interest of $1,153,000 on its subordinated debt which was due September
15, 1997 and December 15, 1997.
In December 1997, the Company was late, but within the grace period, in
paying the quarterly interest of $4,107,000 on its senior secured notes
which was due December 15, 1997. Also in December 1997, the Company
initiated a recapitalization plan which was successfully completed in
February 1998. As part of the recapitalization plan, the Company repaid
the senior secured notes and redeemed the subordinated notes payable (see
Note 9, "Subsequent Events").
Substantially all assets of the Company are pledged to its senior
lenders. In addition, the subsidiaries have guaranteed the indebtedness
owed by the Company and such guarantee is secured by substantially all of
the assets of the subsidiaries. In connection with such indebtedness,
contingent and mandatory prepayments may be required under certain
specified conditions and events. There are no compensating balance
requirements.
F-12
<PAGE> 105
At year end 1996 and 1997, the Company had outstanding letters of credit
primarily related to its self-insurance programs of approximately
$12,356,000 and $11,005,000, respectively.
5. Income Taxes
The Company's state income tax provision, all of which was current, was
$66,000, $81,000 and $63,000 in 1995, 1996 and 1997, respectively. No
provision for Federal income tax was required in any year.
The income tax effects of temporary differences that give rise to
significant portions of the Company's deferred income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
DECEMBER 30, DECEMBER 29,
1996 1997
------------ ------------
<S> <C> <C>
Deferred income tax asset:
Reserves and other accrued expenses not
currently deductible for tax purposes .................. $ 2,543 $ 2,833
Long-lived asset impairment not
recognized on tax return ............................... 5,426 6,675
Tax gain on sale/leaseback
transactions, net ...................................... 3,759 3,545
Net operating loss carryforward ........................ 38,524 45,899
-------- --------
Deferred income tax asset ........................... 50,252 58,952
-------- --------
Deferred income tax liability:
Tax depreciation greater than
depreciation for financial reporting
purposes ............................................... (7,000 (8,034
Costs capitalized for financial
reporting purposes and expensed on tax
return ................................................. (4,973 (4,338
Other, net ............................................. (985) (1,906
-------- --------
Deferred income tax liability ....................... (12,958) (14,278)
-------- --------
Deferred asset, net of deferred liability ..................... 37,294 44,674
Valuation allowance ........................................... (37,294) (44,674)
-------- --------
Net deferred income tax asset ................................. $ -- $ --
======== ========
</TABLE>
The effective tax rate differs from the Federal statutory rate of 34
percent as a result of the following items (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
DECEMBER 25, DECEMBER 30, DECEMBER 29,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax benefit at statutory rates ................. $(13,464) $(13,049) $ (6,878)
State income tax provision for which no federal benefit
was recorded ............................................... 44 53 42
Losses for which no federal benefit was recorded .............. 11,513 12,834 6,125
Nondeductible items, principally intangible amortization ...... 1,973 243 774
-------- -------- --------
Provision for income taxes .................................... $ 66 $ 81 $ 63
======== ======== ========
</TABLE>
At December 29, 1997, the Company had available net operating loss
carryforwards for Federal income tax purposes of $134,996,000, expiring
in 2003 to 2012, and Federal general business credit carryforwards of
$9,192,000, expiring in 2003 to 2012.
6. Commitments and Contingencies
The Company is obligated under employment agreements with certain
officers and employees. Obligations under the agreements are $1,337,000,
provide for periodic increases and expire in 1998 unless extended.
The Company has been named as defendant in various lawsuits. It is the
opinion of management that the outcome of such litigation will not
materially affect the Company's financial position or results of
operations.
F-13
<PAGE> 106
7. Cumulative Preferred Stock, Mandatorily Redeemable (Unaudited)
On February 25, 1998, as part of a recapitalization plan, the Company
issued 35,000 preferred stock units consisting of $1,000 initial
liquidation preference of 12% senior pay-in-kind mandatorily redeemable
cumulative preferred stock ("Cumulative Preferred Stock") and one common
stock purchase warrant ("Warrant") initially to purchase 2.66143 shares
of the Company's common stock at an initial exercise price of one cent
per share.
