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RULE NO. 424(b)(3)
REGISTRATION NO. 333-62775
PROSPECTUS
NE RESTAURANT COMPANY, INC.
OFFER TO EXCHANGE
10 3/4% SENIOR NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING
10 3/4% SENIOR NOTES DUE 2008
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
WEDNESDAY, DECEMBER 16, 1998, UNLESS EXTENDED BY NE RESTAURANT COMPANY, INC.
As more fully described herein under "The Exchange Offer--Expiration Date;
Extensions; Amendments," the time the Exchange Offer expires (including
extensions, if any, by NE Restaurant Company, Inc.) is referred to as the
"Expiration Date."
NE Restaurant Company, Inc., a Delaware corporation ("NERCO" or the
"Company"), is hereby offering (the "Exchange Offer"), upon the terms and
subject to the conditions set forth in this prospectus (the "Prospectus") and
the accompanying letter of transmittal (the "Letter of Transmittal"), to
exchange $1,000 principal amount of its 10 3/4% Senior Notes due July 15, 2008
(the "Exchange Notes"), which exchange has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus is a part,
for each $1,000 principal amount of its outstanding 10 3/4% Senior Notes due
July 15, 2008 (the "Private Notes" and, collectively with the Exchange Notes,
the "Notes"), of which $100,000,000 in aggregate principal amount was issued
and sold on July 20, 1998 in a transaction exempt from registration under the
Securities Act (the "Private Offering") and is outstanding on the date hereof.
The form and terms of the Exchange Notes are substantially identical in all
respects (including principal amount, interest rate, maturity and ranking) to
the form and terms of the Private Notes, except that (i) the Exchange Notes
will have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Exchange and Registration Rights Agreement (as defined herein),
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes and
will be issued pursuant to, and entitled to the benefits of, the Indenture (as
defined herein) governing the Private Notes. The Exchange Offer is being made
to satisfy the obligations of the Company under the Exchange and Registration
Rights Agreement relating to the Private Notes. See "The Exchange Offer" and
"Description of Exchange Notes."
The Exchange Notes will bear interest at the rate of 10 3/4% per annum,
payable in cash semi-annually on January 15 and July 15 of each year,
commencing on January 15, 1999. The Exchange Notes will mature on July 15,
2008. Except as described below, the Company may not redeem the Exchange Notes
prior to July 15, 2003. On and after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if any, to the date of
redemption. In addition, at any time and from time to time prior to July 15,
2001, the Company may, subject to certain requirements, redeem up to 35% of
the original aggregate principal amount of the Notes with the net cash
proceeds of one or more Equity Offerings (as defined herein) at a redemption
price equal to 110.75% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption. The Exchange Notes
will not be subject to any sinking fund requirements. Upon the occurrence of a
Change of Control (as defined herein), each holder of Exchange Notes will have
the right to require the Company to repurchase all or any part of such
holder's Exchange Notes at a purchase price in cash equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
to the date of purchase. See "Description of Exchange Notes."
(CONTINUED ON NEXT PAGE)
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SEE "RISK FACTORS" BEGINNING ON PAGE 22 HEREOF FOR CERTAIN FACTORS WHICH
HOLDERS, OR PROSPECTIVE HOLDERS, OF THE NOTES SHOULD CONSIDER IN CONNECTION
WITH THE EXCHANGE OFFER.
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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 OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1998
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(CONTINUED FROM PREVIOUS PAGE)
The Exchange Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all present and future senior
indebtedness of the Company and senior in right of payment to any subordinated
indebtedness of the Company. Substantially all of the assets of the Company
are, or will be, pledged to lenders other than the holders of Exchange Notes.
The Exchange Notes will be fully and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis (the "Guarantees") by the Company's
existing and future Restricted Subsidiaries (as defined herein) other than
Restricted Subsidiaries that are, or will become, parties to the FFCA Loans
(as defined herein) and other similar secured financings (such guarantors,
collectively, the "Subsidiary Guarantors"). The Guarantees will be effectively
subordinated in right of payment to all existing and future secured
indebtedness of the Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness. The Exchange Notes will be effectively
subordinated to the Company's Senior Bank Facility (as defined herein) to the
extent of the value of the assets securing such indebtedness and to any
additional secured indebtedness of the Company permitted under the Indenture
and the Exchange Notes will be structurally subordinated to indebtedness under
the FFCA Loans and to other similar secured indebtedness of the Company
permitted under the Indenture. As of the end of the First Six Months 1998 (as
defined herein), on an adjusted basis after giving effect to the Transactions
(as defined herein), (i) the aggregate principal amount of senior indebtedness
of the Company and the Restricted Subsidiaries would have been approximately
$124.0 million (excluding unused revolving loan availability), of which $23.8
million would have been indebtedness in respect of the FFCA Loans, and (ii)
the Company would have had no subordinated indebtedness outstanding. See
"Description of Exchange Notes" and "Description of Other Indebtedness."
The Private Notes were originally issued and sold in the Private Offering to
"qualified institutional buyers," as defined in Rule 144A under the Securities
Act ("QIB's"), pursuant to Rule 144A of the Securities Act ("Rule 144A") and
in offshore transactions to persons other than "U.S. persons," as defined in
Regulation S under the Securities Act ("Non-U.S. Persons"), in reliance on
Regulation S under the Securities Act. Based on an interpretation by the staff
of the Securities and Exchange Commission (the "Commission") set forth in no-
action letters issued to third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Private Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided that the holder is
acquiring Exchange Notes in the ordinary course of its business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as
required by the Exchange and Registration Rights Agreement, that such
conditions have been met. The Company believes that none of the registered
holders of the Private Notes is an affiliate (as such term is defined in Rule
405 under the Securities Act) of the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Letter of
Transmittal 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 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 received in exchange for Private Notes, where
such Private Notes were acquired by such broker-dealer as a result of market-
making or other trading activities. The Company has agreed to make this
Prospectus (as it may be amended or supplemented) available to any broker-
dealer, upon request, for use in connection with any such resale, for a period
of up to 180 days after the Registration Statement is declared effective by
the Commission or until such earlier date on which all the Exchange Notes are
freely tradable. However, any broker-dealer who acquired the Private Notes
directly from the Company may not fulfill its prospectus delivery requirements
with this Prospectus, but must comply with the registration and prospectus
delivery requirements of the Securities Act. See "The Exchange Offer--Resale
of the Exchange Notes" and "Plan of Distribution."
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The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with the Exchange Offer. See "The Exchange Offer--Resale of the Exchange
Notes," "Use of Proceeds" and "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the Notes.
The Company does not intend to apply for listing of the Exchange Notes on any
national securities exchange or for their quotation on an automated dealer
quotation system, but the Private Notes are eligible for trading by QIB's in
the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL") market of the National Association of Securities Dealers, Inc.
There can be no assurance that an active market for the Exchange Notes will
develop. To the extent that a market for the Exchange Notes does develop, the
market value of the Exchange Notes will depend on market conditions (such as
yields on alternative investments), general economic conditions, the Company's
financial condition and certain other factors. Such conditions might cause the
Exchange Notes, to the extent they are traded, to trade at a significant
discount from face value. In addition, any Private Notes not tendered and
accepted in the Exchange Offer will remain outstanding. To the extent that the
Private Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered, and tendered but unaccepted, Private Notes could
be adversely affected. Following consummation of the Exchange Offer, the
holders of Private Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Private Notes except under certain limited
circumstances. See "The Exchange Offer--Termination of Certain Rights."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date. Tenders of Private Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. The Exchange Offer is not
conditioned on any minimum aggregate principal amount of Private Notes being
tendered or accepted for exchange; provided, however, Private Notes may be
tendered only in integral multiples of $1,000. The Exchange Offer is subject
to certain customary conditions. See "The Exchange Offer--Conditions.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE
HEREOF AND SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER
THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL AT
ANY TIME NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS
OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL FEBRUARY 14, 1999 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
IN MAKING AN INVESTMENT DECISION REGARDING THE SECURITIES OFFERED HEREBY,
PROSPECTIVE INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND
THE TERMS OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED. THE
EXCHANGE OFFER IS BEING MADE ON THE BASIS OF THIS PROSPECTUS.
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE CONTENTS
OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES AS THEY RELATE
TO SUCH INVESTOR'S PARTICULAR INDIVIDUAL CIRCUMSTANCES. THE COMPANY IS NOT
MAKING ANY REPRESENTATION TO ANY PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES
REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH PERSON UNDER
APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS.
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Except as described herein, the Exchange Notes will be represented by global
Exchange Notes in fully registered form, deposited with a custodian for and
registered in the name of a nominee of The Depository Trust Company ("DTC").
Beneficial interests in such Exchange Notes will be shown on, and transfers
thereof will be effected through, records maintained by DTC and its
participants. Beneficial interests in such Exchange Notes will trade in DTC's
Same-Day Funds Settlement System, and secondary market trading activity in
such interests will therefore settle in immediately available funds. See "The
Exchange Offer--Book-Entry Transfer."
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Bertucci's" and "Business" regarding the Company's future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of forward-
looking terminology such as "may," "will," "expect," "intend," "estimate,"
"anticipate" or "believe" or the negative thereof or variations thereon or
similar terminology. Although the Company believes that the expectations
reflected in such forward-looking statements will prove to have been correct,
it can give no assurance that such expectations will prove to have been
correct. Prospective investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Important factors
that could cause actual results to differ materially from the Company's
expectations (the "Cautionary Statements") are disclosed under "Risk Factors"
and elsewhere in this Prospectus, including, without limitation, in
conjunction with some of the forward-looking statements included in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on its behalf, are expressly
qualified in their entirety by the Cautionary Statements.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, annexes and schedules thereto,
the "Registration Statement") pursuant to the Securities Act, and the rules
and regulations promulgated thereunder, with respect to the securities being
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits filed
as a part thereof and otherwise incorporated therein. 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 such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the
matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. Copies of the Registration Statement and the
exhibits may be inspected, without charge, at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material may also be obtained at prescribed rates from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. Such materials may also be
inspected on the Internet at http://www.sec.gov. Periodic reports, proxy
statements and other documents filed by Bertucci's, Inc. with the Commission
pursuant to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), to which Bertucci's, Inc. was subject
prior to its termination of registration under the Exchange Act in connection
with the consummation of the Acquisition (as defined herein), may be
inspected, and copies thereof obtained, at the places and in the manner set
forth above.
Upon consummation of the Exchange Offer, the Company will become subject to
the informational reporting requirements of the Exchange Act, and in
accordance therewith will file reports and other information with the
Commission. Such materials filed by the Company with the Commission may be
inspected, and copies thereof obtained, at the places, and in the manner, set
forth above.
In the event that the Company ceases to be subject to the informational
reporting requirements of the Exchange Act, the Company has agreed that, for
so long as any of the Notes remain outstanding, it will furnish to the holders
of the Notes and file with the Commission (unless the Commission will not
accept such a filing) (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 as if the Company were required to file such forms, including 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 accountants, and (ii) all reports that would be
required to be filed with the Commission on Form 8-K as if the Company were
required to file such reports, in each case within the time periods set forth
in the Commission's rules and regulations. In addition, for so long as any of
the Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
NEITHER THE FRANCHISOR (AS DEFINED HEREIN) NOR ANY OF ITS SUBSIDIARIES,
AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, ACCOUNTANTS OR ATTORNEYS
ARE IN ANY WAY PARTICIPATING IN, APPROVING OR ENDORSING THE EXCHANGE OFFER,
ANY OF THE SELLING OR ACCOUNTING PROCEDURES USED IN THE EXCHANGE OFFER, OR ANY
REPRESENTATIONS MADE IN CONNECTION WITH THE EXCHANGE OFFER. THE GRANT BY THE
FRANCHISOR OF ANY FRANCHISE OR OTHER RIGHTS TO THE COMPANY IS NOT INTENDED AS,
AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL, ENDORSEMENT
OR ADOPTION OF ANY STATEMENT REGARDING FINANCIAL OR OTHER PERFORMANCE WHICH
MAY BE CONTAINED IN THIS PROSPECTUS.
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ANY REVIEW BY THE FRANCHISOR OF THIS PROSPECTUS OR THE INFORMATION INCLUDED
HEREIN HAS BEEN CONDUCTED SOLELY FOR THE BENEFIT OF THE FRANCHISOR TO
DETERMINE CONFORMANCE WITH THE FRANCHISOR'S INTERNAL POLICIES, AND NOT TO
BENEFIT OR PROTECT ANY OTHER PERSON. NO INVESTOR SHOULD INTERPRET SUCH REVIEW
BY THE FRANCHISOR OR THE USE AND DISPLAY OF ANY FRANCHISOR LOGOS, TRADEMARKS
OR SERVICEMARKS HEREIN AS APPROVAL, ENDORSEMENT, ACCEPTANCE OR ADOPTION OF ANY
REPRESENTATION, WARRANTY OR COVENANT CONTAINED IN THE MATERIALS REVIEWED.
THE ENFORCEMENT OR WAIVER OF ANY OBLIGATION OF THE COMPANY UNDER ANY
AGREEMENT BETWEEN THE COMPANY AND THE FRANCHISOR OR FRANCHISOR'S AFFILIATES IS
A MATTER OF THE FRANCHISOR'S OR THE FRANCHISOR'S AFFILIATES' SOLE DISCRETION.
CERTAIN DEFINITIONS
All references to "Fiscal 1991" refer to the 53-week period ended October 7,
1991 which was the final year of operations by an unaffiliated prior
franchisee of the Company's initial 15 Chili's (as defined herein)
restaurants. All historical references to the Company's "fiscal years" or
"fiscal quarters" or "fiscal six months" refer to calendar years and calendar
quarters and calendar six-month periods. For example, references to "fiscal
1997" shall mean the Company's fiscal year ended December 31, 1997 and to
"first fiscal six months 1998" shall mean the Company's fiscal six-month
period ended June 30, 1998. All historical references to "Bertucci's fiscal"
year refer to the 52- or 53-week period ended on the last Saturday in December
of any calendar year. For example, references to "Bertucci's fiscal 1997"
shall mean Bertucci's fiscal year ended December 27, 1997. All historical
references to "Bertucci's first fiscal six months" refer to the 28-week period
following the end of the immediately preceding Bertucci's fiscal year.
Bertucci's fiscal year has historically consisted of a 16-week first fiscal
quarter followed by two 12-week fiscal quarters and a 12- or 13-week fourth
fiscal quarter. For example, Bertucci's first fiscal quarter 1997, Bertucci's
second fiscal quarter 1997, Bertucci's third fiscal quarter 1997 and
Bertucci's fourth fiscal quarter 1997 refer to Bertucci's fiscal quarters
ended April 19, 1997, July 12, 1997, October 4, 1997 and December 27, 1997,
respectively.
For purposes of pro forma financial data, "Fiscal 1997" shall mean a
combined fiscal year comprising the Company's fiscal year ended December 31,
1997 and Bertucci's fiscal year ended December 27, 1997, as adjusted for the
Transactions (as defined herein). The "First Six Months 1997" shall mean a
combination of the Company's fiscal six-month period ended June 30, 1997 and
Bertucci's fiscal six-month period ended July 12, 1997, as adjusted for the
Transactions. The "First Six Months 1998" shall mean a combination of the
Company's fiscal six-month period ended June 30, 1998 and Bertucci's fiscal
six-month period ended July 11, 1998, as adjusted for the Transactions. The
"Last Twelve Months" shall mean a combined fiscal period ended with the end of
the First Six Months 1998 comprising the last twelve months ended as of June
30, 1998 for the Company and the last twelve months ended as of July 11, 1998
for Bertucci's, as adjusted for the Transactions.
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PROSPECTUS SUMMARY
The following summary is intended to highlight certain information contained
elsewhere in this Prospectus. This summary is not intended to be a complete
statement of all material features of the Exchange Offer and is qualified in
its entirety by the more detailed information, risk factors and consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references herein (i) to
the "Company" or "NERCO" refer to NE Restaurant Company, Inc., a Delaware
corporation, and its subsidiaries, including Bertucci's, and (ii) to
"Bertucci's" refer to Bertucci's, Inc. and its subsidiaries. All references to
the Company as the owner and operator of the Bertucci's and Sal and Vinnie's
Sicilian Steakhouse ("Sal and Vinnie's") restaurants give pro forma effect to
the Acquisition. Prior to consummation of the Acquisition, the Company did not
own or operate any of the Bertucci's or Sal and Vinnie's restaurants. The
Company is not required to comply with any regulatory requirements or obtain
approvals other than under U.S. federal securities laws in connection with the
Exchange Offer.
THE COMPANY
The Company is a leading operator of full-service, casual dining restaurants
in New England. The Company develops and operates two distinct restaurant
franchises, Chili's Grill & Bar(R) ("Chili's") and On The Border Mexican
Cafe(R) ("On The Border") restaurants, under franchise agreements with Brinker
International, Inc., a publicly-owned company ("Brinker" or the "Franchisor"),
together with a proprietary restaurant concept under the name Bertucci's Brick
Oven Pizzeria(R).
The Company is the largest Chili's franchisee and has received numerous
awards from the Franchisor, including being named Chili's "Franchisee of the
Year" in 1992 and 1996 and "Developer of the Year" in 1996. As of September 30,
1998, the Company operated 33 Chili's and three On The Border restaurants in
five New England states. The Company is the successor to a series of limited
partnerships formed in 1991 to acquire 15 Chili's restaurants from a prior
franchisee. Upon its acquisition of the 15 Chili's restaurants in 1991, the
Company recruited a new management team and undertook a series of steps to
enhance operations, including reducing administrative overhead, coordinating a
new advertising campaign, introducing new menu items, renovating restaurant
facilities, installing new information systems and improving purchasing
decisions. The Company has increased the average sales per restaurant of its
Chili's restaurants from approximately $1.8 million for Fiscal 1991, the final
year of ownership by the prior franchisee, to $2.5 million for fiscal 1997. In
addition, since 1991, the Company has grown through the addition of 16 new
Chili's and two On The Border restaurants in the New England market. The
Company also has increased overall net sales and EBITDA (as defined herein)
from approximately $27.5 million and $0.3 million, respectively, for Fiscal
1991 to $81.4 million and $9.0 million, respectively, for fiscal 1997.
In July 1998, the Company completed its acquisition of Bertucci's, a
publicly-owned restaurant company. As of September 30, 1998, the Company owned
and operated 89 full-service, casual dining, Italian-style restaurants under
the name Bertucci's Brick Oven Pizzeria(R) located primarily in the
northeastern and Mid-Atlantic United States and one Sal and Vinnie's steakhouse
located in Massachusetts. Management believes that Bertucci's is a proven
value-based concept with strong brand recognition and that the Acquisition
strengthens the Company's position as a leading operator of casual dining
restaurants in the northeastern United States. As a result of the Acquisition,
the Company offers its targeted customer base three distinct yet complementary
casual dining menus: "American/southwestern" at Chili's, "Tex-Mex" at On The
Border and Italian at Bertucci's. In addition, management expects to realize
cost savings from the Acquisition primarily due to headcount reductions and, to
a lesser extent, reduced administrative and overhead expenses, improved
purchasing practices and greater economies of scale. After giving pro forma
effect to the Transactions, for the Last Twelve Months, the Company had net
sales of $230.8 million, Adjusted EBITDA (as defined herein) of $27.8 million
and a net loss of $1.1 million.
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Since the consummation of the Acquisition, the Company's organizational
structure has been as set forth below.
ORGANIZATIONAL CHART OF
NE RESTAURANT COMPANY, INC. AND SUBSIDIARIES
[CHART APPEARS HERE]
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CONCEPTS
The Company's restaurants are full-service restaurants, featuring substantial
portions of a variety of high quality foods at moderate prices accompanied by
quick, efficient and friendly table service. The Company's restaurants are all
casual dining concepts which are intended to fill a market niche between the
fine-dining and fast-food segments of the restaurant industry. These
restaurants are designed to appeal to a broad customer base of adults and
families with children.
Chili's. Chili's restaurants feature a variety of "All-American" foods with a
southwestern emphasis. The Chili's concept was initiated in 1975 with the
opening of the first Chili's restaurant in Dallas, Texas. As of September 30,
1998, the Chili's restaurant system in the United States consisted of 589
restaurants in 46 states, of which 424 were Franchisor-owned and 165 were
franchised. During 1997, system-wide revenues from Chili's restaurants in the
United States were approximately $1.2 billion. The Company holds the exclusive
rights to operate up to an aggregate of 55 Chili's restaurants (including the
33 it currently operates) in all six New England states and in Westchester
County, New York.
On The Border. On The Border restaurants feature a Tex-Mex menu served in a
distinctive dining atmosphere reminiscent of a Mexican cantina. The On The
Border concept was initiated in 1982 with the opening of the first On The
Border restaurant in Dallas, Texas. As of September 30, 1998, the On The Border
restaurant system in the United States consisted of 73 restaurants in 19
states, of which 55 were Franchisor-owned and 18 were franchised. The Company
holds the exclusive rights to operate up to an aggregate of 31 On The Border
restaurants (including the three it currently operates) in all six New England
states and in Westchester County and upstate New York.
Bertucci's. Bertucci's restaurants feature Italian-style entrees made from
original recipes, including gourmet pizza and specialty pasta dishes.
Bertucci's endeavors to differentiate itself from other pizzerias by offering a
variety of freshly prepared foods using high-quality ingredients and brick-oven
baking techniques. Bertucci's also seeks to distinguish itself with its
contemporary European-style, open-kitchen design. The first Bertucci's was
opened in Somerville, Massachusetts in 1981. As a proprietary concept,
Bertucci's provides the Company with significant flexibility to execute the
concept as the Company may best determine.
COMPETITIVE STRENGTHS
Proven Restaurant Concepts. The Chili's, On The Border and Bertucci's
concepts have been in existence for 23, 16 and 17 years, respectively.
Management believes that Chili's, with its high quality American/southwestern
menu, On The Border, with its distinctive Tex-Mex menu, and Bertucci's, with
its gourmet brick-oven pizza, have each proven popular with consumers over
time. Management believes that the reputation of these restaurants for offering
a distinctive selection of moderately priced, high quality food, combined with
a high level of customer service, has created valuable operations with strong
brand name recognition and customer loyalty. To maintain its strong brand
awareness and promote its restaurants, the Company: (i) clusters restaurant
locations; (ii) seeks to ensure an enjoyable guest experience; and
(iii) implements strategic marketing and advertising initiatives.
Innovative Operator. The Company has developed and implemented several
strategies to enhance operations of the Chili's concept including: (i)
tailoring the national menu with innovative and regional specialties such as
"boneless buffalo wings," "fish & chips" and New England clam chowder; (ii)
initiating a comprehensive management training program, elements of which have
been adopted by the Franchisor; (iii) redesigning the restaurant facility from
the standard Chili's prototype to a more efficient model, elements of which the
Franchisor has begun to incorporate into its own restaurants; (iv) formulating
media strategies and developing its own creative material to supplement
advertising materials supplied by the Franchisor; and (v) implementing
sophisticated management information systems, components of which have been
incorporated
3
<PAGE>
by the Franchisor. The Company has received numerous awards from the
Franchisor, including being named Chili's "Franchisee of the Year" in 1992 and
1996 and "Developer of the Year" in 1996. In addition, the Company participates
in the Franchisor's franchisee advisory council.
Clustered Restaurant Locations. The Company believes that its strategy of
building a critical mass of restaurants in specific cities in the New England
market has enabled it to quickly respond to the needs of its guests, employees
and markets. Clustering restaurant locations allows the Company to realize
certain benefits including: (i) improved purchasing power; (ii) marketing
efficiencies; and (iii) increased knowledge of the Company's customers, markets
and future site locations. The Company believes that the Acquisition should
yield further operational efficiencies as a substantial number of Bertucci's
restaurants are located in the same markets as the Company's existing Chili's
restaurants.
Commitment to Personnel Training. The Company believes that an essential
aspect of its continued success is the training of its personnel. The Company
requires all of its Chili's and On The Border general and restaurant managers
to complete a comprehensive 13-week management training program developed by
the Company. The program instructs management trainees in detailed, concept-
specific food preparation standards and procedures as well as administrative
and human resource functions. The Company also requires each of its non-
management employees to undergo extensive training administered by the
managers. Each of these levels of training is designed to increase product
quality, improve operational safety, increase overall productivity and guest
satisfaction and promote the concept of "continuous improvement." Management
expects to enhance the Bertucci's training program by increasing its length
from eight to 13 weeks and centralizing administration of the program from its
current regional administration.
Management Structure and Experience. The Company believes that one of its
greatest strengths is the operating philosophy of its highly experienced
management team. The five most senior members of the Company's management team
have an average of more than: (i) 20 years in the restaurant industry; (ii) 11
years in the casual dining segment of the industry; and (iii) six years with
the Company. Since the Company's inception in 1991, this management team has
significantly improved the operating performance of the Company's initial 15
Chili's restaurants and successfully developed an additional 21 new
restaurants. Senior management closely monitors and actively supports the
operations of each of the Company's restaurants and incentivizes restaurant-
level managers, through hiring, training, motivational and reward practices, to
operate individual restaurants in a proprietary manner by developing their own
methods to improve operations and enhance the guest experience. The Company
believes that the independent entrepreneurial spirit of its on-site personnel
together with the guidance provided by senior management will continue to be a
key factor in the Company's efforts to maximize revenue, control costs,
engender employee satisfaction and build brand loyalty. Members of the
Company's senior management team own approximately 12.1% of the common stock of
the Company.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading operator
of full-service, casual dining restaurants, thereby increasing net sales and
cash flow. In order to accomplish its goal, the Company intends to pursue the
following strategies:
Further Enhance the Guest Dining Experience. The Company continually
evaluates new initiatives which will improve food presentation and customer
service, and create a consistent enhanced brand image for each of its
restaurants. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company seeks to
maintain a consistently high standard of food preparation and customer service
through stringent operational controls and extensive employee training.
Increase Market Penetration. The Company's development strategy is to
increase market penetration of each of the Chili's, On The Border and
Bertucci's concepts by continuing to cluster its restaurants. The Company
believes that such clustering will enable it to expand brand awareness of the
three concepts in under-penetrated markets and increase marketing, advertising,
management, purchasing and administrative efficiencies.
4
<PAGE>
Increase Operating Efficiencies. The Company believes there are significant
opportunities for improvement in margins and cash flow through intercompany
cooperation among the three restaurant concepts, including: (i) realizing
economies of scale from the combined purchasing power of a larger company;
(ii) achieving operating efficiencies through the implementation of a "best
practices" program that will seek, through management's review and analysis of
the processes, controls and service levels of the post-Acquisition Company, to
identify and implement business practices that promote the most efficient
operation of each department of the Company; and (iii) reducing headcount,
certain professional fees and other selling, general and administrative
expenses. Management estimates that the Company will realize at least $2.0
million of annual cost savings in connection with such increased operating
efficiencies.
Pursue Selective Restaurant Expansion. Management intends: (i) to continue to
open new Chili's and On The Border restaurants in select New England,
Westchester County and additionally, in the case of On The Border, upstate New
York markets pursuant to its Area Development Agreements (as defined herein)
with the Franchisor; and (ii) as a result of the Acquisition, to expand in
select additional markets through new Bertucci's restaurant openings in the New
England, Mid-Atlantic and other regions that Bertucci's currently serves and in
such other markets as the Company may determine. Management also believes that,
as a result of the Acquisition, future opportunities may arise to develop
Bertucci's and Chili's or Bertucci's and On The Border restaurants together on
single real estate parcels, yielding improved development economics and capital
returns.
Standardize and Enhance Bertucci's Design. Bertucci's restaurants
historically have been constructed in varying sizes (averaging approximately
6,200 square feet) and designs, with no two interior decors exactly alike. The
Company's management believes that Bertucci's restaurant investment economics
would benefit from a standardized design which the Company expects to implement
in restaurants to be opened during 1999. Bertucci's former management recently
had begun to build smaller restaurants with fewer seats and smaller bar areas,
a format which the Company expects to enhance by introducing a prototype that:
(i) further reduces building size to a range of 4,800 to 5,400 square feet,
with seating for approximately 150 guests; (ii) features service bars instead
of full bar areas to account for Bertucci's moderate levels of alcohol sales;
and (iii) standardizes interior decor.
THE TRANSACTIONS
Pursuant to the terms of an Agreement and Plan of Merger dated as of May 13,
1998, the Company, through its wholly-owned subsidiary NERC Acquisition Corp.
("Acquisition Sub"), commenced on May 20, 1998 a "first step" tender offer by
which it acquired shares of Bertucci's common stock at a purchase price of
$10.50 per share, net to the seller in cash, which, together with the shares
theretofore owned by the Company, represented 98.3% of the outstanding common
stock of Bertucci's. On July 21, 1998, the Company caused Bertucci's to be
merged with Acquisition Sub, with Acquisition Sub as the surviving entity.
Following the merger of Bertucci's into Acquisition Sub, Acquisition Sub
changed its name to Bertucci's, Inc. The above-described tender offer and
merger are collectively referred to herein as the "Acquisition." As part of the
Acquisition, the Company repaid all amounts outstanding under the Bertucci's
revolving credit facility with BankBoston, N.A. (the "Bertucci's Bank
Facility") and all amounts outstanding under the Company's revolving credit
facility with BankBoston, N.A. (the "Company Bank Facility"). The Company Bank
Facility was replaced with a new revolving credit facility, which provides for
borrowings of up to $20.0 million, with BankBoston, N.A. acting as
administrative agent and Chase Bank of Texas, N.A. acting as documentation
agent (the "Senior Bank Facility"). The transactions described in this
paragraph, together with the Private Offering and the Equity Investment (as
defined herein), are collectively referred to herein as the "Transactions."
The Company required approximately $132.5 million in cash to consummate the
Acquisition, to repay the Bertucci's Bank Facility, to repay the Company Bank
Facility and to pay fees and expenses in connection with the Transactions. The
funds required to consummate the Transactions were provided by: (i) the $100.0
million in gross proceeds from the sale of the Private Notes; (ii) the $28.8
million of proceeds from a private placement of the Company's common stock to
existing shareholders, including certain members of management, and certain
affiliates of Jacobson Partners (the "Equity Investment"); and (iii)
approximately $3.7 million of cash on hand of Bertucci's. See "Use of Proceeds"
and "Description of Other Indebtedness."
5
<PAGE>
The following table summarizes the sources and uses of funds in connection
with the Transactions assuming the consummation of the Transactions had
occurred at the end of the First Six Months 1998:
<TABLE>
<CAPTION>
AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SOURCES:
Cash on hand of Bertucci's............................... $ 3,670
Senior Bank Facility(a).................................. --
Senior Notes due 2008.................................... 100,000
Equity Investment........................................ 28,800
--------
Total sources.......................................... $132,470
========
USES:
Purchase price of the Acquisition(b)..................... $ 90,911
Repayment of Bertucci's Bank Facility.................... 13,500
Repayment of Company Bank Facility....................... 18,058
General corporate purposes............................... 1,001
Fees and expenses(c)..................................... 9,000
--------
Total uses............................................. $132,470
========
</TABLE>
- --------
(a) The Senior Bank Facility permits borrowings of up to an aggregate principal
amount of $20,000. By the consummation of the Transactions, the Company
received approximately $3,000 of additional financing from FFCA (as defined
herein), a portion of the proceeds of which were used to repay amounts
outstanding under the Company Bank Facility. As a result, the Company was
not required to borrow any amounts under the Senior Bank Facility. See
"Description of Other Indebtedness."
(b) Reflects (i) 8,478,621 outstanding shares purchased at a price of $10.50
per share as part of the Transactions and (ii) $1,851 in payment for
cancellation of outstanding stock options to purchase 352,975 shares at
exercise prices below $10.50 per share under the option plans of Bertucci's
and the Merger Agreement. Does not reflect the purchase of 430,000 shares
acquired by the Company prior to the Acquisition.
(c) Represents fees and expenses incurred with the Transactions including
financing fees and advisory fees for both the Company and Bertucci's. Not
included are fees and expenses of approximately $2,250 paid to Ten Ideas
Acquisition Corp., an entity formed and owned by Joseph Crugnale,
Bertucci's founder and, until the consummation of the Acquisition, its
president and chief executive officer, for fees and reimbursement of
certain expenses payable in connection with Bertucci's termination of the
Going Private Transaction (as defined herein).
MANAGEMENT AND OWNERSHIP
All of the outstanding capital stock of the Company is owned by management of
the Company and by investors represented by Jacobson Partners, a private
investment firm of which Benjamin R. Jacobson, Chairman of the Board of
Directors of the Company, is a general partner.
The Company's principal executive offices are located at 80A Turnpike Road,
Westborough, Massachusetts 01581. Its telephone number at that location is
(508) 870-9200. The Company was founded in 1991 as a Massachusetts corporation
(serving first as a general partner to a Massachusetts limited partnership and
then as the successor entity to such partnership and two other limited
partnerships) and was re-incorporated in Delaware on October 20, 1994.
6
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... $100,000,000 aggregate principal amount of 10
3/4% Senior Notes due 2008.
The Exchange Offer.......... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that are
properly tendered and accepted. Private Notes may
be tendered for exchange in multiples of $1000.
The Company will issue Exchange Notes on or
promptly after the Expiration Date. As of the
date hereof, $100,000,000 aggregate principal
amount of Private Notes are outstanding. See "The
Exchange Offer--Purpose of the Exchange Offer."
Based on existing interpretations by the staff of
the Commission set forth in no-action letters
issued to Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991) and
Shearman & Sterling (available July 2, 1993)
(collectively, the "Exxon Capital Holdings
Corporation Line of No-Action Letters"), the
Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for
Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof
(other than an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery requirements of the
Securities Act; provided that the holder is
acquiring Exchange Notes in the ordinary course
of its business and is not participating, and has
no arrangement or understanding with any person
to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing
to accept the Exchange Offer must represent to
the Company, as required by the Exchange and
Registration Rights Agreement, that such
conditions have been met. The Company believes
that none of the registered holders of the
Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of
the Company. Any broker-dealer that resells
Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and
any broker or dealer that participates in the
distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale
of Exchange Notes and any commissions or
concessions received by any such persons may be
deemed to be underwriting compensation under the
Securities Act.
Each broker-dealer that receives Exchange Notes
for its own account in exchange for Private Notes
must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal 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 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
received in exchange for
7
<PAGE>
Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of
market-making or other trading activities. The
Company has agreed to make this Prospectus (as it
may be amended or supplemented) available to any
broker-dealer, upon request, for use in
connection with any such resale, for a period of
up to 180 days after the Registration Statement
is declared effective by the Commission or until
such earlier date on which all the Exchange Notes
are freely tradable. However, any broker-dealer
who acquired the Private Notes directly from the
Company other than as a result of market-making
activities or ordinary trading activities may not
fulfill its prospectus delivery requirements with
this Prospectus, but must comply with the
registration and prospectus delivery requirements
of the Securities Act. See "The Exchange Offer--
Resale of the Exchange Notes."
Exchange and Registration
Rights Agreement...........
The Private Notes were sold by the Company on
July 20, 1998 to Chase Securities Inc. and
BancBoston Securities Inc. (the "Initial
Purchasers") pursuant to a Purchase Agreement,
dated July 13, 1998, as amended on July 21, 1998,
by and between the Company and the Initial
Purchasers (the "Purchase Agreement"). Pursuant
to the Purchase Agreement, the Company and the
Initial Purchasers entered into an Exchange and
Registration Rights Agreement, dated as of July
20, 1998, as amended on July 21, 1998 (the
"Exchange and Registration Rights Agreement"),
which grants the holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
rights, which will terminate upon the
consummation of the Exchange Offer, except under
certain limited circumstances. See "The Exchange
Offer--Termination of Certain Rights."
Holders of Private Notes who do not tender their
Private Notes in the Exchange Offer will continue
to hold such Private Notes and will be entitled
to all the rights and limitations applicable
thereto under the Indenture. All untendered, and
tendered but not accepted, Private Notes will
continue to be subject to the restrictions on
transfer provided for in the Private Notes and
the Indenture. To the extent that Private Notes
are tendered and accepted in the Exchange Offer,
the trading market, if any, for the Private Notes
could be adversely affected.
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on Wednesday, December 16, 1998,
unless the Exchange Offer is extended by the
Company, in its sole discretion, in which case
the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is
extended, which in no event shall be more than 48
days after the date of this Prospectus. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Accrued Interest on the
Exchange Notes and the
Private Notes.............. The Exchange Notes will bear interest from and
including the date of issuance of the Private
Notes (July 20, 1998). Interest on the Private
Notes accepted for exchange will cease to accrue
upon the
8
<PAGE>
issuance of the Exchange Notes. See "The Exchange
Offer--Interest on the Exchange Notes."
Conditions to the Exchange The Exchange Offer is subject to certain
Offer...................... customary conditions that may be waived by the
Company. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Private Notes being tendered for exchange. See
"The Exchange Offer--Conditions."
Procedures for Tendering
Privates Notes.............
Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to United
States Trust Company of New York, as exchange
agent (the "Exchange Agent"), at its address set
forth herein. By executing the Letter of
Transmittal, the holder will represent to and
agree with the Company that, among other things,
(i) any Exchange Notes to be received by such
holder of Private Notes in connection with the
Exchange Offer are being acquired by such holder
in the ordinary course of its business, (ii) such
holder is not currently participating and has no
arrangement or understanding with any person to
participate in a distribution of the Exchange
Notes, (iii) if such holder is a broker dealer
registered under the Exchange Act or is
participating in the Exchange Offer for the
purposes of distributing the Exchange Notes, such
holder will comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of
the staff of the Commission set forth in no
action letters (see "The Exchange Offer--Resale
of Exchange Notes"), (iv) such holder understands
that a secondary resale transaction described in
clause (iii) above and any resales of Exchange
Notes obtained by such holder in exchange for
Private Notes acquired by such holder directly
from the Company should be covered by an
effective registration statement containing the
selling securityholder information required by
Item 507 or Item 508, as applicable, of
Regulation SK of the Commission and (v) such
holder is not an "affiliate" (as defined in Rule
405 under the Securities Act) of the Company. If
the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange
for Private Notes that were acquired as a result
of market-making activities or other trading
activities, such holder will be required to
acknowledge in the Letter of Transmittal that
such holder will deliver a prospectus in
connection with any resale of such Exchange
Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
9
<PAGE>
Consequences of Failure to The Private Notes that are not exchanged pursuant
Exchange................... to the Exchange Offer will remain restricted
securities. Accordingly, such Private Notes must
be resold only (i) to a person whom the seller
reasonably believes is a QIB in a transaction
meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144
under the Securities Act, (iii) outside the
United States to a foreign person in a
transaction meeting the requirements of Rule 904
under the Securities Act, (iv) in accordance with
another exemption from the registration
requirements of the Securities Act (and based
upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to
an effective registration statement and, in each
case, in accordance with any applicable
securities laws of any state of the United States
or any other applicable jurisdiction. See "The
Exchange Offer--Consequences of Failure to
Exchange."
Shelf Registration If any holder of Private Notes (other than any
Statement.................. such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) is not eligible to participate in
the Exchange Offer, the Company has agreed to
file a shelf registration statement (the "Shelf
Registration Statement") to cover resales of
Private Notes by such holders who satisfy certain
conditions relating to the provision of
information to the Company for use therein. The
Company will use its reasonable best efforts to
have the Shelf Registration Statement declared
effective by the Commission and to keep the Shelf
Registration Statement effective until the
earlier of two years after the Issue Date or such
time as all of the applicable Private Notes have
been sold thereunder. See "The Exchange Offer--
Shelf Registration."
Special Procedures for
Beneficial Owners..........
Any beneficial owner whose Private Notes are
registered in the name of a broker, commercial
bank, trust company or other nominee and who
wishes to tender such Private Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery Holders of Private Notes who wish to tender their
Procedures................. Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
10
<PAGE>
Acceptance of the Private
Notes and Delivery of the
Exchange Notes.............
Upon the terms and subject to the satisfaction or
waiver of the conditions to the Exchange Offer,
the Company will accept for exchange any and all
Private Notes that are validly tendered in the
Exchange Offer and not withdrawn prior to the
Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
on the earliest practicable date following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
Withdrawal Rights........... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
U.S. Federal Income Tax
Considerations.............
For a discussion of material U.S. federal income
tax considerations relating to the exchange of
the Exchange Notes for the Private Notes, see
"U.S. Federal Income Tax Considerations."
Exchange Agent.............. United States Trust Company of New York is
serving as the Exchange Agent in connection with
the Exchange Offer.
Use of Proceeds............. The Company will not receive any cash proceeds
from the issuance of the Exchange Notes offered
hereby. See "Use of Proceeds."
Risk Factors................ Investors should carefully consider the risk
factors relating to the Company and the Exchange
Offer described on pages 22 through 29 of this
Prospectus.
11
<PAGE>
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $100,000,000 aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are substantially
identical in all respects (including principal amount, interest rate, maturity
and ranking) to the form and terms of the Private Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof and (ii)
holders of the Exchange Notes will not be entitled to certain rights of holders
of the Private Notes under the Exchange and Registration Rights Agreement,
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes and
will be issued pursuant to, and entitled to the benefits of, the Indenture
governing the Private Notes. The Exchange Offer is being made to satisfy the
obligations of the Company under the Exchange and Registration Rights Agreement
relating to the Private Notes. For further information and for definitions of
certain capitalized terms used below, see "The Exchange Offer" and "Description
of Exchange Notes."
Issuer...................... NE Restaurant Company, Inc.
Securities Offered.......... $100,000,000 aggregate principal amount of 10
3/4% Senior Notes due 2008 (the "Exchange
Notes").
Maturity Date............... July 15, 2008.
Interest Rate............... The Exchange Notes will bear interest at a rate
of 10 3/4% per annum.
Interest Payment Dates...... Interest will accrue on the Exchange Notes from
and including the date of the initial issuance of
the Private Notes (July 20, 1998) and will be
payable on January 15 and July 15 of each year,
commencing January 15, 1999.
Optional Redemption......... Except as described below, the Company may not
redeem the Exchange Notes prior to July 15, 2003.
On or after such date, the Company may redeem the
Exchange Notes, in whole or in part, at any time
at the redemption prices set forth herein,
together with accrued and unpaid interest, if
any, to the date of redemption. In addition, at
any time and from time to time prior to July 15,
2001, the Company may, subject to certain
requirements, redeem up to 35% of the original
aggregate principal amount of the Exchange Notes
with the net cash proceeds of one or more Equity
Offerings, at a redemption price equal to 110.75%
of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date
of redemption, provided that at least 65% of the
original aggregate principal amount of the
Exchange Notes remains outstanding immediately
after each such redemption. See "Description of
Exchange Notes--Optional Redemption."
Change of Control........... Upon a Change of Control, holders of the Exchange
Notes will have the right, subject to certain
restrictions and conditions, to require the
Company to repurchase all or any portion of their
Exchange Notes at a purchase price equal to 101%
of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of
repurchase. See "Description of Exchange Notes--
Change of Control."
Guarantees.................. The Exchange Notes will be (as are the Private
Notes) fully and unconditionally guaranteed (the
"Guarantees"), jointly and severally, on an
unsecured senior basis by the Company's existing
12
<PAGE>
and future Restricted Subsidiaries other than
Restricted Subsidiaries that are, or will become,
parties to the FFCA Loans and other similar
secured financings. See "Description of Exchange
Notes--Guarantees."
Ranking..................... The Exchange Notes will be (as are the Private
Notes) senior unsecured obligations of the
Company and, by their terms, will rank pari passu
in right of payment with all present and future
senior indebtedness of the Company and senior in
right of payment to any subordinated indebtedness
of the Company. However, substantially all of the
assets of the Company are, or will be, pledged to
lenders other than the holders of Notes. The
Guarantees will be effectively subordinated in
right of payment to all existing and future
secured indebtedness of the Subsidiary Guarantors
to the extent of the value of the assets securing
such indebtedness. The Exchange Notes will be (as
are the Private Notes) effectively subordinated
to the Senior Bank Facility to the extent of the
value of the assets securing such indebtedness
and to any additional secured indebtedness of the
Company permitted under the Indenture, and the
Exchange Notes will be (as are the Private Notes)
structurally subordinated to indebtedness under
the FFCA Loans and to other similar secured
indebtedness of the Company permitted under the
Indenture. As described under "Description of
Exchange Notes--Certain Covenants--Limitation on
Indebtedness," the maximum principal amount of
such indebtedness for borrowed money to which the
Notes could be effectively or structurally
subordinated would be (i) $26.1 million, the
aggregate principal amount of such indebtedness
outstanding on the Issue Date (as defined
herein), plus (ii) up to $20.0 million in respect
of the Senior Bank Facility (which represents the
maximum principal amount of borrowing available
thereunder), plus (iii) up to an aggregate of
$15.0 million per year in respect of (x) FFCA
Loans and other similar indebtedness permitted
under the Indenture and (y) Capitalized Lease
Obligations (as defined herein). As of the end of
the First Six Months 1998, on an adjusted basis
after giving effect to the Transactions, (i) the
aggregate principal amount of senior indebtedness
of the Company and the Restricted Subsidiaries
would have been approximately $124.0 million
(excluding unused revolving loan availability),
of which (x) $100.00 million would have been
attributable to the Notes and (y) $23.8 million
would have been indebtedness in respect of the
FFCA Loans and $0.3 million would have been
capital lease obligations, and (ii) the Company
would have had no subordinated indebtedness
outstanding. The Notes would have ranked pari
passu with the outstanding other senior
indebtedness described in the foregoing clause
(i)(y); however, as a result of the secured
status of such other senior indebtedness, the
Notes would have been structurally subordinated
to such other senior indebtedness to the extent
of the value of the assets securing such other
senior indebtedness. See "Description of Exchange
Notes" and "Description of Other Indebtedness."
13
<PAGE>
Certain Covenants........... The Indenture governing the Exchange Notes, which
is the Indenture governing the Private Notes,
contains certain covenants with respect to the
Company and the Restricted Subsidiaries that
limit the ability of the Company and the
Restricted Subsidiaries to, among other things,
(i) incur certain additional indebtedness, (ii)
pay dividends and other restricted payments,
(iii) make certain investments, (iv) create
certain liens, (v) sell certain assets, (vi)
enter into certain transactions with affiliates,
and (vii) enter into certain mergers or
consolidations involving the Company. See
"Description of Exchange Notes--Certain
Covenants."
Absence of a Public Market
for the Notes..............
The Exchange Notes are new securities and there
is currently no established market for the
Exchange Notes. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the Exchange Notes. The Initial
Purchasers have advised the Company that they
currently intend to make a market for the
Exchange Notes. However, they are not obligated
to do so, and any market-making with respect to
the Exchange Notes may be discontinued without
notice. The Company does not intend to apply for
listing of the Exchange Notes on any national
securities exchange or for their quotation on an
automated dealer quotation system. See "Plan of
Distribution."
RISK FACTORS
Holders of the Private Notes should consider carefully the information set
forth under the caption "Risk Factors" and all other information set forth in
this Prospectus for risks in connection with the Exchange Offer.
14
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth summary unaudited pro forma financial data for
Fiscal 1997, the First Six Months 1997, the First Six Months 1998, and the Last
Twelve Months, assuming in each case the consummation of the Transactions. The
summary pro forma financial data set forth below reflect pro forma adjustments
that are based upon available information and certain assumptions that the
Company believes are reasonable. The summary pro forma financial data set forth
below are not necessarily indicative of the results that would have been
achieved had the Transactions been consummated as of the dates indicated or
that may be achieved in the future. The summary pro forma financial data have
been derived from, and should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto included herein, the
consolidated financial statements of Bertucci's and the notes thereto included
herein, the data contained in "Unaudited Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Bertucci's," "Selected Financial Data of
the Company" and the notes thereto, "Selected Financial Data of Bertucci's" and
the notes thereto and the other financial information included elsewhere in
this Prospectus.
For purposes of pro forma financial data, "Fiscal 1997" shall mean a combined
fiscal year comprising the Company's fiscal year ended December 31, 1997 and
Bertucci's fiscal year ended December 27, 1997, as adjusted for the
Transactions. The "First Six Months 1997" shall mean a combination of the
Company's fiscal six-month period ended June 30, 1997 and Bertucci's fiscal
six-month period ended July 12, 1997, as adjusted for the Transactions. The
"First Six Months 1998" shall mean a combination of the Company's fiscal six-
month period ended June 30, 1998 and Bertucci's fiscal six-month period ended
July 11, 1998, as adjusted for the Transactions. The "Last Twelve Months" shall
mean a combined fiscal period ended with the end of the First Six Months 1998
comprising the last twelve months ended as of June 30, 1998 for the Company and
the last twelve months ended as of July 11, 1998 for Bertucci's, as adjusted
for the Transactions.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
FIRST SIX MONTHS LAST
------------------ TWELVE
FISCAL 1997 1997 1998 MONTHS
----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................... $218,084 $110,852 $123,530 $230,762
Cost of sales and expenses:
Cost of sales...................... 57,486 29,281 32,210 60,415
Operating expenses................. 112,037 56,801 63,745 118,981
General and administrative
expenses.......................... 13,035 6,345 7,612 14,302
Deferred rent, depreciation and
amortization...................... 14,262 7,770 7,797 14,289
Taxes other than income............ 10,819 5,713 6,185 11,291
-------- -------- -------- --------
Total cost of sales and expenses... 207,639 105,910 117,549 219,278
-------- -------- -------- --------
Income from operations............. 10,445 4,942 5,981 11,484
Interest expense, net............... 12,136 6,162 7,279 13,253
Income tax benefit.................. (592) (419) (509) (682)
-------- -------- -------- --------
Net loss............................ $ (1,099) $ (801) $ (789) $ (1,087)
======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(a)........................... $ 24,707 $ 13,212 $ 14,278 $ 25,773
Capital expenditures................ 12,493 4,262 8,240 16,471
Ratio of earnings to fixed
charges(b)......................... -- -- -- --
Ratio of EBITDA to interest
expense............................ 1.9x
Ratio of long-term debt to EBITDA... 4.8x
OPERATING STATISTICS (AT END OF
PERIOD):
Number of Chili's restaurants....... 31 31 31 31
Number of On The Border
restaurants........................ 1 1 2 2
Number of Bertucci's
restaurants(c)..................... 85 85 88 88
COMBINED BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital (deficit)........... $(16,552)
Total assets........................ 166,270
Total liabilities................... 149,634
Long-term debt...................... 124,071
Shareholders' equity................ 16,636
</TABLE>
See Notes to Summary Unaudited Pro Forma Financial Data
15
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(a) "EBITDA" is defined as income from operations before deferred rent,
depreciation and amortization. EBITDA is not a measure of performance
defined by GAAP. EBITDA should not be considered in isolation or as a
substitute for net income or the statement of cash flows which have been
prepared in accordance with GAAP. The Company believes EBITDA provides
useful information regarding the Company's ability to service its debt and
the Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. The EBITDA measures presented herein may not
be comparable to similarly titled measures of other companies.
Deferred rent expense for each of Fiscal 1997, First Six Months 1997, First
Six Months 1998 and the Last Twelve Months was $899, $592, $664 and $971,
respectively.
In computing pro forma EBITDA, earnings have not been increased by the
Company's estimates of cost savings. If pro forma EBITDA were adjusted for
these cost savings, EBITDA would be adjusted as follows:
<TABLE>
<CAPTION>
FIRST SIX FIRST SIX LAST TWELVE
FISCAL 1997 MONTHS 1997 MONTHS 1998 MONTHS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EBITDA..................... $24,707 $12,712 $13,778 $25,773
Elimination of salaries and
benefits of certain
employees................. 1,700 425 425 1,700
Elimination of duplicative
professional and office
overhead services......... 300 75 75 300
------- ------- ------- -------
Adjusted EBITDA............ $26,707 $13,212 $14,278 $27,773
</TABLE>
The foregoing positive adjustments represent the Company's estimates of
cost savings. However, there can be no assurance as to when, or if, such
savings will be realized. As used in the Prospectus, the term "Adjusted
EBITDA" represents EBITDA adjusted as above.
(b) Pro forma earnings were insufficient to cover fixed charges for the pro
forma Fiscal 1997, First Six Months 1997, First Six Months 1998 and the
Last Twelve Months by $1.7 million, $1.2 million, $1.3 million and $1.8
million, respectively.
(c) Includes one Sal and Vinnie's restaurant.
16
<PAGE>
SUMMARY FINANCIAL DATA OF THE COMPANY
The following table sets forth summary historical and other consolidated
financial data for the Company (or its predecessors) for the periods and at the
dates indicated. The historical financial data for each of the three years
ended December 31, 1997 and at December 31, 1996 and 1997, have been derived
from the Company's historical consolidated financial statements which are
included elsewhere in this Prospectus and have been audited and reported on by
Arthur Andersen LLP, independent public accountants ("Arthur Andersen"). The
historical financial data for each of the two years ended December 31, 1994 and
at December 31, 1993, 1994 and 1995 have been derived from the Company's
historical consolidated financial statements audited and reported on by Arthur
Andersen, which are not included in this Prospectus. The historical financial
data for the six months ended and at June 30, 1997 and 1998 have been derived
from the Company's unaudited financial statements and reflect, in the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position as of, and the
results for, such interim periods. The historical financial information for the
six months ended June 30, 1998 is not necessarily indicative of results for the
full year ending December 31, 1998. This information should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company," "Selected Financial Data of the Company"
and the notes thereto and the other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ---------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $37,729 $46,588 $60,300 $70,094 $ 81,364 $ 38,872 $ 45,049
Cost of sales and
expenses:
Cost of sales.......... 11,182 13,451 18,095 21,203 23,384 11,334 12,722
Operating expenses..... 19,250 23,130 30,101 34,268 40,932 19,444 22,678
General and
administrative
expenses.............. 2,941 3,359 3,449 3,679 4,207 2,013 2,298
Deferred rent,
depreciation and
amortization.......... 1,298 1,684 3,201 3,679 3,911 2,055 1,989
Taxes other than
income................ 1,764 2,142 2,871 3,207 3,829 1,890 2,082
------- ------- ------- ------- ---------- -------- --------
Total cost of sales and
expenses.............. 36,435 43,766 57,717 66,036 76,263 36,736 41,769
------- ------- ------- ------- ---------- -------- --------
Income from
operations............ 1,294 2,822 2,583 4,058 5,101 2,136 3,280
Interest expense, net... 27 90 463 1,053 1,918 607 1,864
------- ------- ------- ------- ---------- -------- --------
Income before income
tax expense........... 1,267 2,732 2,120 3,005 3,184 1,529 1,416
Income tax expense...... -- 1,122 699 1,047 1,084 543 473
------- ------- ------- ------- ---------- -------- --------
Net income............. $ 1,267 $ 1,610 $ 1,421 $ 1,958 $ 2,100 $ 986 $ 943
======= ======= ======= ======= ========== ======== ========
OTHER FINANCIAL DATA:
Ratio of earnings to
fixed charges (a)...... 2.5x 3.7x 2.5x 2.5x 2.0x 2.3x 1.5x
EBITDA(b)............... $ 2,592 $ 4,506 $ 5,784 $ 7,737 $ 9,012 $ 4,191 $ 5,269
EBITDA margin(c)........ 6.9% 9.7% 9.6% 11.0% 11.1% 10.8% 11.7%
Cash flows from
operating activities... $ 4,554 $ 3,865 $ 5,604 $ 5,744 $ 8,522 $ 2,346 $ 3,349
Cash flows from (used
in) investing
activities............. (4,054) (9,037) (11,758) (9,013) (5,146) (1,460) (7,792)
Cash flows from (used
in) financing
activities............. (369) 5,280 6,290 3,282 (3,540) (1,297) 4,195
Capital expenditures.... $ 3,619 $ 7,989 $10,359 $ 7,946 $ 4,479 $ 1,308 $ 3,476
OPERATING STATISTICS:
Number of restaurants
(end of period)........ 16 19 26 30 32 31 33
Average annual revenue
per restaurant......... $ 2,421 $ 2,623 $ 2,589 $ 2,518 $ 2,614 $ 2,521 $ 2,744
Comparable restaurant
sales(d)............... 14.5% 6.6% (1.6)% (0.4)% 2.7% 0.5% 7.0%
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital
(deficit).............. $(3,375) $(3,750) $(4,524) $(4,996) $ (8,406) $ (4,735) $ (5,043)
Total assets............ 9,704 18,162 27,848 34,340 37,337 34,932 43,126
Long-term debt,
including current
portion................ -- 5,280 11,570 15,273 37,908(e) 13,976 42,105
Shareholders' equity
(deficit).............. 4,468 6,078 7,499 9,457 (13,107)(e) 10,441 (12,164)
</TABLE>
See Notes to Summary Financial Data of the Company
17
<PAGE>
NOTES TO SUMMARY FINANCIAL DATA OF THE COMPANY
(a) For purposes of calculating this ratio, "earnings" consist of earnings from
continuing operations before provision for income taxes and fixed charges.