Costs of approximately $2.2 million were incurred in connection with the
issuance of the Cumulative Preferred Stock. These costs were recorded on
the Company's balance sheet as a reduction to the $35.0 million
Cumulative Preferred Stock and are being amortized as a direct charge to
retained earnings using the straight-line method over the life of the
stock.
Dividends on the Cumulative Preferred Stock accrue at a rate of 12% per
annum payable semiannually on February 15 and August 15 of each year. The
Company may, at its option, pay dividends in cash or in additional shares
of Cumulative Preferred Stock. The Cumulative Preferred Stock may be
redeemed in whole or in part, at the Company's option, at 110% at the
liquidation preference plus accrued and unpaid dividends but must be
redeemed at 110% of the liquidation preference plus accrued and unpaid
dividends on August 15, 2003. The Cumulative Preferred Stock does not
have any voting rights.
8. Redeemable Cumulative Senior and Junior Preferred Stock
At year end 1996 and 1997, there were 1,400,000 authorized shares of
senior preferred stock (one cent par value). There were no issued or
outstanding shares.
At year end 1996 and 1997, there were 100,000 authorized shares of junior
preferred stock (one cent par value). There were no issued or outstanding
shares.
9. Common Stock
Common stock (one cent par value) authorized, issued and outstanding is
as follows:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29, MARCH 30,
1996 1997 1998
------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C>
Shares authorized 1,000,000 1,000,000 1,000,000
Shares issued 93,150 93,150 128,081
Shares outstanding 93,150 93,150 128,081
</TABLE>
As of December 29, 1997, all of the Company's common stock was owned by
American Restaurant Group Holdings, Inc. The Chairman and certain other
members of the Company's management owned all outstanding shares of
Holdings common stock other than shares of Holdings common stock issued
to holders of the debenture units in connection with the refinancing and
rights to acquire shares of Holdings common stock issuable upon exercise
of options and warrants. All such shares owned by management are subject
to a common stock voting trust agreement, in accordance with which the
Chairman and Chief Executive Officer of the Company exercises all voting
and substantially all other rights to which stockholders would otherwise
be entitled until the earlier of August 15, 2005 or the termination of
the common stock voting trust agreement.
Concurrent with the recapitalization plan, the Company issued 34,931
shares of common stock to six members of the Company's management at a
price of one cent per share and common stock Warrants as part of the
preferred stock units mentioned above. Each Warrant entitles the holder
to purchase 2.66143 shares of the Company's common stock at an initial
exercise price of one cent per share. The Warrants are exercisable at any
time and expire on the earlier of the date the Company consummates a
public offering of common stock or August 15, 2008. The initial values of
the shares of common stock and the Warrants were immaterial. (See Note 9,
"Subsequent Events").
10. Subsequent Events
In February 1998, the Company completed a recapitalization plan (the
"Recapitalization Plan") which included, among other things, (a) the
private placement by the Company of $155,000,000 of 11.5% senior secured
notes due 2003 (the "Notes") and (b) the issuance of 35,000 preferred
stock units of the Company (the "Units"), each Unit consisting of $1,000
initial liquidation preference of 12% senior pay-in-kind exchangeable
preferred stock and one common stock purchase warrant initially to
purchase 2.66143 shares of the common stock at an initial exercise price
of one cent per share.
F-14
<PAGE> 107
Also as part of the Recapitalization Plan, the Company concurrently (a)
redeemed at par senior secured notes of $126,381,000 together with
interest thereon and repaid certain other interest-bearing short-term
liabilities, (b) repurchased its existing 10.25% subordinated notes at
65% of the par amount of $45,000,000 together with interest thereon, and
canceled the related warrants to purchase common stock of Holdings, and
(c) established a $15,000,000 revolving credit facility to include
letters of credit. Letters of credit outstanding after the
Recapitalization Plan were $3,395,000. A quarterly fee of 0.5% per annum
is payable on the unused portion of the letter of credit facility and a
quarterly fee of 2.5% per annum is payable on outstanding letters of
credit.
As an additional component of the Recapitalization Plan, Holdings
extended the accretion period on its senior discount debentures due 2005
(the "Holdings Debentures"), from June 15, 1999 to maturity on December
15, 2005, and amended certain provisions of the Holdings Debentures. The
Holdings Debentures will accrete at a rate of 14.25%, compounded
semi-annually. In addition, holders of the Holdings Debentures with an
accreted value of approximately $10,757,000 surrendered such debentures
for cancellation and received $3,600,000 principal amount of the Notes,
in addition to the Notes sold as mentioned above. The Company recorded
this non-cash transaction as a contribution to its parent company.
In conjunction with the Recapitalization Plan, the Company issued shares
of common stock to certain members of the Company's management (the
"Management Stockholders") in an aggregate amount equal to 15% of the
common stock on a fully diluted basis. Such Management Stockholders have
entered into a voting trust agreement in accordance with which the
Chairman and Chief Executive Officer of the Company will exercise all
voting and substantially all other rights to which such Management
Stockholders would otherwise be entitled until August 15, 2005, or the
earlier termination of the agreement. The Management Stockholders also
entered into a stockholders agreement with the remaining Company
stockholders, which provides that the parties will agree to vote all of
their shares of the Company's equity securities so that the Board of
Directors of the Company consists of five directors, with two directors
designated by TCW Asset Management Company, two by the Management
Stockholders, with the remaining director being an independent director
initially designated by the initial purchaser of the Notes.
11. Comprehensive Income (Unaudited)
Effective December 30, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 Reporting Comprehensive Income.
There were no differences between the Company's net income (loss), as
reported, and comprehensive income.
F-15
<PAGE> 108
UNAUDITED SELECTED CONSOLIDATED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited consolidated pro forma condensed financial
statements of the Company present the Company's unaudited consolidated pro forma
condensed income statement for the period ended December 29, 1997 and for the
thirteen weeks ended March 30, 1998. These pro forma financial statements give
effect to the Recapitalization Plan as if all transactions contemplated thereby
had occurred as of the beginning of the period. The unaudited consolidated pro
forma condensed income statement data and notes thereto are based, in part, upon
the Company's consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K, File No. 33-48183, for the period
ended December 29, 1997 and the Company's Quarterly Report on Form 10-Q for the
thirteen weeks ended March 30, 1998. The unaudited condensed pro forma
information appearing herein does not purport to represent what the Company's
results of operations or financial position would have been had such
transactions in fact occurred at the beginning of the period or to project the
financial position or results of operations of the Company for the present year
or any future period. The unaudited pro forma consolidated financial information
should be read in conjunction with the audited consolidated financial statements
and notes thereto of the Company included herein.
AMERICAN RESTAURANT GROUP, INC.