"Fixed charges" consist of interest expense and the estimated interest
portion of rental payments on operating leases.
(b) "EBITDA" is defined as income from operations before deferred rent,
depreciation and amortization. EBITDA is not a measure of performance
defined by GAAP. EBITDA should not be considered in isolation or as a
substitute for net income or the statement of cash flows which have been
prepared in accordance with GAAP. The Company believes EBITDA provides
useful information regarding the Company's ability to service its debt and
the Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. The EBITDA measures presented herein may not
be comparable to similarly titled measures of other companies.
(c) EBITDA margin represents EBITDA divided by net sales.
(d) The Company defines comparable restaurant sales as net sales from
restaurants that have been open for at least one full fiscal year.
(e) In August 1997, the Company paid a dividend and return of capital
distribution to shareholders of $8.31 per share, in the aggregate amount of
$16,670. In addition, the Company repurchased 716,429 shares of common
stock at $11.63 per share, for an aggregate amount of $8,332. The Company's
repurchase of shares of common stock was recorded as treasury stock, at
cost, and resulted in a reduction of shareholders' (deficit) equity. These
transactions were funded from the proceeds of the FFCA Loans. See
"Description of Other Indebtedness."
18
<PAGE>
SUMMARY FINANCIAL DATA OF BERTUCCI'S
The following table sets forth summary historical and other consolidated
financial data for Bertucci's for the periods and at the dates indicated. The
historical financial data for each of the years ended December 30, 1995,
December 28, 1996 and December 27, 1997 and at December 28, 1996 and December
27, 1997 have been derived from Bertucci's historical consolidated financial
statements which are included elsewhere in this Prospectus and have been
audited and reported upon by Arthur Andersen. The historical financial data for
each of the years ended December 25, 1993 and December 31, 1994 and at December
25, 1993, December 31, 1994 and December 30, 1995 have been derived from
Bertucci's historical consolidated financial statements audited and reported on
by Arthur Andersen, which are not included in this Prospectus. The historical
financial data for the 28 weeks ended and at July 12, 1997 and July 11, 1998
have been derived from Bertucci's unaudited financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the results for such interim
periods. The historical financial information for the 28 weeks ended July 11,
1998 is not necessarily indicative of results for the full year ending December
26, 1998. Bertucci's fiscal year has historically consisted of a 16-week first
fiscal quarter followed by two 12-week fiscal quarters and a 12- or 13-week
fourth fiscal quarter. This information should be read in conjunction with the
consolidated financial statements of Bertucci's and the notes thereto included
herein, "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Bertucci's," "Selected Financial Data of Bertucci's"
and the notes thereto and the other financial information included elsewhere in
this Prospectus.
19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED 28 WEEKS ENDED
---------------------------------------------------------------- ------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 28, DECEMBER 27, JULY 12, JULY 11,
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $74,625 $102,797 $120,260 $128,044 $136,720 $ 71,980 $ 78,481
Costs and expenses:
Cost of sales.......... 19,368 26,039 31,060 32,484 34,102 17,947 19,488
Operating expenses..... 33,778 48,804 60,673 65,986 71,652 37,776 41,327
General and
administrative
expenses.............. 4,918 6,566 8,239 7,720 8,828 4,332 5,315
Depreciation and
amortization.......... 4,840 7,327 9,083 8,781 8,626 4,707 4,958
Taxes other than
income................ 3,530 5,106 6,268 6,633 6,990 3,823 4,103
Restaurant closing
expense............... -- -- 5,336 -- -- -- --
------- -------- -------- -------- -------- -------- --------
Total costs and
expenses.............. 66,434 93,842 120,659 121,604 130,198 68,585 75,191
------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................ 8,191 8,955 (399) 6,440 6,522 3,395 3,290
Interest expense, net... 82 155 1,253 1,297 1,037 622 482
Interest income......... 657 33 21 15 32 8 8
------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............. 8,766 8,833 (1,631) 5,158 5,517 2,781 2,816
Income tax expense
(benefit).............. 3,127 3,223 (745) 1,933 2,009 1,014 994
------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 5,639 $ 5,610 $ (886) $ 3,225 $ 3,508 $ 1,767 $ 1,822
======= ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(a)............... $14,195 $ 17,422 $ 9,717 $ 15,711 $ 15,694 $ 8,521 $ 8,509
EBITDA margin(b)........ 19.0% 16.9% 8.1% 12.3% 11.5% 11.8% 10.8%
Cash flows from
operating activities... $12,614 $ 15,908 $ 10,739 $ 14,065 $ 14,746 $ 7,762 $ 5,389
Cash flows from (used
in) investing
activities............. (12,633) (30,621) (15,649) (10,380) (8,618) (3,168) (7,543)
Cash flows from (used
in) financing
activities............. 825 14,407 5,544 (803) (4,638) (3,857) 69
Capital expenditures.... $33,068 $ 27,634 $ 14,039 $ 9,462 $ 8,014 $ 2,954 $ 4,764
OPERATING STATISTICS:
Number of restaurants
(end of period)(c)..... 50 67 76 80 85 81 88
Average annual revenue
per restaurant......... $ 1,820 $ 1,826 $ 1,673 $ 1,671 $ 1,712 $ 1,654 $ 1,691
Comparable restaurant
sales(d)............... 5.8% 0.2% (2.0)% 1.0% 2.5% 0.8% 2.5%
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital
(deficit).............. $(3,973) $ (5,738) $ (5,258) $ (2,857) $ (3,740) $ (3,114) $ (4,405)
Total assets............ 70,181 93,114 98,938 102,528 105,516 101,918 106,059
Long-term debt,
including current
portion................ -- 14,000 19,438 18,438 13,525 14,525 13,525
Shareholders' equity.... 58,804 64,846 64,092 67,538 71,371 69,412 73,286
</TABLE>
See Notes to Summary Financial Data of Bertucci's
20
<PAGE>
NOTES TO SUMMARY FINANCIAL DATA OF BERTUCCI'S
(a) "EBITDA" is defined as operating income before deferred rent, depreciation
and amortization. EBITDA is not a measure of performance defined by GAAP.
EBITDA should not be considered in isolation or as a substitute for net
income or the statement of cash flows which have been prepared in
accordance with GAAP. The Company believes EBITDA provides useful
information regarding the Company's ability to service its debt and the
Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
Deferred rent for Bertucci's fiscal 1993, 1994, 1995, 1996 and 1997 was
$1,164, $1,140, $1,033, $490 and $546, respectively, and for Bertucci's
first fiscal six months 1997 and 1998 was $419 and $261, respectively.
(b) EBITDA margin represents EBITDA divided by net sales.
(c) For all periods including and after Bertucci's fiscal 1997, includes one
Sal and Vinnie's restaurant.
(d) Comparable restaurant sales are defined as net sales from restaurants that
have been open for at least one full fiscal year.
21
<PAGE>
RISK FACTORS
Holders of the Private Notes should carefully consider the following factors
in addition to the other information set forth in this Prospectus in
connection with the Exchange Offer. The risk factors set forth below are
generally applicable to the Private Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE; POTENTIAL INABILITY TO SERVICE INDEBTEDNESS
As a result of the Acquisition, the Company is highly leveraged. After
giving pro forma effect to the Transactions, at the end of the First Six
Months 1998, the Company's aggregate outstanding indebtedness would have been
$124.0 million, the Company's shareholders' equity would have been $16.6
million and the Company's working capital deficit, deficiency of earnings to
fixed charges and losses would have been approximately $16.6 million, $1.3
million and $0.8 million, respectively.
The Company's high degree of leverage could have important consequences to
holders of Exchange Notes (and to holders of Private Notes), including but not
limited to the following: (i) the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired in the future; (ii) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations and
other purposes, including investments in development and capital spending;
(iii) the Company may be substantially more leveraged than certain of its
competitors, which may place the Company at a competitive disadvantage; and
(iv) the Company's substantial degree of leverage may limit its flexibility to
adjust to changing market conditions, reduce its ability to withstand
competitive pressures and make it more vulnerable to a downturn in general
economic conditions or in its business. See "Description of Other
Indebtedness" and "Description of Exchange Notes."
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its future financial and operating
performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to certain financial, business, legislative,
regulatory and other factors, many of which are beyond the Company's control.
These factors could include operating difficulties, increased operating costs,
product pricing pressures, the response of competitors, regulatory
developments, and delays in implementing strategic projects. The Company's
ability to meet its debt service and other obligations may depend in
significant part on the extent to which the Company can implement successfully
its business strategy. There can be no assurance that the Company will be able
to implement its strategy fully or that the anticipated results of its
strategy will be realized. See "Business--Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity
capital, or to refinance or restructure its debt. There can be no assurance
that the Company's cash flow and capital resources will be sufficient for
payment of principal of, and premium, if any, and interest on, its
indebtedness in the future, or that any such alternative measures would be
successful or would permit the Company to meet its scheduled debt service
obligations. In addition, because the Company's obligations under the Senior
Bank Facility bear interest at floating rates, an increase in interest rates
could adversely affect, among other things, the Company's ability to meet its
debt service obligations. See "Description of Other Indebtedness."
If the Company is required to reduce or delay capital expenditures, the
Company may fail to meet its obligations under its Area Development
Agreements, under which the Company is required to open two to three new
Chili's restaurants each year in accordance with a specified schedule over
approximately the next three years and two to four new On The Border
restaurants each year in accordance with a specified schedule over
approximately the next six years. A breach under the Area Development
Agreements may cause the Company to lose its exclusive right to develop
Chili's and On The Border restaurants in Connecticut, New Hampshire, Maine,
Massachusetts, Rhode Island, Vermont, Westchester County, and additionally, in
the case of On The Border, upstate New York. A breach under the Area
Development Agreements could also constitute a default under the Senior Bank
Facility and the FFCA Loans, permitting the applicable lender to declare all
amounts due thereunder immediately due and payable. See "Description of Other
Indebtedness."
22
<PAGE>
EFFECTIVE AND STRUCTURAL SUBORDINATION OF THE NOTES
The Exchange Notes (as well as Private Notes) and the Guarantees constitute
unsecured obligations of the Company and the Subsidiary Guarantors,
respectively, and rank pari passu in right of payment with all present and
future senior indebtedness of the Company and the Subsidiary Guarantors, as
applicable. However, substantially all of the assets of the Company and the
Restricted Subsidiaries are pledged to lenders other than the holders of Notes
and, therefore, the Exchange Notes (as well as the Private Notes) and the
Guarantees will be effectively subordinated to borrowings under the Senior
Bank Facility to the extent of the value of the assets securing such
indebtedness and effectively or structurally subordinated to any additional
secured indebtedness of the Company and the Restricted Subsidiaries,
respectively, permitted under the Indenture, including without limitation the
FFCA Loans (but only with respect to properties mortgaged under such loans).
At the end of the First Six Months 1998, on a pro forma basis after giving
effect to the Transactions, there would have been approximately $24.0 million
of such secured indebtedness to which the Notes would have been structurally
subordinated. See "Description of Exchange Notes" and "Description of Other
Indebtedness."
In the event of bankruptcy, liquidation, dissolution, reorganization or any
similar proceeding regarding the Company, or any default in payment or
acceleration of any debt thereof, the assets of the Company will be available
to pay obligations on the Exchange Notes (as well as the Private Notes) only
after the secured indebtedness of the Company has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on all or any of the
Exchange Notes (as well as the Private Notes). See "Description of Exchange
Notes."
RESTRICTIVE DEBT COVENANTS
The Indenture, the Senior Bank Facility and the FFCA Loans impose
significant operating and financial restrictions on the Company (and its
subsidiaries). Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness, pay dividends or make other
distributions, make certain investments, create certain liens, sell certain
assets, enter into certain transactions with affiliates, or engage in certain
mergers or consolidations involving the Company. In addition, the Senior Bank
Facility and the FFCA Loans contain other and more restrictive covenants and
require the Company (and its subsidiaries) to maintain specified financial
ratios and satisfy certain financial tests. The Company's ability to meet such
financial ratios and tests may be affected by events beyond its control, and
there can be no assurance that the Company will meet such tests. These
restrictions could limit the ability of the Company to obtain future
financing, make needed capital expenditures, withstand a future downturn in
its business or the economy, or otherwise conduct necessary corporate
activities. A failure by the Company to comply with the restrictions contained
in the Indenture, the FFCA Loans or the Senior Bank Facility could lead to a
default under the terms of the Indenture, the FFCA Loans or the Senior Bank
Facility. In the event of a default, the applicable lender could elect to
declare all amounts borrowed pursuant thereto, and all amounts due under other
instruments (including but not limited to the Indenture, the FFCA Loans or the
Senior Bank Facility, as applicable) that may contain cross-acceleration or
cross-default provisions may also be declared to be, immediately due and
payable, together with accrued and unpaid interest, and the lenders could
terminate all commitments thereunder. In such event, there can be no assurance
that the Company would be able to make such payments or borrow sufficient
funds from alternative sources to make any such payment. Even if additional
financing could be obtained, there can be no assurance that it would be on
terms that are favorable or acceptable to the Company. In addition, the
indebtedness of the Company or its subsidiaries under the FFCA Loans and
Senior Bank Facility is secured by a substantial portion of the assets of the
Company or its subsidiaries and, upon the occurrence of a default and the
acceleration of such indebtedness, the holders of such indebtedness could
seize such assets and sell them as a means to satisfy all or part of such
indebtedness. The Senior Bank Facility also contains provisions that prohibit
any modification of the Indenture in any manner adverse to the Senior Lenders
(as defined herein) and that limit the Company's ability to refinance the
Exchange Notes (as well as the Private Notes) without the consent of such
Senior Lenders. See "Description of Exchange Notes--Certain Covenants" and
"Description of Other Indebtedness."
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<PAGE>
RISKS ASSOCIATED WITH THE ACQUISITION
Expected Benefits of Combined Business May Not Be Achieved. Acquisitions are
subject to a number of special risks, including, without limitation, those
associated with adverse short-term effects on the Company's reported operating
results, diversion of management's attention, standardization of accounting
systems, dependence on retaining, hiring and training key personnel and
unanticipated problems or legal liabilities. Achieving the anticipated
benefits of the Acquisition will depend in part upon whether the integration
of the businesses of the companies can be accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. The
combination of the two companies will necessitate, among other things,
integration of management philosophies, personnel and arrangements with third
party vendors, standardization of training programs, realization of economies
of scale, and effective coordination of sales, marketing and financial
reporting efforts. There can be no assurance that such integration will be
accomplished smoothly or successfully. Failure to successfully accomplish the
integration of the operations of the two companies would have a material
adverse effect on the Company. See "Business."
Potential Inability to Manage Increased Size of Company. As a result of the
Acquisition, the size of the Company's combined operations is more than double
the pre-Acquisition size of NERCO. The Company's future operating results will
depend largely upon its ability to manage a growing business profitably such
that it continues the successful operation of its existing restaurants and
also successfully implements its operating strategies for the Bertucci's
restaurants it acquired as a result of the Acquisition as well as any new
restaurants the Company may open or acquire in the future. Any failure of the
Company to manage successfully and profitably the growth of its business may
have a material adverse effect on the Company. See "Business."
Consent of Franchisor to Acquisition Subject to Continuing Compliance with
Certain Agreements. The Franchisor's consent to the Acquisition was granted
subject to the terms and conditions of its franchise agreements and Area
Development Agreements with the Company, including, without limitation, the
development schedule and menu restrictions contained in such agreements. Under
these agreements, the Company is prohibited from directly or indirectly
engaging in the operation of any restaurant which utilizes or duplicates the
menu, trade secrets or service marks of either Chili's or On The Border
restaurants. In addition, the Company is obligated to use its "best efforts"
to promote and develop the Chili's and On The Border concepts. Although it has
no present intention of doing so, the Company, among other things, would be
prevented from developing menu items for the Bertucci's concept in violation
of such agreements. See "Business."
No Prior Ownership of a Restaurant Concept. Although the Company's
management has significant experience in the casual dining segment of the
restaurant industry, the Company has no prior experience as an owner of its
own restaurant concept. There can be no assurance that the Company will be
able to successfully assume the ownership, and undertake execution, of the
Bertucci's concept. As the Company has not had prior experience as the owner
of a restaurant concept, there may be new challenges and risks associated with
such ownership that the Company cannot fully anticipate at this time and which
may have a material adverse effect on the Company. See "Business."
Potential Inability to Manage Geographic Expansion. All of the restaurants
operated by the Company prior to the Acquisition were located in New England.
As a result of consummation of the Acquisition, nearly one-third of the
Company's restaurants are outside of New England. The ability of the Company's
management to effectively recognize and account for diverse regional
conditions and to manage restaurants that are geographically remote will be
critical to the success of the Company. Any inability of the Company to
successfully manage its geographic expansion may have a material adverse
effect on the Company. See "Business."
POTENTIAL INABILITY TO EXPAND SUCCESSFULLY
Pursuant to its Area Development Agreements with the Franchisor, the Company
is currently obligated to open two to three new Chili's restaurants each year
in accordance with a specified schedule over approximately the next three
years and two to four new On The Border restaurants each year in accordance
with a specified
24
<PAGE>
schedule over approximately the next six years. Failure to adhere to the
development schedules contained in each of the Area Development Agreements
would constitute a breach of those agreements. In the event of such a breach,
the Franchisor would be able to terminate the territorial exclusivity granted
to the Company. In addition, a breach under any of the Company's Area
Development Agreements could constitute a default under the Senior Bank
Facility and FFCA Loans, permitting the applicable lender to declare all
amounts borrowed thereunder immediately due and payable. For the past several
years, the Company has satisfied these minimum development requirements,
having opened 18 new Company-owned Chili's restaurants since May 1993 and
three new Company-owned On The Border restaurants since November 1996.
Although there can be no assurance that it will continue to be able to do so,
the Company expects to continue its steady growth strategy over the next
several years. During the remainder of fiscal 1998, the Company intends to
develop one additional Chili's, one On The Border, and one Bertucci's
restaurant, in addition to the 88 restaurants acquired through the Acquisition
and the two Chili's, one On The Border and two Bertucci's restaurants
subsequently opened subsequent to the Acquisition.
The Company anticipates that in fiscal 1998 it will spend approximately
$19.5 million for capital expenditures (not including land costs) (of which
approximately $1.9 million will be pre-opening expenses) relating to new
restaurant openings. The Company currently plans to spend at least $31.2
million in fiscal 1999 to open an expected six each of the Chili's, On The
Border and Bertucci's restaurants. The Company reviews its expansion plans and
budget on a regular basis, in light of circumstances and opportunities that
may arise, and may determine to open a smaller or larger number of stores than
currently planned.
The Company's future operating results will depend largely upon its ability
to open and operate new or newly acquired restaurants successfully and to
manage a growing business profitably. This will depend on a number of factors
(some of which are beyond the control of the Company), including (i) selection
and availability of suitable restaurant locations, (ii) negotiation of
acceptable lease or financing terms, (iii) securing of required governmental
permits and approvals, (iv) timely completion of necessary construction or
remodeling of restaurants, (v) hiring and training of skilled management and
personnel, (vi) successful integration of new or newly acquired restaurants
into the Company's existing operations and (vii) recognition and response to
regional differences in guest menu and concept preferences.
The Company identifies and sources its real estate through a third-party
consultant who specializes in New England and Mid-Atlantic real estate. This
consultant is retained by the Company on an exclusive basis to facilitate
sites in Connecticut and substantially all of Massachusetts. The consultant is
paid by the Company on a contingency basis. Although the Company believes that
it would be able to replace such consultant if it were required to do so, any
disruption in the services of such consultant or the Company's inability to
replace such consultant, when required, may have a material adverse effect on
the Company.
There can be no assurance that the Company's expansion plans can be achieved
on a timely and profitable basis or that it will be able to achieve results
similar to those achieved in existing locations in prior periods or that such
expansion will not result in reduced sales at existing restaurants that are
near new or newly acquired restaurants. Any failure to successfully and
profitably execute its expansion plans could have a material adverse effect on
the Company. See "Business--Franchise and Development Agreements" and
"Business--Restaurant Development."
CHANGES IN FOOD COSTS AND SUPPLIES; KEY SUPPLIER
The Company's profitability is dependent on, among other things, its
continuing ability to offer fresh, high quality food at moderate prices.
Various factors beyond the Company's control, such as adverse weather, labor
disputes or other unforeseen circumstances, may affect its food costs and
supplies. While management has been able to anticipate and react to changing
food costs and supplies to date through its purchasing practices and menu
price adjustments, there can be no assurance that it will be able to do so in
the future.
The Company obtains approximately 75% to 80% of its supplies for its Chili's
and On The Border restaurants through a single vendor pursuant to a contract
for delivery and distribution, with the vendor charging
25
<PAGE>
fixed mark-ups over prevailing wholesale prices. The Company has a two-year
contract with this vendor which expires in October 1999 and is otherwise
terminable by either party upon 30 days' prior notice following breach of such
contract and 60 days' prior notice for any other reason. The Company has
similar supply arrangements for Bertucci's, obtaining 75% to 80% through a
single vendor pursuant to a new four-year contract which expires July 2002 and
is otherwise terminable upon 30 days' prior notice following breach of such
contract. The Company believes that it would be able to replace either such
vendor if it were required to do so; however, any disruption in supply from
such vendors or the Company's inability to replace such vendors, when
required, may have a material adverse effect on the Company. See "Business--
Purchasing."
POSSIBLE ADVERSE IMPACT OF ECONOMIC, REGIONAL AND OTHER BUSINESS CONDITIONS ON
THE COMPANY
The Company's business is sensitive to guests' spending patterns, which in
turn are subject to prevailing regional and national economic conditions such
as interest rates, taxation and consumer confidence. Most of the restaurants
owned by the Company are located in the northeastern and Mid-Atlantic United
States, with a large concentration in New England. In addition, the Company
anticipates substantially all restaurants to be opened in fiscal 1998 will be
in states where the Company presently has operations or in contiguous states.
As a result, the Company is, and will continue to be, susceptible to changes
in regional economic conditions, weather conditions, demographic and
population characteristics, consumer preferences and other regional factors.
See "Business--Restaurant Locations."
DEPENDENCE UPON KEY PERSONNEL
The Company's business depends upon the efforts, abilities and expertise of
its executive officers and other key employees, including Dennis Pedra, its
President and Chief Executive Officer. The Company has no long-term employment
contracts with, and does not maintain "key-man" life insurance for, any of its
executive officers or key employees. The loss of the services of certain of
these executive officers or key employees or the inability to retain key
personnel required to effect a successful integration of the Bertucci's
business with the Company's business existing prior to the Acquisition would
have a material adverse effect on the Company. See "Management."
COMPETITION
The restaurant industry is intensely competitive with respect to, among
other things, price, service, location and food quality. The Company competes
with many well-established national, regional and locally-owned foodservice
companies with substantially greater financial and other resources and longer
operating histories than the Company, which, among other things, may better
enable them to react to changes in the restaurant industry. With respect to
quality and cost of food, size of food portions, decor and quality service,
the Company competes with casual dining, family-style restaurants offering
eat-in and take-out menus, including Applebee's International, Inc., TGI
Friday's Inc., a subsidiary of Carlson Hospitality Worldwide, Ruby Tuesday
Inc., and as a result of the Acquisition, also competes with Italian-style
restaurant concepts such as Uno Restaurant Corp. and Olive Garden Restaurants,
a division of Darden Restaurants Inc. Many of the Company's restaurants are
located in areas of high concentration of such restaurants. Among other
things, the Company also competes with its competitors in attracting guests,
in obtaining premium locations for restaurants (including shopping malls and
strip shopping centers) and in attracting and retaining employees. See
"Business--Competition."
POSSIBLE ADVERSE IMPACT OF GOVERNMENT REGULATION ON THE COMPANY
The restaurant business is subject to extensive federal, state and local
laws and regulations relating to the development and operation of restaurants,
including those concerning alcoholic beverage sales, preparation and sale of
food, relationships with employees (including minimum wage requirements,
overtime and working conditions and citizenship requirements), land use,
zoning and building codes, as well as other health, sanitation, safety and
environmental matters. Compliance with such laws and regulations can impede
the operations of existing Company restaurants and may delay or preclude
construction and completion of new Company restaurants. Bertucci's has
restaurants in 11 states and the District of Columbia and has obtained liquor
licenses
26
<PAGE>
in such jurisdictions for its restaurants. The Company is required to obtain
approvals from certain liquor licensing authorities in connection with the
change of control of Bertucci's. While certain of these approvals have been
obtained, there can be no assurance that all such approvals and licenses, or
approvals and licenses for new restaurants, will be obtained and, if obtained,
will be renewed or not revoked. The Company is subject in certain states to
"dram-shop" statutes, which generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries liquor liability coverage as part of its existing comprehensive
general liability insurance. In addition, the Company may also in certain
jurisdictions be required to comply with regulations limiting smoking in
restaurants. See "Business--Government Regulations."
SEASONALITY
The Company's revenues are subject to seasonal fluctuations. Customer
traffic and consequently revenues are highest in the summer months and lowest
during the winter months because of the high proportion of restaurants located
in states where inclement weather adversely affects guest visits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company--Seasonality."
RELIANCE ON INFORMATION SYSTEMS
The Company relies on various information systems to manage its operations
and regularly makes investments to upgrade, enhance or replace such systems.