UNAUDITED CONSOLIDATED PRO FORMA CONDENSED INCOME STATEMENT DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED DECEMBER 29, 1997
-------------------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMPANY
HISTORICAL (UNAUDITED) (UNAUDITED)
---------- ------------ -----------
<S> <C> <C> <C>
Income Statement Data:
Revenues ..................................................... $ 440,039 $ (11,526)(1) $ 428,513
Restaurant Costs:
Food and Beverage Costs .................................... 140,015 (3,670)(2) 136,345
Payroll .................................................... 133,732 (4,680)(2) 129,052
Direct Operating ........................................... 110,502 (3,924)(2) 106,578
Depreciation and Amortization .............................. 19,627 (3,227)(3) 16,400
General and Administrative Expenses .......................... 29,360 (1,700)(4) 27,660
--------- --------- ---------
Operating Profit before Impairment ........................... 6,803 5,675 12,478
--------- --------- ---------
Interest Expense, Net ........................................ 23,984 (4,478)(5) 19,506
Loss Before Provision for Income Taxes ....................... (20,229) 10,153 (10,076)
Provision for Income Taxes ................................... 63 63
--------- --------- ---------
Net Loss Before Extraordinary Items and
Preferred Stock Dividends .................................. $ (20,292) $ 10,153 $ (10,139)
========= ========= =========
Other Data:
EBITDA(6) .................................................. $ 30,713 $ 33,161
EBITDAR(7) ................................................. 61,389 61,423
EBITDA/Net Interest Expense(8) ............................. 1.3 1.7
EBITDAR/Net Interest Expense plus Rent(8) .................. 1.1 1.3
Deficiency of Earnings to cover Fixed Charges(9) ........... (20,229) (11,001)
Deficiency of Earnings to cover Fixed Charges and Preferred
Stock Dividends(10) ..................................... (20,229) (16,507)
</TABLE>
- ------------------------------------
(1) Represents the elimination of 10.9 million in revenues of closed
restaurants and the elimination of $0.6 million in non-recurring deferred
franchise income.
(2) Represents the elimination of costs associated with restaurants closed in
1998 and prior years. In connection with the closing of restaurants, in
1997 the Company established a closed unit reserve to which the Company
charges ongoing expenses relating to closed restaurants as incurred.
Approximately $1.0 per year million in cash charges will be charged to
this reserve on an on-going basis for the next several years.
PF-1
<PAGE> 109
(3) Represents the elimination of $5.1 million in amortization expense
related to capitalized debt costs associated with indebtedness repaid,
the elimination of $0.2 million in depreciation expense for closed
restaurants and the addition of $2.1 million in amortization expense
related to capitalized debt costs associated with the new indebtedness.
(4) Represents the elimination of a $0.9 million legal settlement, a $0.5
million restructuring charge and the elimination of a $0.3 million
write-off of expenses associated with a sale/leaseback transaction which
was not completed.
(5) Represents the elimination of $21.8 million in interest expense
associated with indebtedness which was repaid, the elimination of $1.0
million in fees associated with existing letters of credit, the addition
of $18.2 million of interest associated with the Notes and $0.2 million
in fees on replacement letters of credit.
(6) EBITDA is defined as operating profit plus depreciation and amortization
and any gain/loss on sale of properties. EBITDA should not be considered
an alternative to, or more meaningful than, earnings from operations or
other traditional indicators of operating performance and cash from
operating activities. On a pro forma basis, approximately $1.0 million
per year in cash charges relating to closed restaurants have not been
reflected as an expense in determining EBITDA.
(7) EBITDAR is defined as EBITDA plus rent expense. EBITDAR has been
presented for the purposes of analyzing the Company's operations before
giving effect to financing activities such as the sale/leaseback
transactions and for comparability purposes to prior periods. In the
second half of 1996, the Company completed $63.4 million of
sale/leaseback transactions with the proceeds used to repay $50.5 million
of indebtedness at par. EBITDAR should not be considered an alternative
to, or more meaningful than, earnings from operations or other
traditional indicators of operating performance and cash from operating
activities.
(8) The ratio is not presented with respect to Preferred Stock dividends
because the Company intends to pay dividends by issuing additional shares
of Preferred Stock.
(9) For the purpose of determining the deficiency of earnings to cover fixed
charges, earnings consist of earnings before extraordinary loss, income
taxes and fixed charges. Fixed charges consist of interest on
indebtedness, the amortization of debt issue costs and that portion of
operating rental expense representative of the interest factor.
(10) The deficiency of earnings to cover fixed charges and preferred stock
dividends is the same as the deficiency of earnings to cover fixed
charges except that preferred stock dividends are added to fixed charges
for the pro forma fifty-two weeks ended December 29, 1997 even though the
Company intends to pay such dividends by issuing additional shares of
Preferred Stock or Exchange Preferred Stock, as the case may be.
PF-2
<PAGE> 110
UNITED STATES TRUST COMPANY OF NEW YORK
Exchange Agent:
By Hand/Overnight Express:
(insured or registered recommended)
United States Trust Company of
New York
65 Beaver Street
Ground Floor
New York, NY 10005
Attn: Corporate Trust and
Agency Services
By Mail:
(insured or registered recommended)
United States Trust Company of
New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust and
Agency Services
By Overnight Delivery:
(insured or registered recommended)
United States Trust Company of
New York
770 Broadway
7th Floor
New York, New York 10003
Attention: Corporate Trust and
Agency Services
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm By Telephone:
800-548-6565
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "GCL") provides in relevant part that a Delaware corporation may indemnify
any persons, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer or director of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer or director acted in good faith and in
a manner he reasonably believed to be in or not opposed to the corporation's
best interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation
in the performance of his duty. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
Article IV of the by-laws of American Restaurant Group, Inc. (the
"Company") provides for indemnification of its officers and directors to the
fullest extent permitted by Section 145 of the GCL.
Section 102(b)(7) of the GCL provides that a Delaware corporation may
eliminate or limit the personal liability of a director to a Delaware
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the GCL relating to the unlawful payment of a
dividend or an unlawful stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit.
Article 7 of the Certificate of Incorporation of the Company provides
for the elimination of personal liability of its directors for monetary damages
for breach of fiduciary duty as a director, except as otherwise provided by the
GCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Purchase Agreement dated as of September 11, 1996 by and
between ARG Property Management Corporation and ARG
Enterprises, Inc. and ARG Properties I, LLC.***
2.2 Master lease dated September 11, 1996 between ARG Properties
I, LLC, as Landlord and ARG Enterprises, Inc. as Tenant.***
2.3 Lease #06152 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc. as Tenant for
Bloomington, Minnesota.***
II-1
<PAGE> 112
EXHIBIT NO. DESCRIPTION
----------- -----------
2.4 Lease #06153 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc. as Tenant for Fridley,
Minnesota.***
2.5 Lease #06154 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc. as Tenant for
Minnetonka, Minnesota.***
2.6 Lease #06155 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc. as Tenant for
Roseville, Minnesota.***
2.7 Lease dated September 11, 1996 between Safeway Inc. as
Landlord and ARG Enterprises, Inc. as Tenant.***
2.8 Guaranty of Lease dated September 11, 1996 by ARG Enterprises,
Inc. as Tenant to ARG Properties I, LLC as Landlord.***
2.9 A Guaranty of Lease dated September 11, 1996 by ARG
Enterprises, Inc. as Tenant to Captec Net Lease Realty, Inc.
as Landlord for each of four Minnesota restaurants.***
2.10 Guaranty of Lease dated September 11, 1996 by ARG Enterprises,
Inc. as Tenant and Safeway Inc. as Landlord.***
3.1 Amended and Restated Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on
July 23, 1991.*
3.2 Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company filed with the Secretary of
State of Delaware on March 21, 1992.*
3.3 Amended and Restated Certificate of Incorporation of the
Company filed with the Secretary of State of Delaware on
February 23, 1998.****
3.4 By Laws of the Company.*
4.1 Indenture dated as of February 25, 1998 between the Company
and U.S. Trust Company of California, N.A., as Trustee
(including specimen certificate of 11.5% Senior Secured Notes
due 2003).****
4.2 Warrant Agreement dated as of February 25, 1998 between the
Company and U.S. Trust Company of California, N.A., as
warrant agent (including specimen certificate of Warrant).****
4.3 Registration Rights Agreement dated as of February 25, 1998
between the Company and Jefferies & Company, Inc.****
4.4 Securityholders' and Registration Right Agreement dated as of
February 25, 1998 between the Company and Jefferies &
Company, Inc., as purchaser.****
4.5 Management Registration Right Agreement dated as of February