The Company expects that its basic information systems will be largely
compatible with those of Bertucci's. However, any delays or difficulties in
transitioning the two systems or in implementing new systems, or any other
disruption affecting the Company's information systems, could have a material
adverse effect on the Company. "See Business--Information Systems and
Restaurant Reporting."
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF EXCHANGE NOTES
The Private Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. Prior to the
Exchange Offer, there has not been any public market for the Private Notes.
The Private Notes have not been registered under the Securities Act and will
be subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in the
Exchange Offer. The market for Private Notes not tendered for exchange in the
Exchange Offer is likely to be more limited than the existing market for such
Notes. The holders of Private Notes (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Private Notes and to use its best
efforts to cause it to be declared effective by the Commission as promptly as
practicable on or after the consummation of the Exchange Offer. The Exchange
Notes will constitute a new issue of securities with no established trading
market. There can be no assurance regarding the future development of a market
for the Exchange Notes, or the ability of holders of the Exchange Notes to
sell their Exchange Notes, or the price at which such holders might be able to
sell their Exchange Notes. If such a market were to develop, the Exchange
Notes could trade at prices that may be higher or lower than their principal
amount, depending on many factors, including prevailing interest rates, the
Company's operating results and the market for similar securities. The Company
does not intend to apply for listing of the Exchange Notes on any national
securities exchange or for their quotation on an automated dealer quotation
system. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes, but they are not obligated to
do so and may discontinue such market-making at any time without notice to the
holders of the Exchange Notes. In addition, such market-making activity will
be subject to the limits imposed by the Securities Act and the Exchange Act
and may be limited during the Exchange Offer and the pendency of the Shelf
Registration Statement. Accordingly, no assurance can be given that an active
public or other market will develop for the Exchange Notes or as to the
liquidity of the trading market for the Exchange Notes. If a trading market
does not develop or is not maintained, holders of Exchange Notes may
experience difficulty in reselling the Exchange Notes or may be unable to sell
them at all. If a market for the Exchange Notes develops, any such market
making may be discontinued at any time.
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<PAGE>
POSSIBLE ADVERSE EFFECTS OF CHANGE OF CONTROL ON THE COMPANY
Upon a Change of Control, the Company is obligated to offer to repurchase
the Exchange Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of repurchase. The
events that constitute a Change of Control under the Exchange Notes could also
constitute a default under the Senior Bank Facility and, in turn, may prohibit
the repurchase of the Exchange Notes by the Company in the event of certain
Change of Control events unless and until such time as the Company's
indebtedness under the Senior Bank Facility is repaid in full. There can be no
assurance that the Company would have sufficient financial resources available
to satisfy all of its obligations under the Senior Bank Facility, which could
have a material adverse effect on the Company. See "Description of Other
Indebtedness" and "Description of Exchange Notes--Change of Control."
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness by the Company, such as the Exchange Notes
(and the related incurrence by the Subsidiary Guarantors of guarantees), may
be subject to review under federal bankruptcy law or relevant state fraudulent
conveyance laws if a bankruptcy case or lawsuit is commenced by the Company or
on behalf of unpaid creditors of the Company. Under these laws, if, in a
bankruptcy or reorganization case or a lawsuit by the Company or on behalf of
creditors of the Company, a court were to find that, at the time the Company
incurred indebtedness, including indebtedness under the Exchange Notes, (i)
the Company incurred such indebtedness with the intent of hindering, delaying
or defrauding current or future creditors or (ii) (a) the Company received
less than reasonably equivalent value or fair consideration for incurring such
indebtedness and (b) the Company (1) was insolvent or was rendered insolvent
by reason of any of the transactions, (2) was engaged, or about to engage, in
a business or transaction for which its assets constituted unreasonably small
capital, (3) intended to incur, or believed that it would incur, debts beyond
its ability to pay as such debts matured (as all of the foregoing terms are
defined in or interpreted under the relevant fraudulent transfer or conveyance
statutes) or (4) was a defendant in an action for money damages, or had a
judgment for money damages docketed against it (if, in either case, after
final judgment the judgment is unsatisfied), then such court could avoid or
subordinate the amounts owing under the Exchange Notes to presently existing
and future indebtedness of the Company and take other actions detrimental to
the holders of the Exchange Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair salable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether the Company was solvent at the relevant time, or whether,
whatever standard was used, the Exchange Notes would not be avoided or further
subordinated on another of the grounds set forth above. In rendering their
opinions in connection with the initial borrowings, counsel for the Company
and counsel for the lenders did not express any opinion as to the
applicability of federal or state fraudulent transfer and conveyance laws.
The Company believes that, at time the indebtedness constituting the Private
Notes was incurred, the Company (and its subsidiaries, after giving effect to
the Transactions) (i) was (a) neither insolvent nor rendered insolvent
thereby, (b) in possession of sufficient capital to run its businesses
effectively and (c) incurring debts within its ability to pay as the same
mature or become due and (ii) had sufficient assets to satisfy any probable
money judgment against it in any pending action. In reaching the foregoing
conclusions, the Company has relied upon its analyses of internal cash flow
projections and estimated values of assets and liabilities of the Company.
There can be no assurance, however, that a court passing on such questions
would reach the same conclusions.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal (or Agent's Message
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<PAGE>
(as defined in the Letter of Transmittal)) and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered, or
are tendered but not accepted, will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof and, upon consummation of the Exchange Offer, certain registration
rights under the Exchange and Registration Rights Agreement will terminate. In
addition, any holder of Private Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes may be
deemed to have received restricted securities, and if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives Exchange Securities for its own account in exchange for Private
Notes, where such Private Notes were acquired by such broker-dealer as a
result of market-making activities or any other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Securities. See "Plan of Distribution." To the extent that
Private Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Private Notes could be
adversely affected. See "The Exchange Offer."
RESALE OF THE EXCHANGE NOTES
The Company is making the Exchange Offer in reliance upon interpretations by
the staff of the Commission set forth in no-action letters issued to third
parties. Based on such interpretations, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Private Notes may
be offered for resale, resold or otherwise transferred by a holder thereof
(other than an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act; provided, that the holder is
acquiring the Exchange Notes in the ordinary course of its business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. However, the Company
has not sought its own no-action letter and there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. Each holder of Private Notes,
other than a broker-dealer, must acknowledge that it is not participating, and
has no arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes. If any holder is an affiliate of the
Company or is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) may not rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes must acknowledge that such Exchange Securities were
acquired by such broker-dealer as a result of market-making activities and
that it will deliver a prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal 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 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 received
in exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities. The
Company has agreed to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer, upon request, for use in
connection with any such resale, for a period of up to 180 days after the
Registration Statement is declared effective by the Commission or until such
earlier date on which all the Exchange Notes are freely tradable. However, any
broker-dealer who acquired the Private Notes directly from the Company other
than as a result of market-making activities or ordinary trading activities
may not fulfill its prospectus delivery requirements with this Prospectus, but
must comply with the registration and prospectus delivery requirements of the
Securities Act. See "The Exchange Offer--Resale of the Exchange Notes."
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<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Exchange and Registration Rights Agreement. The Company
will not receive any cash proceeds from the issuance of the Exchange Notes
offered hereby. In consideration of issuing the Exchange Notes as contemplated
in this Prospectus, the Company will receive in exchange Private Notes in like
principal amount, the form and terms of which are the same as the form and
terms of the Exchange Notes, except as otherwise described herein. The Private
Notes surrendered in exchange for the Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the indebtedness of the Company.
The net proceeds to the Company from the Private Offering were approximately
$96.0 million (after deducting estimated expenses in connection with the
Private Offering payable by the Company). The Company used such net proceeds,
together with the $28.8 million proceeds of the Equity Investment, cash on
hand of Bertucci's and borrowings under the Senior Bank Facility, to pay
amounts due in connection with the Acquisition and certain related
transactions, including repayment of amounts outstanding under the Company
Bank Facility, the Bertucci's Bank Facility, and fees and expenses related to
the Acquisition.
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CAPITALIZATION
The following table sets forth (i) the actual unaudited capitalization of
the Company as of the end of the First Six Months 1998, and (ii) such
unaudited capitalization as adjusted to give effect to the Transactions. The
information set forth below should be read in conjunction with the "Selected
Historical Financial Data of the Company" and the notes thereto, "Unaudited
Pro Forma Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company" and the
consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF THE END OF THE
FIRST SIX MONTHS 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Company Bank Facility................................ $ 18,058 $ --
Senior Bank Facility(a).............................. -- --
FFCA Loans(a)(b)..................................... 23,778 23,778
10 3/4% Senior Notes due 2008........................ -- 100,000
Other debt outstanding............................... 268 293
---------- ----------
Total long-term debt............................... 41,399 124,071
---------- ----------
Shareholders' (deficit) equity(c)...................... (12,164) 16,636
---------- ----------
Total capitalization............................. $ 29,235 $ 140,707
========== ==========
</TABLE>
- --------
(a) The Senior Bank Facility permits borrowings of up to an aggregate
principal amount of $20,000. By the consummation of the Transactions, the
Company received approximately $3,000 of additional financing from FFCA, a
portion of the proceeds of which were used to repay amounts outstanding
under the Company Bank Facility. As a result, the Company was not required
to borrow any amounts under the Senior Bank Facility. See "Description of
Other Indebtedness."
(b) The FFCA Loans mature on various dates from September 2002 through
September 2017. The outstanding borrowings under the FFCA Loans are
currently secured by first priority mortgages on, and security interests
in, 23 of the Company's restaurant properties. See "Description of Other
Indebtedness--FFCA Loans."
(c) The as adjusted shareholders' equity reflects the $28,800 of proceeds of
the sale of common stock of the Company to existing shareholders,
including certain members of management, and affiliates of Jacobson
Partners.
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UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data with respect to the Company
and Bertucci's (the "Unaudited Pro Forma Financial Data") is based on the
historical consolidated financial statements of the Company and Bertucci's
included elsewhere in this Prospectus as adjusted to give effect to the
Transactions. The unaudited pro forma balance sheet gives effect to the
Transactions as if they had occurred on the respective dates presented and the
unaudited pro forma income statements give effect to the Transactions as if
they had occurred on the first day of the stated period. The Transactions and
the related adjustments are described in the accompanying notes. In the
opinion of management, all adjustments have been made that are necessary to
present fairly the pro forma data. Actual amounts could differ from those set
forth below.
The Unaudited Pro Forma Financial Data should be read in conjunction with
the notes included herein, the consolidated financial statements of the
Company and of Bertucci's and, in each case, the notes thereto included
herein, "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company," "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Bertucci's," "Selected
Financial Data of the Company" and the notes thereto, "Selected Financial Data
of Bertucci's" and the notes thereto and the other financial information
included elsewhere in this Prospectus. The unaudited pro forma financial data
do not purport to represent what the Company's results of operations or
financial position would have been had the Transactions occurred on the dates
specified, or to project the Company's results of operations or financial
position for any future period or date.
For purposes of pro forma financial data, "Fiscal 1997" shall mean a
combined fiscal year comprising the Company's fiscal year ended December 31,
1997 and Bertucci's fiscal year ended December 27, 1997, as adjusted for the
Transactions. The "First Six Months 1997" shall mean a combination of the
Company's fiscal six-month period ended June 30, 1997 and Bertucci's fiscal
six-month period ended July 12, 1997, as adjusted for the Transactions. The
"First Six Months 1998" shall mean a combination of the Company's fiscal six-
month period ended June 30, 1998 and Bertucci's fiscal six-month period ended
July 11, 1998, as adjusted for the Transactions. The "Last Twelve Months"
shall mean a combined fiscal period ended with the end of the First Six Months
1998 comprising the last twelve months ended as of June 30, 1998 for the
Company and the last twelve months ended as of July 11, 1998 for Bertucci's,
as adjusted for the Transactions.
32
<PAGE>
NE RESTAURANT COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF THE END OF THE FIRST SIX MONTHS 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA
NERCO BERTUCCI'S ADJUSTMENTS PRO FORMA
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.... $ -- $ 3,670 $ (3,670)(a) $ --
Marketable securities...... 3,434 (b) -- (3,434)(b) --
Inventories................ 570 1,205 -- 1,775
Receivables................ 394 814 -- 1,208
Prepaid expense and other
current assets............ 342 1,204 -- 1,546
Deferred taxes, current.... 112 1,104 -- 1,216
-------- -------- -------- --------
Total current assets....... 4,852 7,997 (7,104) 5,745
Net property and equipment..... 32,798 91,568 -- 124,366
Goodwill....................... 151 2,336 17,684 (c) 20,171
Other assets................... 5,325 4,158 6,505 (d) 15,988
-------- -------- -------- --------
Total assets............... $ 43,126 $106,059 $ 17,085 $166,270
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities:
Accounts payable............. $ 3,658 $ 4,550 $ -- $ 8,208
Accrued expenses............. 5,531 7,827 -- 13,358
Other current liabilities.... 706 25 -- 731
-------- -------- -------- --------
Total current liabilities.... 9,895 12,402 -- 22,297
Long-term debt................. 41,399 13,500 68,442 (e) 123,341
Other noncurrent liabilities... 3,996 6,871 (6,871)(c) 3,996
-------- -------- -------- --------
Total liabilities.......... 55,290 32,773 61,571 149,634
Common Stock................... 20 44 (44)(f) 20
Treasury Stock................. (8,017) (8,017)
Additional Paid in Capital..... 22 45,259 (16,459)(f) 28,822
(Accumulated Deficit) Retained
Earnings...................... (4,189) 27,983 (27,983)(f) (4,189)
Total Equity............... (12,164) 73,286 (44,486) 16,636
======== ======== ======== ========
Total liabilities and
shareholders' equity...... $ 43,126 $106,059 $ 17,085 $166,270
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet
33
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Represents the use of available cash to pay down the Bertucci's Bank
Facility.
(b) Marketable securities consists of 430,000 shares of Bertucci's common
stock. The pro forma adjustment represents use of such stock which is
owned by the Company prior to the Acquisition as a credit against the
purchase price for the Acquisition.
(c) Represents goodwill and other intangible assets resulting from the
Acquisition to be amortized over a fifteen year useful life as follows:
<TABLE>
<S> <C>
Purchase price including transaction costs......................... $97,841
Bertucci's shareholders' equity, plus deferred rent liability not
assumed of $6,871................................................. 80,157
-------
Goodwill........................................................... $17,684
=======
</TABLE>
(d) Represents the financing costs associated with indebtedness incurred in
connection with the Transactions which is amortized over the life of the
related borrowings.
(e) Represents net indebtedness incurred in connection with the Transactions.
This amount has been calculated as follows:
<TABLE>
<S> <C>
Issuance of new debt:
Senior Bank Facility............................................. $ --
Senior Notes due 2008............................................ 100,000
--------
Total of new debt issued....................................... 100,000
Repayment of existing debt:
Company Bank Facility............................................ (18,058)
Bertucci's Bank Facility......................................... (13,500)
--------
Total of existing debt repaid.................................. (31,558)
--------
Total........................................................ $ 68,442
========
</TABLE>
(f) Adjustments to shareholders' equity represents elimination of Bertucci's
shareholder's equity of $73,286 and an increase in the Company's paid in
capital of $28,800 as a result of the Equity Investment.
34
<PAGE>
NE RESTAURANT COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR THE LAST TWELVE MONTHS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA
NERCO BERTUCCI'S ADJUSTMENTS PRO FORMA
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $87,541 $143,221 $ -- $230,762
Cost of sales and expenses:
Cost of sales................... 24,772 35,643 -- 60,415
Operating expenses.............. 44,165 74,816(a) -- 118,981
General and administrative
expenses....................... 4,492 9,810 -- 14,302
Deferred rent, depreciation and
amortization................... 3,845 9,265(a) 1,179 (b) 14,289
Taxes other than income......... 4,021 7,270 -- 11,291
------- -------- -------- --------
Total cost of sales and
expenses....................... 81,295 136,804 1,179 219,278
------- -------- -------- --------
Income from operations.......... 6,246 6,417 (1,179) 11,484
Interest expense, net............. 3,175 865 9,213 (c) 13,253
------- -------- -------- --------
Income (loss) before income
taxes.......................... 3,071 5,552 (10,392) (1,769)
Provision (benefit) for income
taxes............................ 1,014 1,989 (3,685)(d) (682)
------- -------- -------- --------
Net income (loss)............... $ 2,057 $ 3,563 $ (6,707) $ (1,087)
======= ======== ======== ========
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(e)....................... --
EBITDA(f)......................... $10,091 $ 15,682 -- $ 25,773
Capital expenditures.............. 6,647 9,824 -- 16,471
</TABLE>
35
<PAGE>
FOR FISCAL 1997
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA
NERCO BERTUCCI'S ADJUSTMENTS PRO FORMA
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $81,364 $136,720 $ -- $218,084
Cost of sales and expenses:
Cost of sales................... 23,384 34,102 -- 57,486
Operating expenses.............. 40,931 71,106(a) -- 112,037
General and administrative
expenses....................... 4,207 8,828 -- 13,035
Deferred rent, depreciation and
amortization................... 3,911 9,172(a) 1,179 (b) 14,262
Taxes other than income......... 3,829 6,990 -- 10,819
------- -------- -------- --------
Total cost of sales and
expenses....................... 76,262 130,198 1,179 207,639
------- -------- -------- --------
Income from operations.......... 5,102 6,522 (1,179) 10,445
Interest expense, net............. 1,918 1,005 9,213 (c) 12,136
------- -------- -------- --------
Income (loss) before income
expense........................ 3,184 5,517 (10,392) (1,691)
Provision (benefit) for income
taxes............................ 1,084 2,009 (3,685)(d) (592)
------- -------- -------- --------
Net income (loss)............... $ 2,100 $ 3,508 $ (6,707) $ (1,099)
======= ======== ======== ========
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(e)..................... --
EBITDA(f)....................... $ 9,013 $ 15,694 -- $ 24,707
Capital expenditures............ 4,479 8,014 -- 12,493
</TABLE>
See Notes to Unaudited Pro Forma Income Statements
36
<PAGE>
NE RESTAURANT COMPANY, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
FOR FIRST SIX MONTHS 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA
NERCO BERTUCCI'S ADJUSTMENTS PRO FORMA
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................... $38,872 $71,980 $ -- $110,852
Cost of sales and expenses:
Cost of sales.................... 11,334 17,947 -- 29,281
Operating expenses............... 19,444 37,357(a) -- 56,801
General and administrative
expenses........................ 2,013 4,332 -- 6,345
Deferred rent, depreciation and
amortization.................... 2,055 5,126(a) 589 (b) 7,770
Taxes other than income.......... 1,890 3,823 -- 5,713
------- ------- ------- --------
Total cost of sales and
expenses........................ 36,736 68,585 589 105,910
------- ------- ------- --------
Income from operations........... 2,136 3,395 (589) 4,942
Interest expense, net.............. 607 614 4,941 (c) 6,162
Income (loss) before income
taxes........................... 1,529 2,781 (5,530) (1,220)
Provisions (benefit) for income
taxes............................. 543 1,014 (1,976)(d) (419)
------- ------- ------- --------
Net income (loss)................ $ 986 $ 1,767 $(3,554) $ (801)
======= ======= ======= ========
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(e)........................ --
EBITDA(f).......................... $ 4,191 $ 8,521 -- $ 12,712
Capital expenditures............... 1,308 2,954 -- 4,262
</TABLE>
37
<PAGE>
FOR FIRST SIX MONTHS 1998
<TABLE>
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $45,049 $78,481 $ -- $123,530
Cost of sales and expenses:
Cost of sales....................... 12,722 19,488 -- 32,210
Operating expenses.................. 22,678 41,067(a) -- 63,745
General and administrative
expenses........................... 2,298 5,314 -- 7,612
Deferred rent, depreciation and
amortization....................... 1,989 5,219(a) 589 (b) 7,797
Taxes other than income............. 2,082 4,103 -- 6,185
------- ------- ------- --------
Total cost of sales and expenses.. 41,769 75,191 589 117,549
------- ------- ------- --------
Income from operations............ 3,280 3,290 (589) 5,981
Interest expense, net................. 1,864 474 4,941 (c) 7,279
------- ------- ------- --------
Income (loss) before income taxes... 1,416 2,816 (5,530) (1,298)
Provision (benefit) for income taxes.. 473 994 (1,976)(d) (509)
------- ------- ------- --------
Net income (loss)................... $ 943 $ 1,822 $(3,554) $ (789)
======= ======= ======= ========
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(e)........................... --
EBITDA(f)............................. $ 5,269 $ 8,509 -- $ 13,778
Capital expenditures.................. 3,476 4,764 -- 8,240
</TABLE>
See Notes to Unaudited Pro Forma Income Statements
38
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO UNAUDITED PRO FORMA INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
(a) To conform with the Company's financial presentation, the following
deferred rent expense amounts on Bertucci's income statement have been
reclassified from operating expense to depreciation and amortization:
<TABLE>
<CAPTION>
FIRST SIX FIRST SIX LAST TWELVE
FISCAL 1997 MONTHS 1997 MONTHS 1998 MONTHS
----------- ----------- ----------- -----------
<S> <C> <C> <C>
$546 $419 $261 $388
</TABLE>
(b) Reflects goodwill amortization as a result of the Acquisition. Goodwill
will be amortized on a straight line basis over 15 years.
(c) Represents adjustments necessary to reflect pro forma interest expense and
amortization of deferred financing costs based on pro forma debt levels
and applicable interest rates.
<TABLE>
<CAPTION>
FIRST FIRST
SIX SIX
FISCAL MONTHS MONTHS LAST TWELVE
1997 1997 1998 MONTHS
------- ------ ------- -----------
<S> <C> <C> <C> <C>
Amortization of financing costs......... $ 651 $ 163 $ 163 $ 651
Senior Notes due 2008 (at the 10 3/4%
rate).................................. 10,750 5,375 5,375 10,750
FFCA Loans (at an average 9.7% rate)....... 708 -- 1,152 1,860
Other debt--various..................... 27 11 11 27
Elimination of historical interest...... (2,923) (608) (1,760) (4,075)
------- ------ ------- -------
$ 9,213 $4,941 $ 4,941 $ 9,213
======= ====== ======= =======
</TABLE>
(d) Reflects a reduction in the provisions for income taxes as a result of the
pro forma decrease in income before taxes, computed at an effective tax
rate of 40%. The amortization of goodwill is nondeductible for taxes.
(e) Pro forma earnings were insufficient to cover fixed charges for the pro
forma Fiscal 1997, First Six Months 1997, First Six Months 1998 and the
Last Twelve Months by $1.7 million, $1.2 million, $1.3 million and $1.8
million, respectively. For purposes of calculating this ratio, "earnings"
consist of earnings from continuing operations before provision for income
taxes and fixed charges. "Fixed charges" consist of interest expense and
the estimated interest portion of rental payments on operating leases.
(f) "EBITDA" is defined as income from operations before deferred rent,
depreciation and amortization. EBITDA is not a measure of performance
defined by GAAP. EBITDA should not be considered in isolation or as a
substitute for net income or the statement of cash flows which have been
prepared in accordance with GAAP. The Company believes EBITDA provides
useful information regarding the Company's ability to service its debt and
the Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. The EBITDA measures presented herein may not
be comparable to similarly titled measures of other companies.
Deferred rent expense for each of Fiscal 1997, the First Six Months 1997,
the First Six Months 1998 and the Last Twelve Months was $899, $592, $664
and $971, respectively.
In computing pro forma EBITDA, earnings have not been increased by the
Company's estimates of cost savings. If pro forma EBITDA were adjusted for
these cost savings, EBITDA would be adjusted as follows:
<TABLE>
<CAPTION>
FIRST SIX FIRST SIX LAST
FISCAL MONTHS MONTHS TWELVE
1997 1997 1998 MONTHS
------- --------- --------- -------
<S> <C> <C> <C> <C>
EBITDA.................................. $24,707 $12,712 $13,778 $25,773
Elimination of salaries and benefits of
certain employees...................... 1,700 425 425 1,700
Elimination of duplicative professional
and office overhead services........... 300 75 75 300
------- ------- ------- -------
Adjusted EBITDA......................... $26,707 $13,212 $14,278 $27,773
</TABLE>
The foregoing positive adjustments represent the Company's estimates of
cost savings. However, there can be no assurance as to when, or if, such
savings will be realized. As used in this Prospectus, the term "Adjusted
EBITDA" represents EBITDA adjusted as above.
39
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The following table sets forth the selected historical and other
consolidated financial data for the Company for the periods and at the dates
indicated. The historical financial data for each of the three years ended
December 31, 1997 and at December 31, 1996 and 1997 have been derived from the
Company's historical consolidated financial statements which are included
elsewhere in this Prospectus and have been audited and reported upon by Arthur
Andersen. The historical financial data for each of the two years ended
December 31, 1994 and at December 31, 1993, 1994 and 1995 have been derived
from the Company's historical consolidated financial statements audited and
reported upon by Arthur Andersen, which are not included in this Prospectus.
The historical financial data for the six months ended and at June 30, 1997
and 1998 have been derived from the Company's unaudited financial statements
and reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position as of, and the results for, such interim periods. The historical
financial information for the six months ended June 30, 1998 is not
necessarily indicative of results for the full year ending December 31, 1998.
This information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company" and
the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $37,729 $46,588 $60,300 $70,094 $ 81,364 $38,872 $45,049
Cost of sales and
expenses:
Cost of sales........... 11,182 13,451 18,095 21,203 23,384 11,334 12,722
Operating expenses..... 19,250 23,130 30,101 34,268 40,932 19,444 22,678
General and
administrative
expenses.............. 2,941 3,359 3,449 3,679 4,207 2,013 2,298
Deferred rent,
depreciation and
amortization.......... 1,298 1,684 3,201 3,679 3,911 2,055 1,989
Taxes other than
income................ 1,764 2,142 2,871 3,207 3,829 1,890 2,082
------- ------- ------- ------- -------- ------- -------
Total costs of sales
and expenses.......... 36,435 43,766 57,717 66,036 76,263 36,736 41,769
------- ------- ------- ------- -------- ------- -------
Income from
operations............ 1,294 2,822 2,583 4,058 5,101 2,136 3,280
------- ------- ------- ------- -------- ------- -------
Interest expense, net... 27 90 463 1,053 1,918 607 1,864
Income before income
tax expense........... 1,267 2,732 2,120 3,005 3,184 1,529 1,416
Income tax expense...... -- 1,122 699 1,047 1,084 543 473
------- ------- ------- ------- -------- ------- -------
Net income............. $ 1,267 $ 1,610 $ 1,421 $ 1,958 $ 2,100 $ 986 $ 943
------- ------- ------- ------- -------- ------- -------
OTHER FINANCIAL DATA:
Ratio of earnings to
fixed charges(a)....... 2.5x 3.7x 2.5x 2.5x 2.0x 2.3x 1.5x
EBITDA(b)............... $ 2,592 $ 4,506 $ 5,784 $ 7,737 $ 9,012 $ 4,191 $ 5,269
EBITDA margin(c)........ 6.9 % 9.7 % 9.6 % 11.0 % 11.1 % 10.8 % 11.7 %
Cash flows from
operating activities... $ 4,554 $ 3,865 $ 5,604 $ 5,744 $ 8,522 $ 2,346 $ 3,349
Cash flows from (used
in) investing
activities............. (4,054) (9,037) (11,758) (9,013) (5,146) (1,460) (7,792)
Cash flows from (used
in) financing
activities............. (369) 5,280 6,290 3,282 (3,540) (1,297) 4,195
Capital expenditures.... $ 3,619 $ 7,989 $10,359 $ 7,946 $ 4,479 $ 1,308 $ 3,476
OPERATING STATISTICS:
Number of restaurants
(end of period)........ 16 19 26 30 32 31 33
Average annual revenue
per restaurant......... $ 2,421 $ 2,623 $ 2,589 $ 2,518 $ 2,614 $ 2,521 $ 2,744
Comparable restaurant
sales(d)............... 14.5 % 6.6 % (1.6)% (0.4)% 2.7 % 0.5 % 7.0 %
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital
(deficit).............. $(3,375) $(3,750) $(4,524) $(4,996) $ (8,406) $(4,735) $(5,043)
Total assets............ 9,704 18,162 27,848 34,340 37,337 34,932 43,126
Long-term debt,
including current
portion................ -- 5,280 11,570 15,273 37,908 (e) 13,976 42,105
Shareholders' equity
(deficit)(e)........... 4,468 6,078 7,499 9,457 (13,107)(e) 10,441 (12,164)
</TABLE>
See Notes to Selected Financial Data of the Company
40
<PAGE>
NOTES TO SELECTED FINANCIAL DATA OF THE COMPANY
(a) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before provision for income taxes and fixed
charges. "Fixed charges" consist of interest expense and the estimated
interest portion of rental payments on operating leases.
(b) "EBITDA" is defined as income from operations before deferred rent,
depreciation and amortization. EBITDA is not a measure of performance
defined by GAAP. EBITDA should not be considered in isolation or as a
substitute for net income or the statement of cash flows which have been
prepared in accordance with GAAP. The Company believes EBITDA provides
useful information regarding the Company's ability to service its debt and
the Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
(c) EBITDA margin represents EBITDA divided by net sales.
(d) The Company defines comparable restaurant sales as net sales from
restaurants that have been open for at least one full fiscal year.
(e) In August 1997, the Company paid a dividend and return of capital
distribution to shareholders of $8.31 per share, in the aggregate amount
of $16,670. In addition, the Company repurchased 716,429 shares of common
stock at $11.63 per share, for an aggregate amount of $8,332. The
Company's repurchase of shares of common stock was recorded as treasury
stock, at cost, and resulted in a reduction of shareholders' (deficit)
equity. These transactions were funded from the proceeds of the FFCA Loan.
See "Description of Other Indebtedness."
41
<PAGE>
SELECTED FINANCIAL DATA OF BERTUCCI'S
The following table sets forth the selected historical and other
consolidated financial data for Bertucci's for the periods and at the dates
indicated. The historical financial data for each of the years ended December
30, 1995, December 28, 1996 and December 27, 1997 and at December 28, 1996 and
December 27, 1997 have been derived from Bertucci's historical consolidated
financial statements which are included elsewhere in this Prospectus and have
been audited and reported upon by Arthur Andersen. The historical financial
data for each of the years ended December 25, 1993 and December 25, 1994 and
at December 25, 1993, December 31, 1994 and December 30, 1995 have been
derived from Bertucci's historical consolidated financial statements audited
and reported upon by Arthur Andersen, which are not included in this
Prospectus. The unaudited historical financial data for the 28 weeks ended and
at July 12, 1997 and July 11, 1998 have been derived from Bertucci's unaudited
financial statements and reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results for such interim periods. The historical financial
information for the 28 weeks ended July 11, 1998 is not necessarily indicative
of results for the full year ending December 26, 1998. Bertucci's fiscal year
has historically consisted of a 16-week first fiscal quarter followed by two
12-week fiscal quarters and a 12- or 13-week fourth fiscal quarter. This
information should be read in conjunction with the consolidated financial
statements of Bertucci's and the notes thereto included herein, "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Bertucci's" and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 28 WEEKS ENDED
---------------------------------------------------------------- -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 28, DECEMBER 27, JULY 12, JULY 11,
1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $ 74,625 $102,797 $120,260 $128,044 $136,720 $ 71,980 $ 78,481
Costs and expenses:
Cost of sales.......... 19,368 26,039 31,060 32,484 34,102 17,947 19,488
Operating expenses..... 33,778 48,804 60,673 65,986 71,652 37,776 41,327
General and administra-
tive
expenses.............. 4,918 6,566 8,239 7,720 8,828 4,332 5,315
Depreciation and amor-
tization.............. 4,840 7,327 9,083 8,781 8,626 4,707 4,958
Taxes other than in-
come.................. 3,530 5,106 6,268 6,633 6,990 3,823 4,103
Restaurant closing ex-
pense................. -- -- 5,336 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and ex-
penses................ 66,434 93,842 120,659 121,604 130,198 68,585 75,191
-------- -------- -------- -------- -------- -------- --------
Income (loss) from oper-
ations................. 8,191 8,955 (399) 6,440 6,522 3,395 3,290
Interest expense, net... 82 155 1,253 1,297 1,037 622 482
Interest income......... 657 33 21 15 32 8 8
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............. 8,766 8,833 (1,631) 5,158 5,517 2,781 2,816
Income tax expense (ben-
efit).................. 3,127 3,223 (745) 1,933 2,009 1,014 994
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 5,639 $ 5,610 $ (886) $ 3,225 $ 3,508 $ 1,767 $ 1,822
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(a)............... $ 14,195 $ 17,422 $ 9,717 $ 15,711 $ 15,694 $ 8,521 $ 8,509
EBITDA margin(b)........ 19.0 % 16.9 % 8.1 % 12.3 % 11.5 % 11.8 % 10.8 %
Cash flows from
operating activities... $ 12,614 $ 15,908 $ 10,739 $ 14,065 $ 14,746 $ 7,762 $ 5,389
Cash flows from (used
in) investing
activities............. (12,633) (30,621) (15,649) (10,380) (8,618) (3,168) (7,543)
Cash flows from (used
in) financing
activities............. 825 14,407 5,544 (803) (4,638) (3,857) 69
Deferred rent, deprecia-
tion and
amortization........... $ 6,004 $ 8,467 $ 10,116 $ 9,271 $ 9,172 $ 5,126 $ 5,219
Capital expenditures.... 33,068 27,634 14,309 9,462 8,014 2,954 4,764
OPERATING STATISTICS:
Number of restaurants
(end of period)(c)..... 50 67 76 80 85 81 88
Average annual revenue
per restaurant......... $ 1,820 $ 1,826 $ 1,673 $ 1,671 $ 1,712 $ 1,654 $ 1,691
Comparable restaurant
sales(d)............... 5.8 % 0.2 % (2.0)% 1.0 % 2.5 % 0.8 % 2.5 %
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital (defi-
cit)................... $ (3,973) $ (5,738) $ (5,258) $ (2,857) $ (3,740) $ (3,114) $ (4,405)
Total assets............ 70,181 93,114 98,938 102,528 105,516 101,918 100,059
Long-term debt,
including current
portion................ -- 14,000 19,438 18,438 13,525 14,525 13,525
Shareholders' equity.... 58,804 64,846 64,092 67,538 71,371 69,412 73,286
</TABLE>
See Notes to Selected Financial Data of Bertucci's
42
<PAGE>
NOTES TO SELECTED FINANCIAL DATA OF BERTUCCI'S
(a) "EBITDA" is defined as operating income before deferred rent, depreciation
and amortization. EBITDA is not a measure of performance defined by GAAP.
EBITDA should not be considered in isolation or as a substitute for net
income or the statement of cash flows which have been prepared in
accordance with GAAP. The Company believes EBITDA provides useful
information regarding the Company's ability to service its debt and the
Company understands that such information is considered by certain
investors to be an additional basis for evaluating a company's ability to
pay interest and repay debt. EBITDA measures presented herein may not be
comparable to similarly titled measures of other companies.
Deferred rent for Bertucci's fiscal 1993, 1994, 1995, 1996 and 1997 was
$1,164, $1,140, $1,033, $490 and $546, respectively, and for Bertucci's
first fiscal six months 1997 and 1998 was $419 and $261, respectively.
(b) EBITDA margin represents EBITDA divided by net sales.
(c) For all periods including and after Bertucci's fiscal 1997, includes one
Sal and Vinnie's restaurant.
(d) Comparable restaurant sales are defined as net sales from restaurants that
have been open for at least one full fiscal year.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
The following discussion should be read in conjunction with the "Selected
Financial Data of the Company" and the notes thereto, and the consolidated
financial statements of the Company and the notes thereto, included herein,
and the other more detailed financial data appearing elsewhere herein.
GENERAL
The Company operates 33 Chili's and three On The Border restaurants in five
New England states, and, as a result of the Acquisition, owns and operates 89
Bertucci's restaurants located primarily in the northeastern and Mid-Atlantic
United States and one Sal and Vinnie's steakhouse located in Massachusetts.
The Company has entered into franchise and development agreements with
Brinker to operate the 36 Chili's and On The Border restaurants and to
exclusively develop additional restaurants in New England and Westchester
County and additionally, in the case of On The Border, upstate New York.
The Company is a successor to a series of limited partnerships formed in
1991 to acquire 15 Chili's restaurants originally developed by another
franchisee. Upon its acquisition of the 15 Chili's restaurants in 1991, the
Company recruited a new management team and undertook a series of steps to
enhance operations, including reducing administrative overhead, coordinating a
new advertising campaign, introducing new menu items, renovating restaurant
facilities, installing new information systems and improving purchasing
decisions. These efforts resulted in significant increases in comparable
restaurant sales. During the Company's first three full years of operation,
same store sales increased over the prior year by 10.0%, 14.5%, and 6.6%,
respectively. From Fiscal 1991, the final year of operations by the prior
franchisee, to fiscal 1997 average sales per restaurant for the Company's
Chili's restaurants increased over 30.0% to $2.5 million from $1.8 million.
Additionally, over the same period net sales and EBITDA increased from $27.5
million and $0.3 million to $81.4 million and $9.0 million, respectively.
For all the Company's restaurants, net sales consist of food, beverage and
alcohol sales. For fiscal 1997, with respect to the Company's Chili's
restaurants, food accounted for approximately 73%, alcoholic beverages
approximately 18%, and non-alcoholic beverages approximately 9%, of net sales.
For fiscal 1997, with respect to the Company's On The Border restaurants, food
accounted for approximately 64%, alcoholic beverages for approximately 31%,
and non-alcoholic beverages for approximately 5% of total sales. The larger
bar area for On The Border restaurants combined with a four-season patio
contribute to the higher liquor mix in this concept. Cost of sales consists of
food, beverage and alcohol costs. Total operating expenses consist of five
primary categories: (i) labor expenses; (ii) restaurant operations; (iii)
facility costs; (iv) office expenses; and (v) non-controllable expenses, which
include such items as Brinker's royalty and advertising fees, rent, insurance,
and real estate and personal property taxes. General and administrative
expenses include costs associated with those departments of the Company that
assist in restaurant operations and management of the business, including
accounting, management information systems, training, executive management,
purchasing and construction.
44
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales,
unless otherwise indicated, of certain items included in the Company's income
statement, as well as certain operating data, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ --------------------
1995 1996 1997 1997 1998
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... 100.0 % 100.0 % 100.0% 100.0% 100.0%
------ ------ ------ -------- --------
Cost of sales and expenses:
Cost of sales............. 30.0 30.3 28.7 29.2 28.2
Operating expenses........ 49.9 48.9 50.3 50.0 50.3
General and administrative
expenses................. 5.7 5.2 5.2 5.2 5.1
Deferred rent,
depreciation and
amortization............. 5.3 5.2 4.8 5.3 4.4
Taxes other than income... 4.8 4.6 4.7 4.9 4.6
------ ------ ------ -------- --------
Total cost of sales and
expenses............... 95.7 94.2 93.7 94.5 92.7
------ ------ ------ -------- --------
Income from operations.. 4.3 5.8 6.3 5.5 7.3
------ ------ ------ -------- --------
Interest expense, net....... 0.8 1.5 2.4 1.6 4.1
Income before income tax
expense.................. 3.5 4.3 3.9 3.9 3.1
Income tax expense.......... 1.2 1.5 1.3 1.4 1.1
------ ------ ------ -------- --------
Net income................ 2.3 % 2.8 % 2.6% 2.5% 2.1%
====== ====== ====== ======== ========
RESTAURANT OPERATING DATA
(DOLLARS IN THOUSANDS):
Average annual sales per
restaurant................. $2,589 $2,518 $2,614 $ 2,521(a) $ 2,744(a)
Comparable restaurant
sales...................... (1.6)% (0.4)% 2.7% 0.5% 7.0%
Number of restaurants:
Restaurants open at
beginning of period...... 19 26 30 30 32
Restaurants opened...... 7 4 2 1 1
Restaurants closed...... 0 0 0 0 0
------ ------ ------ -------- --------
Total restaurants open at
end of period.............. 26 30 32 31 33
====== ====== ====== ======== ========
</TABLE>
- --------
(a) Average sales per restaurant for the fiscal six months have been
annualized to reflect a full year of operations, but are not necessarily
indicative of results for a full year.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net Sales. Net sales increased by $6.2 million, or 15.9%, to $45.0 million
during the first fiscal six months 1998 from $38.9 million during the first
fiscal six months 1997. The increase was primarily due to the opening of two
Chili's restaurants during fiscal 1997 and one On The Border restaurant during
March 1998, combined with a comparable restaurant sales increase of 7.0% for
the first fiscal six months 1998. Annualized average sales per restaurant
increased by 8.8% to $2.7 million during the first fiscal six months 1998 as
compared to $2.5 million during the first fiscal six months 1997.
Approximately one-third of the increases in comparable restaurant sales and
annualized average sales per restaurant reflected an increase in menu prices
by an average of 0.5% in March 1997 and 1.0% in July 1997, and approximately
two-thirds reflected an increase in guest counts by 7.2% resulting from
improved advertising and operations in the restaurants during the first fiscal
six months 1998 as compared to the first fiscal six months 1997.
Cost of Sales. Cost of sales increased by $1.4 million, or 12.2%, to $12.7
million during the first fiscal six months 1998 from $11.3 million during the
first fiscal six months 1997. Expressed as a percentage of net sales, cost of
sales decreased to 28.2% during the first fiscal six months 1998 from 29.2%
during the first fiscal six months 1997. Approximately half of the decrease
was attributable to reduced pricing from a new broadline food supplier and the
remainder was attributable to a more efficient, automated ordering system
implemented during the fourth fiscal quarter 1997.
45
<PAGE>
Operating Expenses. Operating expenses increased by $3.2 million, or 16.6%,
to $22.7 million during the first fiscal six months of 1998 from $9.4 million
during the first fiscal six months 1997. Expressed as a percentage of net
sales, operating expenses increased to 50.3% during the first fiscal six
months of 1998 from 50.0% during the first fiscal six months 1997. The
increase was primarily due to increased advertising expenditures during the
first fiscal quarter 1998 as compared to the first fiscal quarter 1997.
General and Administrative Expenses. General and administrative expenses
increased by $0.3 million, or 14.2%, to $2.3 million during the first fiscal
six months 1998 from $2.0 million during the first fiscal six months 1997.
Expressed as a percentage of sales, general and administrative expenses
decreased to 5.1% during the first fiscal six months 1998 from 5.2% during the
first fiscal six months 1997. The decrease was attributable to an increase in
net sales, combined with relatively flat general and administrative expenses,
during 1998 as compared to 1997.
Deferred Rent, Depreciation and Amortization. Deferred rent, depreciation
and amortization expenses were $2.0 million during the first fiscal six months
1998 and $2.1 million during the first fiscal six months 1997.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased by
$0.2 million, or 10.2%, to $2.1 million during the first fiscal six months
1998 from $1.9 million for the first fiscal six months 1997. Expressed as a
percentage of net sales, taxes, other than income taxes, decreased to 4.6%
during the first fiscal six months 1998 from 4.9% for the first fiscal six
months 1997. The improvement was primarily due to decreases in state
unemployment tax rates for fiscal 1998.
Interest Expense. Interest expense increased by $1.3 million to $1.9 million
during the first fiscal six months 1998 from $0.6 million during the first
fiscal six months 1997. The increase was primarily due to approximately $1.2
million of interest expense on approximately $24.3 million aggregate principal
amount of borrowings under the FFCA Loan during the third fiscal quarter 1997
as discussed below under "Liquidity and Capital Resources."
Income Taxes. The effective income tax rate decreased to 33.4% during the
first fiscal six months 1998 from 35.5% during the first fiscal six months
1997 due to a higher FICA credit as a result of increased payroll in the first
fiscal six months 1998 in comparison to the first fiscal six months 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased by $11.3 million, or 16.1%, to $81.4 million
during fiscal 1997 from $70.1 million during fiscal 1996. The increase in net
sales was primarily attributable to the opening of two Chili's restaurants
during fiscal 1997 and the full year impact of three Chili's and one On The
Border restaurant opened during fiscal 1996. Comparable restaurant sales for
locations opened prior to 1996 increased 2.7% in fiscal 1997 as compared to
fiscal 1996. Average sales per restaurant increased 4.0% to $2.6 million
during fiscal 1997 from $2.5 million during fiscal 1996. Approximately four-
fifths of the increases in comparable restaurant sales and average sales per
restaurant reflected an increase in menu prices by an average of 0.5% in March
1997 and another 1.0% in July 1997, and approximately one-fifth reflected an
increase in guest counts by 0.8% resulting from improved advertising and
operations in the restaurants.
Cost of Sales. Cost of sales increased by $2.2 million, or 10.3%, to $23.4
million during fiscal 1997 from $21.2 million during fiscal 1996. Expressed as
a percentage of net sales, cost of sales decreased to 28.7% during fiscal 1997
from 30.2% during fiscal 1996. Approximately one-third of the decrease was
attributable to reduced pricing from a new broadline food supplier and
substantially all of the remainder was due to a more efficient, automated
ordering system implemented during the fourth fiscal quarter 1997.
Operating Expenses. Operating expenses increased by $6.6 million, or 19.2%,
to $40.9 million during fiscal 1997 from $34.3 million during fiscal 1996.
Expressed as a percentage of net sales, operating expenses increased to 50.3%
during fiscal 1997 from 48.9% during fiscal 1996. Nearly half of the increase
was due to increased advertising expenditures and substantially all of the
remainder was due to increased payroll costs as a result of federal minimum
wage increases during fiscal 1997.
46
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased by $0.5 million, or 13.5%, to $4.2 million during fiscal 1997 from
$3.7 million during fiscal 1996. The increase was attributable to increases in
the Company's headcount and related expenses at the administrative and
divisional levels. As a percentage of net sales, general and administrative
expenses were 5.2% of net sales in both years.
Deferred Rent, Depreciation and Amortization. Deferred rent, depreciation
and amortization expenses increased by $0.2 million, or 5.4%, to $3.9 million
during fiscal 1997 from $3.7 million during fiscal 1996. Expressed as a
percentage of sales, deferred rent, depreciation and amortization decreased to
4.8% during fiscal 1997 from 5.2% during fiscal 1996. Amortization expense was
impacted because of a reduction in amortization costs associated with new
restaurant openings as fewer restaurants were opened during fiscal 1997 than
during fiscal 1996.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased by
$0.6 million, or 18.8%, to $3.8 million during fiscal 1997 from $3.2 million
during fiscal 1996. Expressed as a percentage of net sales, taxes, other than
income taxes, increased to 4.7% during fiscal 1997 from 4.6% during fiscal
1996. The increase was primarily due to higher payroll taxes resulting from
increased payroll costs associated with minimum wage increases enacted during
fiscal 1997.
Interest Expense. Interest expense increased by $0.8 million to $1.9 million
during fiscal 1997 from $1.1 million during fiscal 1996. The increase was
primarily attributable to borrowings under the FFCA Loan during fiscal 1997 as
discussed below under "--Liquidity and Capital Resources."
Income Taxes. The effective income tax rate decreased to 34.0% during fiscal
1997 from 34.8% during fiscal 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased by $9.8 million, or 16.3%, to $70.1 million
during fiscal 1996, from $60.3 million during fiscal 1995. The increase in net
sales was primarily attributable to the opening of four new Chili's
restaurants during fiscal 1996 and the full year impact of seven new Chili's
restaurants opened during fiscal 1995. Comparable restaurant sales for
locations opened prior to 1995 decreased by 0.4% during fiscal 1996. Average
sales per restaurant decreased slightly to $2.5 million during fiscal year
1996 from $2.6 million during fiscal 1995. The decreases in comparable
restaurant sales and average sales per restaurant were due to the combined
effect of opening four Chili's restaurants, reduced advertising expenditures
and new competing entrants in the markets in which the Company operated
restaurants during fiscal 1996.
Cost of Sales. Cost of sales increased by $3.1 million, or 17.1%, to $21.2
million during fiscal 1996 from $18.1 million during fiscal 1995. Expressed as
a percentage of net sales, cost of sales increased to 30.2% during fiscal 1996
from 30.0% during fiscal 1995. This increase was primarily due to changes in
menu strategies by the Franchisor that resulted in increased portion sizes.
Operating Expenses. Operating expenses increased by $4.2 million, or 14.0%,
to $34.3 million during fiscal 1996 from $30.1 million during fiscal 1995.
This increase was primarily attributable to $2.4 million of increased payroll
expenses, $0.4 million of increased utility expenses, $0.3 million of
increased advertising expenses and $0.4 million of increased royalties payable
to the Franchisor, with $1.7 million of such expenses being attributable to
new restaurants. Expressed as a percentage of net sales, operating expenses
decreased to 48.9% during fiscal 1996 from 49.9% during fiscal 1995. The
decrease was primarily due to reductions in renewal premiums for worker's
compensation coverage and employee health insurance combined with a reduction
in advertising expenditures during fiscal 1996.
General and Administrative Expenses. General and administrative expenses
increased by $0.3 million, or 8.8%, to $3.7 million during fiscal 1996 from
$3.4 million during fiscal 1995. Expressed as a percentage of net sales,
general and administrative expenses decreased to 5.2% during fiscal 1996 from
5.7% during fiscal 1995. This decrease was primarily attributable to the
spreading of fixed costs over a larger sales base during fiscal 1996 as
compared to fiscal 1995.
47
<PAGE>
Deferred Rent, Depreciation and Amortization. Deferred rent, depreciation
and amortization expenses increased by $0.5 million, or 15.6%, to $3.7 million
during fiscal 1996 from $3.2 million during fiscal 1995. Expressed as a
percentage of net sales, deferred rent, depreciation and amortization
decreased to 5.2% during fiscal 1996 from 5.3% during fiscal 1995.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased by
$0.3 million, or 10.3%, to $3.2 million during fiscal 1996 from $2.9 million
during fiscal 1995. Expressed as a percentage of net sales, taxes, other than
income taxes, decreased to 4.6% during fiscal 1996 from 4.8% during fiscal
1995.
Interest Expense. Interest expense increased by $0.6 million to $1.1
million, during fiscal 1996 from $0.5 million during fiscal 1995. The increase
was primarily due to increases in bank borrowings due to restaurant expansion
during fiscal 1995 and fiscal 1996.
Income Taxes. The effective income tax rate increased to 34.8% during fiscal
1996 from 33.0% during fiscal 1995.
IMPACT OF ACQUISITION ON RESULTS OF OPERATIONS
As a result of the Acquisition, operations going forward will be impacted by
amortization of approximately $18.0 million of goodwill and additional
interest expense associated with the Notes. On a pro forma basis, for fiscal
1997, amortization of goodwill would have been approximately $1.2 million and
additional interest expense on the Notes would have been approximately $9.2
million. The additional interest expense will have a resulting tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its capital expenditures and working
capital needs through a combination of operating cash flow, borrowings under
the FFCA Loans and borrowings under the Company Bank Facility.
Net cash flows from operating activities were $3.3 million for the first
fiscal six months 1998 as compared to $2.3 million for the first fiscal six
months 1997. This increase was primarily due to a decrease in working capital
needs for new restaurant locations. Net cash flows from operating activities
increased to $8.4 million for fiscal 1997 from $5.7 million for fiscal 1996.
Six Months Ended June 30, 1998. Net cash provided by operating activities
for the first fiscal six months 1998 was $3.3 million. Net income from
operations for this period was $0.9 million and the non-cash reconciling item
of deferred rent, depreciation and amortization increased cash flows by $2.4
million. Net cash used in investing activities for the first fiscal six months
1998 was $7.8 million. Approximately one-half of this amount, $3.9 million,
was used in developing, building and opening new restaurants and capital
additions at existing restaurants, while $3.4 million was used to purchase 5%
of the common stock of Bertucci's, Inc. Net cash provided by financing
activities was $4.2 million for the first fiscal six months 1998. During this
period, $4.6 million was borrowed from the line of credit, while $0.3 million
was used for repayment of mortgage loans.
Year Ended December 31, 1997. Net cash provided from operating activities
was $8.5 million for fiscal 1997. Net income from operations provided $2.1
million, the adjustment from deferred rent, depreciation and amortization
provided $3.9 million and changes to working capital provided $2.5 million
during this period. Net cash used from investing activities was $5.1 million
for fiscal 1997. Net cash used was for developing, building and opening new
restaurants and capital improvement of existing restaurants, which accounted
for $4.5 million of the cash used. During fiscal 1997, net cash used in
financing activities was $3.5 million. During fiscal 1997 $24.3 million in
cash was provided from the financing of properties through mortgage loans,
while $8.3 million was used to purchase treasury stock and a cash dividend of
$12.2 million was paid out. In addition, proceeds from the loans were used to
return capital of $4.4 million and financing expenses of $1.4 million. In
addition, $1.4 million of repayments were made on the line of credit.
48
<PAGE>
Year Ended December 31, 1996. Net cash provided by operating activities for
fiscal 1996 was $5.7 million. Net income for fiscal 1996 accounted for $2.0
million and the non-cash adjustment of deferred rent, depreciation and
amortization accounted for an additional $3.4 million. Net cash used investing
in fiscal 1996 was $9.0 million, of which $8.9 million was used to develop,
build and open new restaurants and add capital to existing restaurants. Net
cash provided from financing activities was $3.3 million in fiscal 1996, which
was borrowed from the available bank line of credit.
The Company's capital expenditures were $10.4 million, $7.9 million and $4.5
million for fiscal 1995, 1996 and 1997, respectively. In fiscal 1997, capital
expenditures for routine maintenance and repair of the Company's restaurants
were approximately $2.8 million. Under its Area Development Agreements, the
Company is required to open at least two Chili's and two On The Border
restaurants in each of 1998 and 1999. Based on its current estimates, the
Company would be required to expend approximately $7.8 million in each of
fiscal 1998 and fiscal 1999 to meet its minimum development requirements. The
Company currently expects to exceed these minimum requirements by opening a
total of three Chili's and three On The Border restaurants (one of which it
has already opened) in fiscal 1998, requiring capital expenditures of
approximately $11.7 million, and six Chili's and six On The Border restaurants
in fiscal 1999, requiring capital expenditures of approximately $23.4 million.
In addition, the Company expects to open three new Bertucci's restaurants
during the remainder of fiscal 1998, requiring capital expenditures of
approximately $3.9 million, and six new Bertucci's restaurants in fiscal 1999,
requiring capital expenditures of approximately $7.8 million. As described
below, the Company believes that it will have sufficient working capital and
bank borrowing availability to finance its expansion and other plans through
2003.