28, 1998 between the Company and the Management
Stockholders.****
4.6 Certificate of Designation filed with the Secretary of State
of Delaware on February 24, 1998.****
4.7 Certificate of Correction to the Certificate of Designation
filed with the Secretary of State of Delaware on February 25,
1998.****
5 Opinion of Simpson Thacher & Bartlett.*****
8 Opinion of Simpson Thacher & Bartlett regarding tax
matters.*****
9.1 Common Stock Voting Trust and Transfer Agreement dated as of
February 24, 1998 among the Company and the stockholders
parties thereto and Anwar S. Soliman, as voting trustee.****
9.2 Securityholders Agreement dated as of February 25, 1998 among
the Company, American Restaurant Group Holdings, Inc.,
Jefferies & Company, Inc., TWC Asset Management Company and
the Management Stockholders.****
10.1 Amended and Restated Employment Agreement dated as of December
14, 1993 between the Company and Anwar S. Soliman.**
10.2 Amended and Restated Employment Agreement dated as of December
14, 1993 between the Company and Ralph S. Roberts.**
10.3 Amended and Restated Employment Agreement dated as of December
14, 1993 between the Company and Wilfred H. Partridge.**
12 Statement setting forth Computation of Ratio of Earnings to
Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.*****
21.1 Subsidiaries of the Company.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5
hereto).*****
23.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 8
hereto).*****
25 Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of United States Trust Company
of New York.*****
99.1 Form of Letter of Transmittal.*****
99.2 Form of Notice of Guaranteed Delivery.*****
99.3 Form of Exchange Agent Agreement to be entered into between
the Company and United States Trust Company of New York.*****
II-2
<PAGE> 113
EXHIBIT NO. DESCRIPTION
----------- -----------
_________
* Incorporated by reference to the Registrant's Registration
Statement No. 33-48183 on Form S-4 filed with the Securities
and Exchange Commission on May 28, 1992 as amended with
Amendment No. 1 filed on September 11, 1992.
** Incorporated by reference to the Registrant's Registration
Statement No. 33-74010 on Form S-4 filed with the Securities
and Exchange Commission on January 12, 1994.
*** Incorporated by reference to the Registrant's Current Report
on Form 8-K dated September 13, 1996 filed with the Securities
and Exchange Commission on September 30, 1996.
**** Incorporated by reference to the Registrant's Annual Report
on Form 10-K dated December 29, 1997 filed with the
Securities and Exchange Commission on March 20, 1998.
***** To be filed by amendment.
ITEM 22. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
B. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; or
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
II-3
<PAGE> 114
(5) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-4
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, hereunto duly authorized in the City of Newport
Beach, State of California on the 2nd day of June, 1998.
AMERICAN RESTAURANT GROUP, INC.
By: /s/ William J. McCaffrey, Jr.
------------------------------
William J. McCaffrey, Jr.
Chief Financial Officer, Vice President, Treasurer
and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
AMERICAN RESTAURANT GROUP, INC.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Anwar S. Soliman Chairman, Chief Executive June 2, 1998
- ---------------------------- Officer and Director
(Anwar S. Soliman) (Principal Executive Officer)
/s/ William J. McCaffrey, Jr. Chief Financial Officer, June 2, 1998
- ---------------------------- Vice President, Treasurer,
(William J. McCaffrey, Jr.) Assistant Secretary
(Principal Financial
and Accounting Officer)
/s/ Ralph S. Roberts President, Chief Operating June 2, 1998
- ---------------------------- Officer and Director
(Ralph S. Roberts)
/s/ Robert D. Beyer Director June 2, 1998
- ----------------------------
Robert D. Beyer)
/s/ George G. Golleher Director June 2, 1998
- ----------------------------
(George G. Golleher)
/s/ Jeffry K. Weinhuff Director June 2, 1998
- ----------------------------
(Jeffry K. Weinhuff)
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent pubilc accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our report dated February 27, 1998 included
in American Restaurant Group, Inc's Form 10-K for the fiscal year ended
December 29, 1997, and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
June 2, 1998