In August 1997, the Company paid a dividend and return of capital
distribution to shareholders of approximately $16.7 million from additional
paid-in capital, with the excess payout being charged to retained earnings. In
addition, as part of such transaction, the Company repurchased a portion of
its capital stock, for an aggregate amount of approximately $8.3 million. The
Company's repurchase of shares of common stock was recorded as treasury stock,
at cost, and resulted in a reduction of shareholders' equity. These payments
were funded through the use of proceeds from the FFCA Loan.
The Company incurred a significant amount of indebtedness in connection with
the Transactions. As of the end of the First Six Months 1998, after giving pro
forma effect to the Transactions, the Company would have had approximately
$124.0 million of consolidated indebtedness, including $100.0 million of
indebtedness pursuant to the Notes, $23.8 million of borrowings under the FFCA
Loans and $0.3 million of capital lease obligations. Significant liquidity
demands will arise from debt service on the Notes, the FFCA Loans and
borrowings under the Senior Bank Facility. In addition to its debt service
obligations, the Company estimates that it will require $15.6 million for
capital expenditures, $0.1 million for lease obligations and $0.7 million for
general working capital needs in 1998 and $31.2 million, $0.1 million and
$(0.4) million, respectively, for such expenditures and obligations in 1999.
The Company believes that the cash flow generated from its operations,
together with available borrowings under the Senior Bank Facility and under
the FFCA Loans and similar secured indebtedness, should be sufficient to fund
its debt service requirements, lease obligations, working capital needs,
current expected capital expenditures and other operating expenses through
2003. The Senior Bank Facility provides the Company with available borrowings
up to an aggregate amount of $20.0 million. On a pro forma basis, as of the
end of the First Six Months 1998, approximately $20.0 million would have been
available. The Company's future operating performance and ability to service
or refinance the Notes, the FFCA Loans and the Senior Bank Facility will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control. See "Description of
Other Indebtedness."
IMPACT OF INFLATION
Inflationary factors such as increases in labor, food or other operating
costs could adversely affect the Company's operations. The Company does not
believe that inflation has had a material impact on its financial position or
results of operations for the periods discussed above. Management believes
that through the proper leveraging of purchasing size, labor scheduling, and
restaurant development analysis, inflation will not have a material adverse
effect on income during the foreseeable future. There can be no assurance that
inflation will not materially adversely affect the Company.
49
<PAGE>
SEASONALITY
The Company's quarterly results of operations have fluctuated and are
expected to continue to fluctuate depending on a variety of factors, including
the timing of new restaurant openings and related pre-opening and other
startup expenses, net sales contributed by new restaurants, increases or
decreases in comparable restaurant sales, competition and overall economic
conditions. The Company's business is also subject to seasonal influences of
consumer spending, dining out patterns and weather. As is the case with many
restaurant companies, the Company typically experiences lower net sales and
net income during the first and fourth fiscal quarters. Because of these
fluctuations in net sales and net income (loss), the results of operations of
any quarter are not necessarily indicative of the results that may be achieved
for a full fiscal year or any future quarter.
YEAR 2000 IMPACT
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, within the next two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. The Company is currently assessing the potential impact of Year
2000 on the processing of date-sensitive information by the Company's
automated information and point-of-sale systems and Bertucci's computerized
information systems. While there can be no assurance that Year 2000 matters
will be satisfactorily identified and resolved, the Company currently
believes, based on preliminary discussions with its and Bertucci's information
systems vendors, that Year 2000 issues will not have a material adverse effect
on the Company.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff and is designed to ensure that there are no adverse effects
on the Company's ability to conduct business at the restaurant level and to
process and support restaurant activity at the corporate level. The initiative
covers restaurant point-of-sale systems, back office software, including
labor, menu and inventory management software, ordering systems, the corporate
office network and financial systems, payroll processing, corporate computers
and telephone systems. In addition, the project includes a review of the Year
2000 compliance efforts of the Company's key suppliers and other principal
business partners and, as appropriate, the development of joint business
support and continuity plans for Year 2000 issues. The Year 2000 project is
divided into the following phases: inventory, assessment, remediation,
testing, deployment and monitoring. As of September 30, 1998, the inventory
and assessment phases were substantially completed, and the remediation,
testing, deployment and monitoring phases are in progress. As part of its
testing phase, the Company intends to conduct independent verification testing
of selected network component upgrades received from suppliers. In addition,
selected Year 2000 upgrades are slated to undergo testing in a controlled
environment that replicates the current network and is equipped to simulate
the turn of the century and leap year dates.
Under its current Year 2000 plan, the Company has brought a number of its
systems into Year 2000 compliance, and has established a target date of March
1, 1999 for remediation of most of those systems which are not yet compliant,
subject to additional Year 2000 testing and responsive actions. The Company's
accounts receivable system is expected to be compliant by June 1999 and the
point-of-sale systems in seven remaining Chili's restaurants are expected to
be compliant by September 1999. The Company's ability to meet the target dates
is dependent upon the timely provision of necessary upgrades and modifications
by its suppliers and contractors. In some instances, third party upgrades or
modifications are not expected to be available until late 1998 or early 1999;
accordingly, the Company's testing and redeployment of affected items may be
delayed into mid-1999. The Company has established a supplier compliance
program, and is working with its key suppliers and the Franchisor to minimize
such risks. Based upon information obtained from the Company's two principal
vendors of restaurant supplies and products (which together account for
approximately 75% to 80% of its supplies), the Company believes that the
vendors' systems that could affect the Company's business are Year 2000
compliant. While the Company believes that its relationships with its smaller
suppliers and the Franchisor, as such relationships relate to Year 2000
issues, are less significant, it is continuing to assess these relationships
and to develop contingency plans with such suppliers and expects that such
efforts will be completed by June 1,
50
<PAGE>
1999. The Company currently estimates that it will incur expenses of
approximately $230,000 through 1999 in connection with its anticipated Year
2000 efforts. The timing and amount of the Company's expenses may vary and are
not necessarily indicative of readiness efforts or progress to date.
As part of its Year 2000 initiative, the Company is evaluating scenarios
that may occur as a result of the century change and is in the process of
developing contingency and business continuity plans tailored for Year 2000-
related occurrences. The Company believes that most of its significant
hardware and software systems are already Year 2000 compliant. However, for
those systems which are not yet compliant, the Company is currently in the
process of evaluating alternative vendors from whom they may obtain upgrades
in the event that the vendors who are expected to deliver such upgrades do not
meet the anticipated delivery dates. The Company believes that the most
reasonably likely worst case scenario of failure by the Company or its
suppliers to adequately resolve Year 2000 issues would arise from a complete
failure of its point-of-sale and ordering systems. Such a failure would
require the Company to resort to "non-computerized" means to undertake such
restaurant functions as placing customer orders, preparing customer checks,
accounting of restaurant receipts, recording and ordering restaurant inventory
and supplies, evaluating menu mix and analyzing other operating statistics.
While the Company believes that it is equipped to operate in such a "non-
computerized" mode to address such a failure, there can be no assurance that
the Company would not, as a result of such or any other unanticipated Year
2000 failure, suffer from lost revenues, increased operating costs, loss of
customers or other business interruptions of a material nature.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other resources,
third party modification actions and other factors. Given the complexity of
these issues and possible as yet unidentified risks, actual results may vary
materially from those anticipated and discussed above. Specific factors that
might cause such differences include, among others, the availability and cost
of personnel trained in this area, the ability to locate and correct all
affected computer code, the timing and success of remedial efforts of the
Company's third party suppliers and similar uncertainties.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
its Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-
Up Activities. SOP 98-5 requires that costs incurred during start-up
activities, including organization costs, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998, although early application is encouraged. Initial application of SOP
98-5 should be as of the beginning of the fiscal year in which it is first
adopted and should be reported as a cumulative effect of a change in
accounting principle.
The Company currently intends to adopt SOP 98-5 on January 1, 1999. Upon
adoption, the Company estimates it will incur a cumulative effect of a change
in accounting principle that will range from $0.3 million to $1.0 million.
This estimate primarily includes unamortized pre-opening costs which were
previously amortized over the 12-month period following the opening of a
restaurant.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF BERTUCCI'S
GENERAL
Prior to the Acquisition, Bertucci's operated a chain of 87 full-service,
Italian restaurants in the northeastern and Mid-Atlantic United States and the
Chicago, Illinois and Atlanta, Georgia metropolitan areas as well as one Sal
and Vinnie's steakhouse in Massachusetts. Bertucci's menu features original-
recipe gourmet pizza, prepared in brick ovens, and other high quality,
moderately priced Italian food.
Prior to the Acquisition, Bertucci's net sales consisted of food, beverage
and liquor sales. Food sales accounted for the majority of the revenues
generated at Bertucci's restaurants, or approximately 90% in Bertucci's fiscal
1997, with sales of alcoholic beverages accounting for approximately 9%, and
with non-alcoholic beverages accounting for the balance. Cost of sales
primarily consisted of food, beverage and alcohol costs. Operating expenses
consisted of four primary categories: (i) labor costs; (ii) restaurant
operating costs; (iii) facility costs; and (iv) other office expenses. Labor
costs included direct labor and associated taxes and benefits, as well as
restaurant management payroll, bonuses, taxes and benefits. Restaurant
operating costs included other expenses incurred in the daily operation of the
restaurant including smallwares, wood, and cleaning supplies. Facility costs
included utilities, repairs and maintenance and trash removal. General and
administrative expenses included costs associated with those departments that
assist in restaurant operations and management of the business, including
accounting, management information systems, purchasing and construction.
The following table sets forth the percentage relationship to net sales,
unless otherwise indicated, of certain items included in Bertucci's income
statement, as well as certain operating data, for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED ENDED
-------------------------------------- ---------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27, JULY 12, JULY 11,
1995 1996 1997 1997 1998
(52 WEEKS) (52 WEEKS) (52 WEEKS) (28 WEEKS) (28 WEEKS)
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... 100.0 % 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Cost and expenses:
Cost of sales......... 25.8 25.4 24.9 24.9 24.8
Operating expenses.... 50.4 51.5 52.4 52.5 52.7
General and
administrative
expenses............. 6.9 6.0 6.5 6.0 6.8
Depreciation and
amortization......... 7.6 6.9 6.3 6.6 6.3
Taxes other than
income............... 5.2 5.2 5.1 5.3 5.2
Restaurant closing
expense.............. 4.4 -- -- -- --
----- ----- ----- ----- -----
Total costs and
expenses........... 100.3 95.0 95.2 95.3 95.8
----- ----- ----- ----- -----
Operating income
(loss)............. (0.3) 5.0 4.8 4.7 4.2
Interest expense, net... 1.0 1.0 0.8 0.8 0.6
Interest income......... -- -- -- -- --
----- ----- ----- ----- -----
Income (loss) before
income tax expense
(benefit)............ (1.3) 4.0 4.0 3.9 3.6
Income tax expense
(benefit).............. (0.6) 1.5 1.5 1.4 1.3
----- ----- ----- ----- -----
Net income (loss)... (0.7)% 2.5% 2.5% 2.5% 2.3%
===== ===== ===== ===== =====
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED ENDED
-------------------------------------- ---------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27, JULY 12, JULY 11,
1995 1996 1997 1997 1998
(52 WEEKS) (52 WEEKS) (52 WEEKS) (28 WEEKS) (28 WEEKS)
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
RESTAURANT OPERATING
DATA (DOLLARS IN
THOUSANDS):
Average sales per
restaurant open for
full period............ $1,673 $1,671 $1,712 $1,654 $1,691
Percentage change in
average sales per
restaurant open for
full period............ (8.4)% (0.1)% 2.5% (2.4)% 2.2%
Percentage change in
comparable restaurant
sales.................. (2.0)% 1.0 % 2.5% 0.8 % 2.5%
Number of restaurants:
Restaurants open at
beginning of period.. 67 76 80 80 85
Restaurants opened.. 9 7 5 1 3
Restaurants closed.. -- (3) -- -- --
------ ------ ------ ------ ------
Total restaurants open
at end of period....... 76 80 85 81 88
====== ====== ====== ====== ======
</TABLE>
TWENTY-EIGHT WEEKS ENDED JULY 11, 1998 COMPARED TO TWENTY-EIGHT WEEKS ENDED
JULY 12, 1997
Net Sales. Net sales increased $6.5 million, or 9.0%, to $78.5 million for
the twenty-eight week period ended July 11, 1998, compared to $72.0 million
for the corresponding period in 1997. New restaurants opened in 1997 and 1998
primarily contributed to the increase. Comparative restaurant sales during the
twenty-eight week period ended July 11, 1998 were positive by 2.5%. The
increase was primarily due to continued growth of "take-out" food sales which
comprised 21.3% of total food sales for the twenty-eight weeks ended July 11,
1998 as compared to 19.9% for the corresponding period in 1997.
Cost of Sales. Cost of sales, primarily food and beverages, increased from
$17.9 million in the twenty-eight weeks ended July 12, 1997 to $19.5 million
in the corresponding 1998 period, and decreased as a percentage of net sales,
from 24.9% to 24.8% for the twenty-eight week periods in 1997 and 1998.
Operating Expenses. Restaurant operating expenses for the twenty-eight week
period increased from $37.8 million in Bertucci's fiscal 1997 to $41.3 million
in fiscal year 1998. As a percentage of net sales, operating expenses
increased from 52.5% during the twenty-eight weeks ended July 12, 1997 to
52.7% during the corresponding period in 1998. The increase was largely the
result of a $2.9 million increase in payroll costs offsetting a $0.4 million
decrease in advertising costs during such 1998 period as compared to such 1997
period, with the remaining increase attributable to small increases spread
across a number of operating expenses.
General and Administrative Expenses. General and administrative expenses, as
a percentage of net sales, increased from 6.0% in 1997 to 6.8% in 1998. This
increase was due to higher costs associated with opening new restaurants and
recruiting and training managers for existing restaurants.
Depreciation and Amortization. Depreciation and amortization expense, as a
percentage of net sales, decreased from 6.6% in the 1997 twenty-eight week
period to 6.3% in the 1998 twenty-eight-week period. This decrease was
attributable to the amortization expense on fewer new restaurants.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased
from $3.8 million during the twenty-eight week period ended July 12, 1997 to
$4.1 million in the corresponding 1998 period, and decreased, as a percentage
of net sales, from 5.3% in such 1997 period to 5.2% in such 1998.
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<PAGE>
Interest Expense. Interest expense decreased from $621,000 to $482,000 for
the corresponding twenty-eight week periods of 1997 and 1998, respectively.
This decrease was attributable to the lower amount of bank borrowings in the
1998 twenty-eight week period.
Income Taxes. The effective income tax rate decreased from 36.5% for the
twenty-eight week period ended July 12, 1997 to 35.3% for the corresponding
1998 period.
YEAR ENDED DECEMBER 27, 1997 COMPARED TO YEAR ENDED DECEMBER 28, 1996
Net Sales. Net sales increased by $8.7 million, or 6.8%, to $136.7 million
in Bertucci's fiscal 1997, from $128.0 million in Bertucci's fiscal 1996. Most
of the increase was attributed to five new restaurants that opened in
Bertucci's fiscal 1997 and seven new restaurants that were opened in
Bertucci's fiscal 1996. Comparable restaurant sales increased 2.5% from
Bertucci's fiscal 1996 to Bertucci's fiscal 1997. This increase was largely
the result of menu price increases which averaged about 1.9% during the
periods under comparison. Average sales per restaurant open for both periods
increased 2.5% to $1.71 million, from $1.67 million the previous year.
Cost of Sales. Cost of sales, primarily food and beverages, increased from
$32.5 million in Bertucci's fiscal 1996 to $34.1 million in Bertucci's fiscal
1997 and decreased as a percentage of revenues from 25.4% in Bertucci's fiscal
1996 to 24.9% in Bertucci's fiscal 1997. The decrease was the result of lower
costs paid for cheese, chicken and flour.
Operating Expenses. Operating expenses increased from $66.0 million in
Bertucci's fiscal 1996 to $71.7 million in Bertucci's fiscal 1997 and
increased as a percentage of sales from 51.5% in Bertucci's fiscal 1996 to
52.4% in Bertucci's fiscal 1997. The increase was largely attributable to
increases of $3.3 million in payroll and $0.8 million in advertising costs
over Bertucci's fiscal 1996, with the remaining increase due to small
increases spread across a number of operating expenses.
General and Administrative Expenses. General and administrative expenses
increased from $7.7 million in Bertucci's fiscal 1996 to $8.8 million in
Bertucci's fiscal 1997 and increased as a percentage of sales from 6.0% in
Bertucci's fiscal 1996 to 6.5% in Bertucci's fiscal 1997. The increase
primarily came from higher payroll, training and recruitment costs.
Depreciation and Amortization. Depreciation and amortization expense
decreased from $8.8 million in Bertucci's fiscal 1996 to $8.6 million in
Bertucci's fiscal 1997, a decrease, as a percentage of sales, from 6.9% in
1996 to 6.3% in 1997. This decrease was attributable to a reduction in
amortization costs on new restaurant openings.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased
from $6.6 million in Bertucci's fiscal 1996 to $7.0 million in Bertucci's
fiscal 1997 and decreased as a percentage of net sales from 5.2% to 5.1% in
Bertucci's fiscal 1997.
Interest Expense. Interest expense decreased from $1.3 million in Bertucci's
fiscal 1996 to $1.0 million in Bertucci's fiscal 1997. The decrease came from
the lower amount of bank borrowings during Bertucci's fiscal 1997.
Income Taxes. The effective income tax rate decreased from 37.5% for
Bertucci's fiscal 1996 to 36.4% for Bertucci's fiscal 1997.
FISCAL YEAR 1996 VERSUS FISCAL YEAR 1995
Net Sales. Net sales increased $7.8 million, or 6.5%, to $128.0 million in
Bertucci's fiscal 1996, from $120.3 million in Bertucci's fiscal 1995. Most of
the increase was attributed to seven new restaurants that were opened in
Bertucci's fiscal 1996 and nine new restaurants that were opened in Bertucci's
fiscal 1995. Comparable restaurant sales increased 1.0% for the fifty-two week
period. This increase was largely the result of menu price
54
<PAGE>
increases which averaged about 2.2% during the periods under comparison.
Average sales per restaurant open for the full period remained at $1.67
million for Bertucci's fiscal 1996.
Cost of Sales. Cost of sales, primarily food and beverages, increased from
$31.1 million in Bertucci's fiscal 1995 to $32.5 million in Bertucci's fiscal
1996 and decreased as a percentage of revenues from 25.8% in Bertucci's fiscal
1995 to 25.4% in Bertucci's fiscal 1996. Through more efficient operations and
pricing, Bertucci's was able to control the higher costs of flour, cheese and
chicken during Bertucci's fiscal 1996.
Operating Expenses. Operating expenses increased from $60.7 million in
Bertucci's fiscal 1995 to $66.0 million in Bertucci's fiscal 1996 and
increased as a percentage of sales from 50.4% in Bertucci's fiscal 1995 to
51.5% in Bertucci's fiscal 1996. The increase was largely the result of a $1.2
million increase in advertising costs during Bertucci's fiscal 1996 and, to a
lesser extent, labor costs, which increased slightly but were offset by lower
costs for insurance.
General and Administrative Expenses. General and administrative expenses
decreased from $8.2 million in Bertucci's fiscal 1995 to $7.7 million in
Bertucci's fiscal 1996 and decreased as a percentage of sales from 6.9% in
Bertucci's fiscal 1995 to 6.0% in Bertucci's fiscal 1996. This decrease was
the result of attrition at the corporate level, reduction in training costs
associated with new restaurant openings and a reduction of in-house marketing
costs.
Depreciation and Amortization. Depreciation and amortization expense was
$9.1 million in Bertucci's fiscal 1995 and $8.8 million in Bertucci's fiscal
1996, a decrease, as a percentage of net sales, from 7.6% in Bertucci's fiscal
1995 to 6.9% in Bertucci's fiscal 1996. This decrease was attributable to a
reduction in amortization costs on new restaurant openings.
Taxes Other than Income Taxes. Taxes, other than income taxes, increased
from $6.3 million in Bertucci's fiscal 1995 to $6.6 million in Bertucci's
fiscal 1996 and were 5.2% of net sales for both the 1995 and 1996 periods.
Restaurant-Closing Expenses. Restaurant-closing expenses of $5.3 million in
Bertucci's fiscal 1995 were associated with the closing of three restaurants,
which occurred at the close of business on February 22, 1996. The expense
consisted of $3.8 million for the disposal of fixed assets, $1.0 million for
the liabilities associated with the termination of leases and $500,000 for
legal and other related closing costs. At December 28, 1996, $45,000 of this
reserve remained. This reserve was adequate to cover any remaining costs
associated with the three restaurant closings.
Interest Expense. Interest expense remained constant at $1.3 million for
each of Bertucci's fiscal 1995 and Bertucci's fiscal 1996.
Income Taxes. For Bertucci's fiscal 1995, Bertucci's incurred a tax benefit
of $745,000 due to the closing of the three restaurants. The effective income
tax rate for Bertucci's fiscal 1996 was 37.5%.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Acquisition, Bertucci's financed its expansion from operations,
bank borrowings and the private placement and public offering of equity
securities. Following the Acquisition, Bertucci's sources of capital are the
same as the Company's. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--Liquidity and Capital
Resources."
During Bertucci's fiscal 1995, 1996 and 1997, Bertucci's investment in
property and equipment was $14.3 million, $9.5 million and $8.0 million,
respectively. The investments were funded with cash provided by operations and
with the proceeds of financing activities. During Bertucci's fiscal 1995, 1996
and 1997, Bertucci's generated net cash, from continuing operations, of $10.7
million, $14.1 million and $14.7 million, respectively. During Bertucci's
fiscal 1995, 1996 and 1997, Bertucci's received cash from financing activities
of $5.5 million,
55
<PAGE>
$(0.8) million and $(4.6) million, respectively. During the twenty-eight weeks
ended July 12, 1997 and July 11, 1998, Bertucci's investment in property and
equipment was $2.2 million and $2.3 million, respectively. The investments
were funded with cash provided by operations and with the proceeds of
financing activities. During the twenty-eight weeks ended July 12, 1997, and
July 11, 1998, Bertucci's generated net cash, from continuing operations, of
$3.8 million and $2.0 million, respectively.
Pursuant to the terms of the Merger Agreement, Bertucci's paid Ten Ideas
Acquisition Corp. a fee of $1.5 million and up to $750,000 as reimbursement
for certain expenses in connection with Bertucci's termination of the Going
Private Transaction. As used in this Prospectus, the term "Going Private
Transaction" refers to the transaction which was contemplated by a merger
agreement among Bertucci's and a group led by Joseph Crugnale, Bertucci's
founder and, until the consummation of the Acquisition, its president and
chief executive officer, pursuant to which Ten Ideas, Inc., a corporation
formed by Mr. Crugnale for purposes of such merger, proposed to acquire all of
the outstanding shares of Bertucci's (other than shares owned by Mr. Crugnale)
for a purchase price of $8.00 per share in cash. In connection with the Going
Private Transaction, Bertucci's filed with the Commission a copy of the
Agreement and Plan of Merger dated February 13, 1998 among Bertucci's, Ten
Ideas, Inc. and Ten Ideas Acquisition Corp. as an exhibit to Bertucci's
Current Report on Form 8-K dated February 13, 1998. The Going Private
Transaction was terminated in May 1998 because the Company's proposal to
acquire all outstanding shares of Bertucci's common stock at a purchase price
of $10.50 per share represented a greater value to Bertucci's shareholders.
IMPACT OF INFLATION
The impact of inflation on food, labor and occupancy costs can affect
Bertucci's operations significantly. Many of Bertucci's employees are paid
hourly rates related to the federal minimum wage, which was increased in
Bertucci's fiscal 1997. Food costs were essentially stable during Bertucci's
fiscal 1997. Building costs, taxes, maintenance and insurance costs all have
an impact on Bertucci's occupancy costs, which continued to increase during
Bertucci's fiscal 1997. The Company believes that Bertucci's current practice
of maintaining adequate operating margins through a combination of menu price-
increases and cost-controls, careful evaluation of property and equipment
needs and efficient purchasing practices will be Bertucci's most effective
tool for coping with inflation.
SEASONALITY
Bertucci's results of operations have not been materially affected by
seasonality.
56
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading operator of full-service, casual dining restaurants
in New England. The Company develops and operates two distinct restaurant
franchises, Chili's and On The Border restaurants, under franchise agreements
with Brinker, together with a proprietary restaurant concept under the name
Bertucci's Brick Oven Pizzeria(R).
The Company is the largest Chili's franchisee and has received numerous
awards from the Franchisor, including being named Chili's "Franchisee of the
Year" in 1992 and 1996 and "Developer of the Year" in 1996. As of September
30, 1998, the Company operated 33 Chili's and three On The Border restaurants
in five New England states. The Company was founded in 1991 as a Massachusetts
corporation, serving first as a general partner to a Massachusetts limited
partnership and then as the successor entity to such partnership and two other
limited partnerships, and was re-incorporated in Delaware on October 20, 1994.
The Company was formed to acquire 15 Chili's restaurants from a prior
franchisee. Upon its acquisition of the 15 Chili's restaurants in 1991, the
Company recruited a new management team and undertook a series of steps to
enhance operations, including reducing administrative overhead, coordinating a
new advertising campaign, introducing new menu items, renovating restaurant
facilities, installing new information systems and improving purchasing
decisions. Since 1991, the Company has grown through the addition of 18 new
Chili's and three On The Border restaurants in the New England Market. The
Company opened three Chili's restaurants in 1994, seven in 1995, four in 1996,
one in 1997 and two in 1998, and opened one On The Border restaurant in 1996.
The Company has increased the average sales per restaurant of its Chili's
restaurants from approximately $1.8 million for Fiscal 1991, the final year of
ownership by the prior franchisee, to $2.5 million for fiscal 1997. The
average sales per restaurant for the Company's Chili's restaurants in fiscal
1992, 1993, 1994, 1995 and 1996 were $2.1 million, $2.4 million, $2.6 million,
$2.6 million and $2.5 million, respectively. In addition, since 1991, the
Company has grown through the addition of 16 new Chili's and two On The Border
restaurants in the New England market. The Company also has increased overall
net sales and EBITDA from approximately $27.5 million and $0.3 million,
respectively, for Fiscal 1991 to $81.4 million and $9.0 million, respectively,
for fiscal 1997.
The first Bertucci's restaurant was opened in 1981. In 1985 Bertucci's began
expanding from its one restaurant and as of September 30, 1998, Bertucci's
owned and operated 89 full-service, casual dining, Italian-style restaurants
under the name Bertucci's Brick Oven Pizzeria(R) located primarily in the
northeastern and Mid-Atlantic United States and one Sal and Vinnie's
steakhouse located in Massachusetts. Bertucci's opened 17 Bertucci's
restaurants in 1994, nine in 1995, four in 1996, four in 1997 and five in
1998, and one Sal and Vinnie's restaurant in 1997. In July 1998, the Company
completed its acquisition of Bertucci's by causing Bertucci's to be merged
into Acquisition Sub, a wholly-owned subsidiary of the Company, which entity
survived the merger. Following the merger of Bertucci's into Acquisition Sub,
Acquisition Sub changed its name to Bertucci's, Inc. Management believes that
Bertucci's is a proven value-based concept with strong brand recognition and
that the Acquisition will strengthen the Company's position as a leading
operator of casual dining restaurants in the northeastern United States. As a
result of the Acquisition, the Company offers its targeted customer base three
distinct yet complementary casual dining menus: "American/southwestern" at
Chili's, "Tex-Mex" at On The Border and Italian at Bertucci's. In addition,
management expects to realize cost savings from the Acquisition primarily due
to headcount reductions and, to a lesser extent, reduced administrative and
overhead expenses, improved purchasing practices and greater economies of
scale. After giving pro forma effect to the Transactions, for the Last Twelve
Months, the Company had net sales of $230.8 million, Adjusted EBITDA of $27.8
million and a net loss of $1.1 million.
CONCEPTS
The Company's restaurants are full-service restaurants, featuring
substantial portions of a variety of high quality foods at moderate prices
accompanied by quick, efficient and friendly table service. The Company's
restaurants are all casual dining concepts which are intended to fill a market
niche between the fine-dining and
57
<PAGE>
fast-food segments of the restaurant industry. These restaurants are designed
to appeal to a broad customer base of adults and families with children.
Chili's. Chili's restaurants feature a variety of "All-American" foods with
a southwestern emphasis. The Chili's concept was initiated in 1975 with the
opening of the first Chili's restaurant in Dallas, Texas. As of September 30,
1998, the Chili's restaurant system in the United States consisted of 589
restaurants in 46 states, of which 424 were Franchisor-owned and 165 were
franchised. During 1997, system-wide revenues from Chili's restaurants in the
United States were approximately $1.2 billion. The Company holds the exclusive
rights to operate up to an aggregate of 55 Chili's restaurants (including the
33 it currently operates) in all six New England states and in Westchester
County, New York.
On The Border. On The Border restaurants feature a Tex-Mex menu served in a
distinctive dining atmosphere reminiscent of a Mexican cantina. The On The
Border concept was initiated in 1982 with the opening of the first On The
Border restaurant in Dallas, Texas. As of September 30, 1998, the On The
Border restaurant system in the United States consisted of 73 restaurants in
19 states, of which 55 were Franchisor-owned and 18 were franchised. The
Company holds the exclusive rights to operate up to an aggregate of 31 On The
Border restaurants (including the three it currently operates) in all six New
England states and in Westchester County and upstate New York.
Bertucci's. Bertucci's restaurants feature Italian-style entrees made from
original recipes, including gourmet pizza and specialty pasta dishes.
Bertucci's endeavors to differentiate itself from other pizzerias by offering
a variety of freshly prepared foods using high-quality ingredients and brick-
oven baking techniques. Bertucci's also seeks to distinguish itself with its
contemporary European-style, open-kitchen design. The first Bertucci's was
opened in Somerville, Massachusetts in 1981. As a proprietary concept,
Bertucci's will provide the Company with significant flexibility to execute
the concept as the Company may best determine.
COMPETITIVE STRENGTHS
Proven Restaurant Concepts. The Chili's, On The Border and Bertucci's
concepts have been in existence for 23, 16 and 17 years, respectively.
Management believes that Chili's, with its high quality American/southwestern
menu, On The Border, with its distinctive Tex-Mex menu, and Bertucci's, with
its gourmet brick-oven pizza, have each proven popular with consumers over
time. Management believes that the reputation of these restaurants for
offering a distinctive selection of moderately priced, high quality food,
combined with a high level of customer service, has created valuable
operations with strong brand name recognition and customer loyalty. To
maintain its strong brand awareness and promote its restaurants, the Company:
(i) clusters restaurant locations; (ii) seeks to ensure an enjoyable guest
experience; and (iii) implements strategic marketing and advertising
initiatives.
Innovative Operator. The Company has developed and implemented several
strategies to enhance operations of the Chili's concept including: (i)
tailoring the national menu with innovative and regional specialties such as
"boneless buffalo wings," "fish & chips" and New England clam chowder; (ii)
initiating a comprehensive management training program, elements of which have
been adopted by the Franchisor; (iii) redesigning the restaurant facility from
the standard Chili's prototype to a more efficient model, elements of which
the Franchisor has begun to incorporate into its own restaurants; (iv)
formulating media strategies and developing its own creative material to
supplement advertising materials supplied by the Franchisor; and
(v) implementing sophisticated management information systems, components of
which have been incorporated by the Franchisor. The Company has received
numerous awards from the Franchisor, including being named Chili's "Franchisee
of the Year" in 1992 and 1996 and "Developer of the Year" in 1996. In
addition, the Company participates in the Franchisor's franchisee advisory
council.
Clustered Restaurant Locations. The Company believes that its strategy of
building a critical mass of restaurants in specific cities in the New England
market has enabled it to quickly respond to the needs of its guests, employees
and markets. Clustering restaurant locations allows the Company to realize
certain benefits
58
<PAGE>
including: (i) improved purchasing power; (ii) marketing efficiencies; and
(iii) increased knowledge of the Company's customers, markets and future site
locations. The Company believes that the Acquisition should yield further
operational efficiencies as a substantial number of Bertucci's restaurants are
located in the same markets as the Company's existing Chili's restaurants.
Commitment to Personnel Training. The Company believes that an essential
aspect of its continued success is the training of its personnel. The Company
requires all of its Chili's and On The Border general and restaurant managers
to complete a comprehensive 13-week management training program developed by
the Company. The program instructs management trainees in detailed, concept
specific food preparation standards and procedures as well as administrative
and human resource functions. The Company also requires each of its non-
management employees to undergo extensive training administered by the
managers. Each of these levels of training is designed to increase product
quality, improve operational safety, increase overall productivity and guest
satisfaction and promote the concept of "continuous improvement." Management
expects to enhance the Bertucci's training program by increasing its length
from eight to 13 weeks and centralizing administration of the program from its
current regional administration.
Management Structure and Experience. The Company believes that one of its
greatest strengths is the operating philosophy of its highly experienced
management team. The five most senior members of the Company's management team
have an average of more than: (i) 20 years in the restaurant industry; (ii) 11
years in the casual dining segment of the industry; and (iii) six years with
the Company. Since the Company's inception in 1991, this management team has
significantly improved the operating performance of the Company's initial 15
Chili's restaurants and successfully developed an additional 21 new
restaurants. Senior management closely monitors and actively supports the
operations of each of the Company's restaurants and incentivizes restaurant-
level managers, through hiring, training, motivational and reward practices,
to operate individual restaurants in a proprietary manner by developing their
own methods to improve operations and enhance the guest experience. The
Company believes that the independent entrepreneurial spirit of its on-site
personnel together with the guidance provided by senior management will
continue to be a key factor in the Company's efforts to maximize revenue,
control costs, engender employee satisfaction and build brand loyalty. Members
of the Company's senior management team own approximately 12.1% of the common
stock of the Company.
BUSINESS STRATEGY
The Company's objective is to strengthen its position as a leading operator
of full-service, casual dining restaurants, thereby increasing net sales and
cash flow. In order to accomplish its goal, the Company intends to pursue the
following strategies:
Further Enhance the Guest Dining Experience. The Company continually
evaluates new initiatives which will improve food presentation and customer
service, and create a consistent enhanced brand image for each of its
restaurants. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company seeks
to maintain a consistently high standard of food preparation and customer
service through stringent operational controls and extensive employee
training.
Increase Market Penetration. The Company's development strategy is to
increase market penetration of each of the Chili's, On The Border and
Bertucci's concepts by continuing to cluster its restaurants. The Company
believes that such clustering will enable it to expand brand awareness of the
three concepts in under-penetrated markets and increase marketing,
advertising, management, purchasing and administrative efficiencies.
Increase Operating Efficiencies. The Company believes there are significant
opportunities for improvement in margins and cash flow through intercompany
cooperation among the three restaurant concepts, including: (i) realizing
economies of scale from the combined purchasing power of a larger company;
(ii) achieving operating efficiencies through the implementation of a "best
practices" program that will seek, through management's review and analysis of
the processes, controls and service levels of the post-Acquisition Company, to
identify and implement business practices that promote the most efficient
operation of each
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department of the Company; and (iii) reducing headcount, certain professional
fees and other selling, general and administrative expenses. Management
estimates that the Company will realize at least $2.0 million of annual cost
savings in connection with such increased operating efficiencies.
Pursue Selective Restaurant Expansion. Management intends: (i) to continue
to open new Chili's and On The Border restaurants in select New England,
Westchester County and additionally, in the case of On The Border, upstate New
York markets pursuant to its Area Development Agreements with the Franchisor;
and (ii) as a result of the Acquisition, to expand in select additional
markets through new Bertucci's restaurant openings in the New England, Mid-
Atlantic and other regions that Bertucci's currently serves and in such other
markets as the Company may determine. Management also believes that, as a
result of the Acquisition, future opportunities may arise to develop
Bertucci's and Chili's or Bertucci's and On The Border restaurants together on
single real estate parcels, yielding improved development economics and
capital returns.
Standardize and Enhance Bertucci's Design. Bertucci's restaurants
historically have been constructed in varying sizes (averaging approximately
6,200 square feet) and designs, with no two interior decors exactly alike. The
Company's management believes that Bertucci's restaurant investment economics
would benefit from a standardized design which the Company expects to
implement in restaurants to be opened during 1999. Bertucci's former
management recently had begun to build smaller restaurants with fewer seats
and smaller bar areas, a format which the Company expects to enhance by
introducing a prototype that: (i) further reduces building size to a range of
4,800 to 5,400 square feet, with seating for approximately 150 guests; (ii)
features service bars instead of full bar areas to account for Bertucci's
moderate levels of alcohol sales; and (iii) standardize interior decor.
RESTAURANT OVERVIEW AND MENU
The Company's restaurants are full-service, casual dining restaurants,
featuring substantial portions of high quality food at moderate prices
accompanied by quick, efficient and friendly table service designed to
minimize guest waiting time and facilitate table turnover. All of the
Company's restaurants are open for lunch and dinner seven days a week. To
encourage patronage by families with children, the Company's restaurants
feature lower-priced children's' menus in addition to the standard menus.
Chili's Grill and Bar. Chili's restaurants feature a casual dining
atmosphere and a menu of "All-American" food items with a southwestern
emphasis, including a variety of hamburger, fajita, chicken, steak, seafood
and vegetarian entrees, as well as a number of sandwich, barbecue, salad,
appetizer and dessert selections, prepared fresh daily according to recipes
specified by Chili's. The Company has its own executive chef who has worked
with senior management to develop certain innovative and regional menu items
to supplement the basic Chili's menu, including a "boneless buffalo wings"
appetizer, a "fish & chips" entree and a New England clam chowder, each of
which have proven popular with the Company's guests. Each Chili's restaurant
also has a fully licensed bar serving beer, wine and cocktails. Price points
for entrees generally range from $5.99 to $10.99. For fiscal 1997, the per
guest average check was $10.75.
On The Border. On The Border restaurants also feature a casual yet
distinctive dining atmosphere, focusing on the cuisine of the border region
between Texas and Mexico. The On The Border menu offers an assortment of
authentic fajita, chicken, steak, shrimp, barbecued ribs, enchilada, burrito
and other Tex-Mex specialties, prepared fresh daily according to recipes
specified by On The Border. There is a luncheon menu as well as a full dinner
menu. Each On The Border restaurant also has a full-service bar which
specializes in Tex-Mex alcoholic beverages, including a variety of popular
margaritas. Price points generally range from $4.79 to $6.79 for lunch entrees
and from $6.99 to $10.99 for dinner entrees. For fiscal 1997, the per guest
average check was $11.43 at the one Company-owned On The Border restaurant
that had been operating for at least 12 months as of December 31, 1997.
Bertucci's. Bertucci's restaurants offer a distinctive menu and a
contemporary European-style design which in the opinion of management offer a
unique dining experience at a reasonable price. Bertucci's signature
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product, gourmet pizza, is offered with a wide variety of cheese, vegetable
and meat toppings and is prepared in brick ovens. Management believes that
Bertucci's original recipes and brick-oven baking techniques combine to
produce a superior pizza that is difficult to duplicate. During Bertucci's
fiscal 1997, sales of pizza accounted for approximately 40% of net sales. In
addition to pizzas, Bertucci's menu features a variety of pasta items,
appetizers, soups, salads, calzones and desserts that are prepared fresh daily
according to Bertucci's original recipes. Natural, fresh ingredients are a
cornerstone of the Bertucci's concept. In an effort to ensure the uniform
high-quality and freshness of its menu offerings, Bertucci's prepares all of
its own dough, sauces and desserts. Full bar service is available at most
Bertucci's restaurants and beer and wine are available at all locations. Price
points generally range from $4.95 to $6.75 for lunch entrees and from $5.95 to
$10.99 for dinner entrees. For fiscal 1997, the per guest average check was
$7.40 for lunch and $9.95 for dinner. Most items on the menu may be purchased
for take-out service or delivery, which together, during Bertucci's fiscal
1997, accounted for approximately 27% of net sales.
In addition to the Bertucci's concept, as a result of the Acquisition, the
Company also acquired one Sal and Vinnie's steakhouse. The Sal and Vinnie's
concept features steak, chicken and fish entrees seasoned with Italian spices,
as well as a variety of Italian pasta dishes. The Company is evaluating the
further development of the Sal and Vinnie's concept and has made no conclusive
determinations as to whether or how it may proceed with such development.
RESTAURANT LOCATIONS
The table below identifies the location of the 126 restaurants operated by
the Company at September 30, 1998.
<TABLE>
<CAPTION>
STATE CHILI'S ON THE BORDER BERTUCCI'S TOTAL
----- ------- ------------- ---------- -----
<S> <C> <C> <C> <C>
Connecticut............................. 9 2 9 20
Georgia................................. -- -- 6 6
Illinois................................ -- -- 7 7
Maine................................... 1 -- -- 1
Maryland................................ -- -- 6 6
Massachusetts........................... 14 1 35(a) 50
New Hampshire........................... 5 -- 3 8
New York................................ -- -- 3 3
New Jersey.............................. -- -- 5 5
Pennsylvania............................ -- -- 5 5
Rhode Island............................ 4 -- 2 6
Virginia................................ -- -- 7 7
Washington D.C.......................... -- -- 2 2
--- --- --- ---
Total................................. 33 3 90 126
=== === === ===
</TABLE>
- --------
(a) Includes one Sal and Vinnie's restaurant.
In fiscal 1998, through September 30, 1998, the Company has opened two
Chili's, two On The Border and five Bertucci's restaurants. In addition to the
restaurants listed in the table above, the Company is currently developing one
Chili's, one On The Border and one Bertucci's restaurant which are expected to
be opened by the end of fiscal 1998. Although prior to the Acquisition
Bertucci's had considered developing one additional Sal and Vinnie's
restaurant, the Company has made no conclusive determinations whether or how
to proceed with such development. Of the 126 restaurants operated by the
Company at September 30, 1998, the Company owned the land for 11 restaurants
and leased the land for all other restaurants.
All but six of its existing Chili's and On The Border restaurant locations
are leased by the Company, with lease terms expiring between 2003 and 2016
with an average unexpired lease term of 14 years (not including
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additional option terms). The leases for most of the existing restaurants are
for terms of 20 years and provide for additional option terms and, in the case
of a limited number of leases, a specified annual rental plus additional rents
based on sales volumes exceeding specified levels. Leases for future
restaurants will likely include similar rent provisions. The Sal and Vinnie's
restaurant is leased from Joseph Crugnale, who until consummation of the
Acquisition was president and chief executive officer of Bertucci's. Initial
Bertucci's restaurant lease terms range from two years to 40 years. The
majority of such leases provide for an option to renew for additional terms
ranging from five years to 20 years. All of Bertucci's leases provide for a
specified annual rental and most leases call for additional rent based on
sales volumes exceeding specified levels. Generally, the leases are net leases
that require Bertucci's or the Company, as applicable, to pay all taxes,
insurance and maintenance costs.
RESTAURANT DESIGN
Chili's. The Company's Chili's restaurants are prototypically free-standing
buildings (ranging from 5,300 to 7,200 square feet) that average approximately
5,800 square feet in size and have a seating capacity of approximately 190
people. The bar area consists of approximately 10 tables and 60 seats. The
Chili's decor includes booth and table seating with table-tops inlaid with
decorative ceramic tiles, beamed ceilings, tiled or brick floors, and wood
paneled and brick walls. The walls are decorated with a variety of nostalgic
American artifacts, with a significant number of items evoking images of the
American southwest. Live cactus and other greenery are placed in clay pots or
hanging baskets throughout the restaurant.
Of the 18 new Chili's restaurants that the Company has opened since 1991, 16
have been built pursuant to a prototype designed and developed by the Company.
Management believes that its prototype, which, among other things, sets apart
the bar area to one side of the restaurant, provides an optimal use of space.
A significant portion of the Company's revenues have been from sales of
alcoholic beverages and the Company believes its prototype bar design promotes
such increased beverage sales. In fiscal 1997, such sales accounted for
approximately 19.0% of revenues among the group of the Company's Chili's
restaurants that were built pursuant to the prototype design, as compared to
approximately 17.5% of revenues among the group of the Company's Chili's
restaurants that were not built pursuant to such design. In addition, the
overall design provides management a broader view of the entire restaurant,
allowing greater supervision of customer service. Since the Company's
implementation of its prototype, the Franchisor has begun to introduce a
similar prototype.
On The Border. The Company's On The Border restaurants are free-standing
buildings averaging approximately 7,800 square feet in size with a seating
capacity of approximately 305 people. The bar area has approximately seven
tables and 60 seats. The On The Border decor includes booth and table seating,
stucco walls, some with frescoes depicting images of the Mexican "vaquero"
cowboy, wrought iron and glass light fixtures and an array of Mexican
handicrafts, many of which emphasize the "vaquero" theme. Each restaurant has
a large stone fireplace with a gas-fired flame, an authentic handmade tortilla
machine producing fresh product within the guests' view and a four-season
patio which incorporates outdoor dining as the weather permits.
Bertucci's. Bertucci's restaurants are free standing or in-line buildings
(ranging from 1,000 to 12,000 square feet) averaging approximately 6,200
square feet in size with a seating capacity of approximately 170 people. The
bar area has approximately 12 seats. Each of Bertucci's restaurants features a
contemporary European-style, open-kitchen design centered around brick ovens.
Ingredients are displayed and food is prepared on polished granite counters
located in front of the brick ovens, in plain view of diners. Bertucci's
restaurants historically have been built in varying sizes and designs, with no
two interior decors exactly alike. Management believes that unit economics
would benefit from a standardized design which the Company expects to
implement for restaurants to be opened during fiscal 1999. Bertucci's has
recently begun to build smaller restaurants. Management believes that further
decreasing building size to a range of 4,800 to 5,400 square feet with seating
for approximately 150 guests would maximize efficiency of Bertucci's dine-in
business (73% of sales in Bertucci's fiscal 1997) and its take-out and
delivery business (27% of sales in Bertucci's fiscal 1997). In addition, with
Bertucci's moderate sale of alcoholic beverages accounting for approximately
9% of net sales during Bertucci's fiscal 1997, the Company expects to
introduce service bars in new restaurants instead of full bar areas
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to further optimize utilization of space. Finally, the Company expects to
introduce a more cost-efficient, standardized interior decor.
RESTAURANT ECONOMICS
Chili's. During fiscal 1997, average revenue per restaurant was $2.5 million
and average restaurant cash flow was $410,000 (after average rent expense of
$115,000). Corporate general and administrative costs are not included in
average restaurant cash flow. Lunch and dinner accounted for approximately 35%
and 65% of net sales, respectively, during fiscal 1997. The percentage of net
sales from alcoholic beverages for the Company's Chili's restaurants during
fiscal 1997 was approximately 18%.
On The Border. During fiscal 1997, for the one Company-owned On The Border
restaurant that had been operating for at least 12 months as of December 31,
1997, revenue was $4.2 million and cash flow was approximately $723,000 (after
rent expense of $153,000). Lunch and dinner accounted for approximately 35%
and 65% of net sales, respectively, during fiscal 1997. The percentage of net
sales from alcoholic beverages for the Company's On The Border restaurants
during fiscal 1997 was approximately 31%.
Bertucci's. During Bertucci's fiscal 1997, average revenue per restaurant
was $1.7 million and average restaurant cash flow was $245,000 (after average
rent expense of $135,000). Lunch and dinner accounted for approximately 26%
and 74% of net sales, respectively, during Bertucci's fiscal 1997. The
percentage of net sales from alcoholic beverages for Bertucci's restaurants
during Bertucci's fiscal 1997 was approximately 9%.
FRANCHISE AND DEVELOPMENT AGREEMENTS
The Company operates its Chili's and On The Border restaurants under
individual franchise agreements that are part of broader exclusive development
agreements (the "Area Development Agreements") with the Franchisor. These
agreements grant the Company the exclusive right to develop up to 55 Chili's
and 31 On The Border restaurants (inclusive of the 36 such restaurants that
the Company currently operates) in New England, Westchester County and
additionally, in the case of On The Border, upstate New York markets. The Area
Development Agreements require the Company to develop a minimum of two to
three Chili's and two to four On The Border restaurants each year in
accordance with a specified schedule during the term of the agreement in order
to maintain its exclusive development rights. If the Company opens fewer
restaurants than required by the development schedule in any development
territory, the Franchisor has the right to terminate the Company's development
rights in the territory where the deficiency occurs. In addition, a breach
under an Area Development Agreement could constitute a default under the
Senior Bank Facility and FFCA Loans, permitting the applicable lender to
declare all amounts borrowed thereunder immediately due and payable. The Area
Development Agreements expire in 2000 in the case of Chili's and 2001 in the
case of On The Border, but are each renewable at the Company's option at the
scheduled expiration date.
Under the Area Development Agreements, the Company is responsible for all
costs and expenses incurred in locating, acquiring, and developing restaurant
sites, although the Franchisor must approve each proposed restaurant site and
the related real estate purchase contract or lease agreement. The franchise
agreements convey the right to use the Franchisor's trade names, trademarks,
and service marks with respect to specific restaurant units. The Franchisor
also provides general construction specifications, designs, color schemes,
signs and equipment, recipes for food and beverage products, marketing
concepts, and materials. Generally, each new franchise agreement requires an
initial $40,000 franchise fee which is, typically, in addition to a $10,000
nonrefundable development fee per proposed restaurant, paid under the Area
Development Agreements. The franchise agreements also require payment to
Brinker of a royalty fee of 4.0% of annual net sales. In addition, pursuant to
its franchise agreements, the Company contributes 0.5% of monthly net sales
from each of its Chili's or On The Border restaurant to Brinker for
advertising and marketing to benefit all restaurants in the Chili's or On The
Border system, respectively. The Company is also required to spend at least
2.0% of annual net sales on local advertising.
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RESTAURANT DEVELOPMENT
Expansion. The Company expects to continue its steady growth strategy
through the opening of new restaurants over the next several years. During the
remainder of fiscal 1998, the Company intends to develop one additional
Chili's, one On The Border and one Bertucci's restaurant, in addition to the
88 restaurants acquired through the Acquisition and the two Chili's, one On
The Border and two Bertucci's restaurants opened subsequent to the
Acquisition. For a typical new Chili's restaurant, capital expenditures (not
including land costs) approximate $1.7 million (of which approximately
$190,000 are pre-opening expenses), and for an On The Border restaurant
approximate $2.2 million (of which approximately $250,000 are pre-opening
expenses). Based on the current capital expenditures typically associated with
a new Bertucci's restaurant, management estimates that the Company will spend
approximately $1.2 million (of which approximately $100,000 will be pre-
opening expenses) to open each new Bertucci's restaurant. During fiscal 1998
through September 30, 1998, the Company had spent approximately $14.0 million
(of which approximately $1.3 million were pre-opening expenses) to open two On
The Border and five Bertucci's restaurants and anticipates that for the
remainder of fiscal 1998 it will spend an additional $3.7 million (of which
approximately $0.5 million will be pre-opening expenses) to open an additional
Chili's, one On The Border and one Bertucci's restaurant. The Company
currently plans to spend at least $31.2 million in fiscal 1999 to open an
expected six each of the Chili's, On The Border and Bertucci's restaurants.
The Company expects to finance the development of its Chili's and On The
Border restaurants through borrowings under the Senior Bank Facility and loans
from FFCA and similar lenders, and of its Bertucci's restaurants through cash
flows from operations and borrowings under the Senior Bank Facility. The
Company reviews its expansion plans and budget on a regular basis, in light of
opportunities that may arise, and may determine to open a smaller or larger
number of stores than currently planned.
As a market area becomes more fully developed, each restaurant normally
benefits from increased customer recognition, greater advertising
capabilities, and economies of scale with respect to food costs, advertising
and promotion, and certain other expenses. Markets which have reached this
minimum level of penetration are characterized as "efficient" and typically
are more profitable than emerging markets. The Company attempts to balance its
new restaurant development by (i) selectively locating restaurants in areas
where an appropriate level of market penetration has been achieved, (ii)
increasing the level of market penetration in territories that are not yet
"efficient," and (iii) expanding into new territory. Management believes that
the Company's existing development territory will support over 55 Chili's and
31 On The Border restaurants (inclusive of the 36 such restaurants that the
Company currently operates) and will accommodate planned Chili's and On The
Border restaurant development for approximately five to seven years.
Site Selection and Construction. Management's site selection strategy for
new restaurants focuses on high-density, high-traffic, high-visibility free
standing sites which are, for the most part, positioned within existing
markets to take advantage of certain operational efficiencies. Management
seeks out sites with a mixture of retail, office, residential and
entertainment concentration which promote both lunch and dinner business.
Management devotes significant time and resources to identify and analyze
potential sites, as it believes that site selection is crucial to its success.
Management also believes that multiple locations focused in defined geographic
areas will result in increased market penetration, brand recognition and
permit advertising, management, purchasing and administrative efficiencies.
The typical time period required to select a site and build and open a Company
restaurant is approximately 18 months.
QUALITY CONTROL
Chili's and On The Border. The Company's general and assistant managers are
responsible for assuring compliance with the Company's operating procedures.
Both the Company and the Franchisor have uniform operating standards and
specifications relating to the quality, preparation and selection of menu
items, maintenance and cleanliness of the premises, and employee conduct.
Compliance with these standards and specifications is monitored by periodic
on-site visits and inspections by area supervisors and directors of operations
and by representatives of the Franchisor. Each restaurant typically has a
general manager and three to four assistant managers who together train and
supervise employees and are, in turn, supported by Quality
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Assurance Managers and Regional Directors of Operations. The Company's
operational structure encourages all employees to assume a proprietary role in
ensuring that such standards and specifications are consistently adhered to.
Bertucci's. Each Bertucci's restaurant typically has a general manager and
two to three assistant managers who are responsible for assuring compliance
with Bertucci's operating procedures and for the training and supervision of
restaurant employees. The general managers report to regional managers who
oversee six to 10 Bertucci's restaurants. Bertucci's also has an innovative,
toll-free "customer comment line" that encourages customer feedback with
respect to restaurant operations. The Company believes that through an
improved "customer comment line," increased centralized training and other
support for regional managers, the quality control operations of Bertucci's
can be further enhanced.
MANAGEMENT INCENTIVE PROGRAMS
Since the Company's founding in 1991, management has developed a profit-
based reward system for its restaurant level managers such that their bonus
levels are directly tied to an individual restaurant's profitability. The
Company has also implemented a program whereby certain managers make modest
financial investments in the Company for which they receive a larger portion
of their restaurant's cash flow. The Company believes these incentive programs
have contributed significantly to the entrepreneurial spirit of its
restaurants and, ultimately, to overall guest satisfaction and Company
profitability. Management believes that it will offer similar incentive
programs to Bertucci's managers.
TRAINING
Chili's and On The Border. The Company places significant emphasis on the
proper training of its employees. To maintain its high service and quality
standards, the Company has developed its own training programs that are
coordinated through the Company's training department which is supervised by a
four-member senior management training team. Each level of Company training is
designed to increase product quality, operational safety, overall productivity
and guest satisfaction and to foster the concept of "continuous improvement."
The Company requires new non-management employees to undergo extensive
training administered by restaurant-level managers to improve the confidence,
productivity, proficiency level and customer relations skills of such
employees. The Company also requires all of its general and restaurant
managers to complete a comprehensive 13-week management training program
developed by the Company. This program instructs management trainees in
detailed, concept-specific food preparation standards and procedures as well
as administrative and human resource functions. This training is largely
conducted at specified restaurants throughout New England which are designated
as "training restaurants" and also incorporates training manuals and other
written guides. At the end of the 13-week process, trainee skills are tested
by a variety of means including a full-day written examination. Initial
instruction is typically followed up by periodic supplemental training.
Following the Company's creation and successful implementation of this
management-trainee program, certain of its elements have been adopted by the
Franchisor, system-wide. When the Company opens a new restaurant, management
positions are typically staffed with personnel who have had previous
experience in a management position at another Chili's or On The Border
restaurant. In addition, a highly experienced opening team assists in opening
the restaurant. Prior to opening, all staff personnel undergo a week of
intensive training conducted by the restaurant opening team. The training
includes drills in which test meals and beverages are served.
Bertucci's. Bertucci's currently requires all of its general and restaurant
managers to participate in an eight to 10-week training program which
instructs management trainees in Bertucci's detailed food preparation
standards and procedures as well as administration and human resource matters.
The Company expects to enhance the Bertucci's training program by increasing
its length to 13 weeks and centralizing administration of the program from its
current regional administration.
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ADVERTISING AND MARKETING
The Company's marketing strategy is to continue to strengthen the brand
equity of each of its restaurant groups and to increase profitability and
build revenues across all three groups. Management utilizes strategies
designed to encourage consumer trial of new products and increase the average
guest check while reinforcing each restaurant concept's distinctive dining
experience. The Company's advertising and promotion plan is designed to build
awareness and increase trial among key target audiences while optimizing
spending by market, based on media cost efficiencies. The Company classifies
markets based upon restaurant penetration and the resulting advertising and
promotion costs per restaurant. The Company's three most highly-penetrated
markets are supported with regular spot television advertisements during all
but the first fiscal quarter of each year. The Company augments its marketing
efforts in these markets with radio advertising to target the lunch and dinner
time periods and to increase the frequency of the promotional message. In its
secondary markets, the Company utilizes more cost-effective localized
marketing initiatives such as radio, direct mail and newspaper advertising.
The Company expects to benefit from enhanced marketing and volume discounts as
a result of additional spending related to the Bertucci's restaurants.
Chili's. The Company determines its own marketing strategies and where to
place and how much to pay for its advertisements. Although advertisements for
television have historically been developed by the Franchisor for system-wide
use, the Company has developed its own radio advertisements. The Company
expends a significant portion (approximately 90%) of its total advertising
dollars in its areas of dominant influence--Boston, Hartford and Providence--
where management believes there is strong brand awareness of the Chili's
concept because of strong market penetration and well-placed media
expenditures.
Pursuant to its franchise agreements with the Franchisor, the Company
contributes 0.5% of net sales from each Chili's restaurant to the Franchisor
for advertising and marketing to benefit all of the Franchisor's restaurants.
The Franchisor uses these funds to develop advertising and sales promotion
materials and concepts. The Company is also required to spend 2.0% of net
sales from each restaurant on local advertising. The Company's advertising
expenditures generally have exceeded the levels required under its agreements,
ranging between 2.5% and 3.0%. During fiscal 1997, the Company's advertising
expenditures for its Chili's restaurants were $2.6 million, or 3.3% as
percentage of Chili's net sales. The Company spends substantially all of its
advertising dollars on strategically placed television and radio advertising.
The Company also conducts promotional marketing efforts targeted at various
local markets, including media and printed materials.
On The Border. Under the terms of its franchise agreements with the
Franchisor, the Company contributes 0.5% of net sales from each On the Border
restaurant to the Franchisor for advertising and marketing to benefit all On
the Border restaurants and is required to spend 2.0% of net sales from each
restaurant on local advertising. During fiscal 1997, the Company's advertising
expenditures for its On The Border restaurants were $0.1 million, or 3.3% as
percentage of On The Border net sales. Due to the small number of Company-
owned On The Border restaurants to date, advertising and marketing efforts
have thus far been largely targeted towards printed materials. The Company
will consider television and radio advertising once it achieves critical mass
in a market with respect to the On The Border concept.
Bertucci's. Bertucci's has historically employed broadcast media, print and
direct mail as its primary advertising technique, together with local
restaurant promotions. During Bertucci's fiscal 1997, Bertucci's expenditures
for advertising and marketing were approximately $3.9 million, or 2.9% of
Bertucci's net sales. Management believes that the adoption of the marketing
techniques and strategies used at Chili's and On The Border will enhance the
marketing programs currently employed by Bertucci's. Although management
expects to employ consumer focus research to determine its specific marketing
strategies for Bertucci's, the Company is currently expected to expend a
majority of its Bertucci's-related advertising dollars in Bertucci's core
markets.
PURCHASING
Chili's and On The Border. As a franchisee, the Company must comply with the
uniform recipe and ingredient specifications provided by the Franchisor. The
Company, however, negotiates directly with suppliers
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of food and beverage products and other restaurant supplies to ensure
consistent quality and freshness of products and to obtain competitive prices.
Although the Company believes that essential restaurant supplies and products
are available on short notice from several sources, the Company's Chili's and
On The Border restaurant groups use one full-service distributor, Alliant
Foodservice, Inc., for the substantial portion of their restaurant supplies
and products requirements, with such distributor charging the Company fixed
mark-ups over prevailing wholesale prices (such distributor, the "Principal
Vendor"). The Company has a two-year contract with the Principal Vendor which
is terminable by either party upon 30 days' prior notice following breach and
60 days' prior notice for any other reason. The Company also has arrangements
with several smaller and regional distributors for the balance of its
purchases. These distribution arrangements have allowed the Company to benefit
from economies of scale and resulting lower commodity costs. Most major
purchasing decisions for the Company's restaurants are made by its senior
management which includes a Vice President of Food Purchase and Procurement.
Smaller day-to-day purchasing decisions are made at the individual restaurant
level. The Company has not experienced any significant delays in receiving
food and beverage inventories or restaurant supplies.
Bertucci's. Bertucci's has maintained as much on-site preparation of food
products at its restaurants as possible in order to ensure freshness and
quality and to enhance the dining experience through the visual display of
fresh ingredients. Bertucci's has negotiated directly with manufacturers,
importers, brokers and wholesale suppliers of primary food ingredients and
beverage products to ensure consistent quality and freshness of products in
its restaurants and to obtain competitive pricing. Bertucci's has a four-year
contract, which is terminable upon 30 days' prior notice following breach,
with a full-service distributor, Ferraro Foods, Inc., through which Bertucci's
currently obtains a substantial portion of its restaurant supplies and
products requirements. The Company expects to refine and consolidate the
purchasing practices of Bertucci's to conform to such practices for the
Company's Chili's and On The Border restaurants. Management believes that
these initiatives, including consolidation of vendors and economies of scale,
will result in cost savings in this area.
INFORMATION SYSTEMS AND RESTAURANT REPORTING
The Company's sophisticated information systems provide detailed monthly
financial statements for each restaurant, weekly restaurant inventories, menu
mix, cash management and payroll analysis, as well as daily operating
statistics such as sales, labor, guest check and average table turns. The
varying levels of systems data are consolidated and processed by the Company
at its headquarters daily, weekly or monthly as management deems appropriate.
The Company's point-of-sale systems not only relay information within the
Company, but also are linked to the ordering system of the Principal Vendor.
In addition, the Company has an in-house payroll system which the Company
believes is more efficient for restaurant managers than third-party payroll
systems. Components of the Company's information systems, particularly its
point-of-sale systems, have been adopted by the Franchisor.
Based upon its preliminary review of Bertucci's information systems,
management believes that such systems are largely compatible with those used
by the Company for its Chili's and On The Border restaurant groups. In
particular, the point-of-sale systems used by Bertucci's and the Company's
Chili's and On The Border restaurant groups are manufactured by the same
company. The Company expects to evaluate the most efficient means for
integrating the information systems for all three restaurant groups.
PROPERTIES
The Company's executive offices are located in Westborough, Massachusetts
and are occupied under the terms of a lease covering approximately 14,000
square feet that is scheduled to expire in 2007 and has a six year option
term. In September 1993, Bertucci's moved into its current corporate
headquarters in Wakefield, Massachusetts. Bertucci's purchased its 60,000
square foot office building in December 1992 and, after renovations were
completed, approximately 20,000 square feet of office and administrative space
were created. Another 40,000 square feet of storage space is available and can
be utilized as additional office space when
67
<PAGE>
needed. The Company is analyzing its post-Acquisition requirements with
respect to certain Bertucci's properties, but to date has made no conclusive
determinations. See "--Restaurant Locations."
TRADEMARKS, SERVICEMARKS AND OTHER INTELLECTUAL PROPERTY
Prior to the Acquisition, the Company had no proprietary intellectual
property. As a franchisee of Brinker, the Company has contractual rights to
use certain Franchisor-owned trademarks, servicemarks and other intellectual
property relating to the Chili's and On The Border concepts.
Bertucci's has registered the names "Bertucci's," "Bertucci's Brick Oven
Pizzeria" and "Sal and Vinnie's Sicilian Steakhouse" as service marks and
trademarks with the United States Patent and Trademark Office. As a result of
the Acquisition, the Company assumed ownership of these marks. Management is
aware of names similar to that of Bertucci's used by third parties in certain
limited geographical areas. Such third-party use may prevent the Company from
licensing the use of the Bertucci's mark for restaurants in such areas. Except
for these areas, management is not aware of any infringing uses that could
materially affect the Bertucci's business. Bertucci's has filed applications
with the United States Patent and Trademark Office to register "Food Does Not
Lie" as a service mark and its olive design as a trademark and service mark.
Management intends to protect the Bertucci's service marks and trademarks by
appropriate legal action whenever necessary.
COMPETITION
The Company's business and the restaurant industry in general are highly
competitive and are often affected by changes in consumer tastes and dining
preferences, by local and national economic conditions and by population and
traffic patterns. The Company competes directly or indirectly with all
restaurants, from national and regional chains to local establishments, as
well as with other foodservice providers. Many of its competitors are
significantly larger than the Company and have substantially greater
resources.
EMPLOYEES
At September 30, 1998, the Company had approximately 1,250 full-time
employees (of whom approximately 40 are based at the Company's headquarters)
and approximately 1,875 part-time employees. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes its
relations with its employees are good.
Management believes that the Company's continued success will depend to a
large degree on its ability to attract and retain good management employees.
While the Company will continually have to address the high level of employee
attrition normal in the food-service industry, the Company has taken steps to
attract and keep qualified management personnel through the implementation of
a variety of employee benefit plans, including a management incentive plan, a
401(k) plan, and a non-qualified stock option plan for its key employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. In the opinion of management, any
ultimate liability arising out of such proceedings will not have a material
adverse effect on the financial condition or results of operations of the
Company.
Management is not aware of any litigation to which the Company or Bertucci's
is a party (other than lawsuits filed from time to time against the Company or
Bertucci's in the ordinary course of its business) which is likely to have a
material adverse effect on the Company or Bertucci's.
GOVERNMENT REGULATIONS
Each of the Company's restaurants is subject to licensing and regulation by
a number of governmental authorities, which include health, safety, fire and
alcoholic beverage control agencies in the state or municipality
68
<PAGE>
in which the restaurant is located. Difficulties or failures in obtaining
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area.
In 1997, approximately 18% of the Company's Chili's, approximately 31% of
the Company's On The Border, and approximately 9% of Bertucci's sales were
attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Some of the counties in which the
Company has restaurants prohibit the sales of alcoholic beverages on Sundays.
Typically, licenses or permits must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the Company's restaurants,
including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage,
and dispensing of alcoholic beverages. The Company is required to obtain
approvals from certain liquor licensing authorities in connection with the
change of control of Bertucci's as a result of the Acquisition.
The Company may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
The Company is also subject to various other federal, state and local laws
relating to the development and operation of restaurants, including those
concerning preparation and sale of food, relationships with employees
(including minimum wage requirements, overtime and working conditions and
citizenship requirements), land use, zoning and building codes, as well as
other health, sanitation, safety and environmental matters.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Benjamin R. Jacobson.... 54 Chairman of the Board of Directors and Treasurer
Dennis D. Pedra......... 45 President, Chief Executive Officer and Director
Paul V. Hoagland........ 46 Executive Vice President--Finance, Chief Financial Officer and Director
Raymond P. Barbrick..... 45 Vice President--Operations of Chili's
Richmond A. Britting- 50 Regional Director--South Region
ham....................
Gary S. Schwab.......... 42 Vice President and Controller
Stephen F. Mandel, Jr... 42 Director
James J. Morgan......... 56 Director
David A. Roosevelt...... 28 Director
Thomas Devlin........... 51 Director
James Parish............ 52 Director
</TABLE>
BENJAMIN R. JACOBSON. Mr. Jacobson has served as Chairman of the Board of
Directors of the Company since 1991. Since 1989, Mr. Jacobson has served as
the Managing General Partner of Jacobson Partners, which specializes in direct
equity investments. Mr. Jacobson is a director of Childtime, Inc. and a number
of privately-held corporations.
DENNIS D. PEDRA. Mr. Pedra has been employed in the restaurant industry for
24 years and has served as President, Chief Executive Officer and a director
of the Company since its inception in 1991. From 1984 to 1991, Mr. Pedra was
President of UNO Concepts, Inc., a multi-unit Pizzeria Uno franchisee. From
1980 to 1984, Mr. Pedra was employed by PepsiCo/Taco Bell Restaurants, first
as regional operations manager for the southeastern and then for the
northeastern United States. From 1974 to 1980, Mr. Pedra held various
management positions with Sambo's Restaurants, Big Wheel, Inc. and Marriott
Corporation. Mr. Pedra also serves as a director of Lakeview Savings Bank.
PAUL V. HOAGLAND. Mr. Hoagland has been employed in the restaurant industry
for 18 years and has served as the Company's Executive Vice President since
1992 and its Chief Financial Officer and a director since the Company's
inception in 1991. Mr. Hoagland is also responsible for all administrative and
new restaurant development functions within the Company. Prior to joining the
Company, Mr. Hoagland was employed by Burger King Corporation from 1981 to
1990, where he held various positions over time, including Vice President of
Operations, Vice President of Finance for Europe, and Regional Controller for
New England. From 1974 to 1981, Mr. Hoagland was employed by I.T.T.
Continental Baking Company first as a financial manager and then as
controller.
RAYMOND P. BARBRICK. Mr. Barbrick has been employed in the restaurant
industry for 29 years and has served as the Company's Vice President of
Operations for Chili's since January 1998. Prior to that, he served as Senior
Director of Operations, from 1992 through 1997, with responsibility for all of
the Company's Chili's restaurants in Connecticut and western Massachusetts.
Prior to joining the Company, Mr. Barbrick was employed by Back Bay Restaurant
Group, where he held the position of director of regional operations from 1989
to 1992.
RICHMOND A. BRITTINGHAM. Mr. Brittingham has been employed in the restaurant
industry for 30 years and has served as the Company's Regional Director for
the South Region since 1992. In such capacity, he is responsible for the
operational performance of all the Company's Chili's restaurants in
southeastern Massachusetts and Rhode Island. Prior to joining the Company, Mr.
Brittingham served as director of operations for Legal Sea Foods Company.
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<PAGE>
GARY S. SCHWAB. Mr. Schwab has been employed in the restaurant industry for
12 years and has served as a Vice President of the Company since 1996 and as
its Controller since 1991. Mr. Schwab's present responsibilities include
oversight of all accounting, financial analysis and planning, information
systems, cash management and tax compliance. Prior to joining the Company, Mr.
Schwab was employed from 1985 to 1990 by Trefz Corporation/McDonald's, one of
the largest McDonald's franchisees in the United States, where he held the
positions of Accounting Manager and Controller.
STEPHEN F. MANDEL, JR. Mr. Mandel has served as a director of the Company
since December 1997. Since July 1997, Mr. Mandel has served as managing
director, portfolio manager and consumer retail/analyst at Lone Pine Capital
LLC, a hedge fund which he founded. Prior to that, he served as senior
managing director and consumer analyst at Tiger Management Corporation from
1990 to 1997 and served on that company's management committee, as director of
equities and portfolio manager. Prior to 1990, Mr. Mandel served as a vice
president and mass-market retailing analyst at Goldman, Sachs and Co.
JAMES J. MORGAN. Mr. Morgan has served as a director of the Company since
December 1997. From 1963 until his retirement in 1997, Mr. Morgan was employed
by Philip Morris U.S.A. where he served as President and Chief Executive
Officer from 1994 until his retirement in 1997. Prior to 1994, Mr. Morgan
served in various capacities at Philip Morris including Senior Vice President
of Marketing, and Corporate Vice President of Marketing Planning of the Philip
Morris Companies Inc.
DAVID A. ROOSEVELT. Mr. Roosevelt has served as a director of the Company
since December 1997. Mr. Roosevelt has been an associate at Jacobson Partners
since 1996. Prior to that he was a principal of General Gas Company, a natural
gas marketing company from 1995 to 1996 and a financial analyst in the account
management group of Blackrock Financial Management from 1993 to 1995.
THOMAS R. DEVLIN. Mr. Devlin has served as a director of the Company since
July 1998. Since 1987, Mr. Devlin has served as Chief Executive Officer of
Devlin Enterprises, which owns positions in numerous operating companies. Mr.
Devlin is a director of a number of privately-held corporations. Mr. Devlin
previously served as a director of the Company from October 1991 through
August 1997.
JAMES R. PARISH. Mr. Parish has been employed in the restaurant industry for
23 years and has served as a director of the Company since July 1998. Since
1991, Mr. Parish has served as Chief Executive Officer of Parish Partners,
Inc. From 1995 to 1996, Mr. Parish served as Chief Executive Officer of
Sfuzzi, Inc. From 1983 to 1991, Mr. Parish served as Executive Vice President
and Chief Financial Officer of Chili's Inc. (now named Brinker International,
Inc.).
TERM AND COMPENSATION OF DIRECTORS
The Company's directors serve in such capacity until the next annual meeting
of the shareholders of the Company or until their successors are duly elected
and qualified. Each of the Company's directors is reimbursed for any expenses
incurred by such director in connection with such director's attendance at a
meeting of the Board of Directors, or committee thereof. In addition, all
directors are eligible to receive options under the Company's stock option
plans. Directors receive no other compensation from the Company for serving on
the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Effective as of January 1, 1998, the Board of Directors has appointed a
Compensation Committee comprising Messrs. Jacobson, Mandel, Morgan and
Roosevelt and an Audit Committee comprising Messrs. Jacobson, Mandel and
Roosevelt.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to 1998, the Board of Directors of the Company did not have a formal
compensation committee and decisions with respect to executive officer
compensation for Messrs. Pedra and Hoagland were made by Mr. Jacobson and
other non-management directors, and for other executive officers by Messrs.
Pedra and Hoagland.
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Company has
adopted provisions in its Certificate of Incorporation and Bylaws which
provide for the indemnification of directors and officers of the Company to
the fullest extent permitted by applicable law. These agreements, among other
things, indemnify each of the Company's directors for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred
by such director in any action or proceeding, including any action by or in
the right of the Company, on account of such director's service as a director
of the Company. The Company believes that these indemnification provisions are
necessary to attract and retain qualified persons as directors.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for fiscal 1997 for the
Company's Chief Executive Officer and each of its four other most highly
compensated executive officers (the Chief Executive Officer and such other
officers, collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER
ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($) OPTIONS(#)
--------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Dennis D. Pedra............... $212,508(a) $100,000 $70,698(c) 99,198
President and Chief Executive
Officer
Paul V. Hoagland.............. $150,242(b) $ 75,000 $52,275(c) 33,068
Executive Vice President and
Chief Financial Officer
Raymond P. Barbrick........... $ 89,720 $ 66,431 -- 21,268
Vice President--Operations of
Chili's
Richmond A. Brittingham....... $ 85,787 $ 69,217 -- 14,178
Regional Director--South Re-
gion
Gary S. Schwab................ $ 95,204 $ 27,720 -- 21,268
Vice President and Controller
</TABLE>
- --------
(a) Includes $100,000 payable for fiscal 1997 but deferred pursuant to the
Non-qualified Deferred Compensation Plan. See "--Stock Option and Other
Plans for Employees--Non-qualified Deferred Compensation Plan."
(b) Includes $103,496 payable for fiscal 1997 but deferred pursuant to the
Non-qualified Deferred Compensation Plan. See "--Stock Option and Other
Plans for Employees--Non-qualified Deferred Compensation Plan."
(c) Reflects compensation to cover certain taxes incurred by such officer in
connection with the payment by the Company in August 1997 of a dividend
and return of capital contribution to shareholders of $8.31 per share and
the related repurchase by the Company of certain shares of common stock at
$11.63 per share.
72
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning options granted during
fiscal 1997 to each of the Named Executive Officers. To date, no such options
have been exercised.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL OPTION TERM(C)
OPTIONS GRANTED IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(A) FISCAL 1997 PRICE(B) DATE 5% 10%
---- ---------- ----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dennis D. Pedra......... 99,198 29.96% $11.63 9/15/02 $319,417.56 $705,297.78
Paul V. Hoagland........ 33,068 9.99% $11.63 9/15/02 $106,478.96 $235,113.48
Raymond P. Barbrick..... 21,268 6.42% $11.63 9/15/02 $ 68,482.96 $151,215.48
Richmond A.
Brittingham............ 14,178 4.28% $11.63 9/15/02 $ 45,653.16 $100,805.58
Gary S. Schwab.......... 21,268 6.42% $11.63 9/15/02 $ 68,482.96 $151,215.48
</TABLE>
- --------
(a) Each of the options granted becomes exercisable at the rate of 25% on or
after each of the second, third, fourth and fifth anniversaries of the
date of grant. Each of the options expires 90 days following the fifth
anniversary of the date of the grant. See "--Stock Option and Other Plans
for Employees--Stock Option Plan."
(b) The exercise price was fixed at the date of the grant and represented the
fair market value per share of common stock on such date.
(c) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and do not reflect the Company's estimates or projections
of future prices of the Company's common stock. The gains shown are net of
the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise. Actual gains, if any, on
stock option exercises will depend on the future performance of the
Company's common stock, the option holders' continued employment through
the option period, and the date on which the options are exercised.
EMPLOYMENT AGREEMENTS
Executive officers of the Company are elected by the Board of Directors and
serve at the discretion of the Board or pursuant to an employment agreement.
The Company is party to certain short-term employment agreements with certain
executive officers as described below:
DENNIS D. PEDRA. Mr. Pedra's employment agreement (as amended, the "Pedra
Agreement") provides that he will serve as President and Chief Operating
Officer of the Company until such time as such agreement is terminated by
either party upon six months' prior written notice or pursuant to the other
termination provisions of the Pedra Agreement. If Mr. Pedra's employment is
terminated, the Pedra Agreement provides that he may not engage in a competing
business within a ten mile radius of a Company-owned restaurant, for a period
of one year following his termination.
Mr. Pedra's fiscal 1998 base salary of $225,000 may be increased, from time
to time, in the Company's sole discretion. In addition to his base salary, Mr.
Pedra is entitled to receive (i) an annual performance bonus in the amount of
up to fifty (50%) percent of his base salary which will be based on a bonus
plan tied to the combined operating results of the Company as such plan may be
revised from time to time, (ii) a $790 per month automobile allowance and
reimbursement of reasonable expenses, including insurance and repairs, and
(iii) certain insurance and other benefits to be maintained and paid by the
Company.
PAUL V. HOAGLAND. Mr. Hoagland's employment agreement (as amended, the
"Hoagland Agreement") provides that he will serve as Vice President and Chief
Financial Officer of the Company until such time as such agreement is
terminated by either party upon six months' prior written notice or pursuant
to the other termination
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<PAGE>
provisions of the Hoagland Agreement. If Mr. Hoagland's employment is
terminated, the Hoagland Agreement provides that he may not engage in a
competing business within a ten mile radius of a Company-owned restaurant, for
a period of one year following his termination.
Mr. Hoagland's fiscal 1998 base salary of $158,788 may be increased, from
time to time, in the Company's sole discretion. In addition to his base
salary, Mr. Hoagland is entitled to receive (i) an annual performance bonus in
the amount of up to fifty (50%) percent of his base salary which will be based
on a bonus plan tied to the combined operating results of the Company as such
plan may be revised from time to time, (ii) a $650 per month automobile
allowance and reimbursement of reasonable expenses, including insurance and
repairs, and (iii) certain insurance and other benefits to be maintained and
paid by the Company.
STOCK OPTION AND OTHER PLANS FOR EMPLOYEES
Stock Option Plan. On September 15, 1997, the Board of Directors of the
Company established the 1997 Equity Incentive Plan, which includes a
nonqualified stock option plan (the "Stock Option Plan"), for certain key
employees and directors. The Stock Option Plan is administered by the Board of
Directors of the Company and may be modified or amended by the Board of
Directors in any respect.
Options granted to employees under the Stock Option Plan are generally
exercisable cumulatively at the rate of 25% on or after each of the second,
third, fourth and fifth anniversaries of the date of grant and options granted
to directors thereunder are generally exercisable immediately upon grant.
Options granted under the Stock Option Plan to date expire 90 days following
the fifth anniversary of the date of the grant. Between September 15, 1997 and
December 31, 1997, 331,123 options were granted at a price of $11.63 per share
under the Stock Option Plan (of which 11,020 options have been exercised as of
the date of this Prospectus). At December 31, 1997, there were 1,316,656
shares of common stock of the Company outstanding. An additional 1,644,775
such shares were issued pursuant to the Equity Investment.
401(k) Savings Plan. The Company maintains a defined contribution plan (the
"401(k) Plan") whereby after six months of employment substantially all
employees of the Company may defer a portion of their current salary, on a
pretax basis, to the 401(k) Plan. The Company may also make a discretionary
profit sharing contribution to the 401(k) Plan that is allocated, based on a
formula as defined by the 401(k) Plan, to the 401(k) Plan participants.
Discretionary contributions made by the Company for the years ended December
31, 1997 and 1996 were approximately $67,000 and $43,000, respectively. Two of
the Named Executive Officers, Dennis Pedra and Paul Hoagland, serve as the
401(k) Plan's trustees.
Management Incentive Plan. Certain management employees of the Company,
including directors of operations, managing partners (who are senior general
managers), general managers and assistant managers are eligible, at the
discretion of the Company, to participate in the Company's management
incentive plan that incentivizes and rewards the performance of such personnel
with bonus awards that reflect a percentage of each restaurant's cash
contribution. Payments under the management incentive plan are payable monthly
or in accordance with the then current payroll cycle of the Company. During
fiscal 1997, these awards ranged from $8,000 to $60,000 and aggregate payments
under this plan amounted to $2.0 million.
Non-qualified Deferred Compensation Plan. The Company has established the NE
Restaurant Company Deferred Compensation Plan (the "Non-qualified Deferred
Compensation Plan") pursuant to which certain eligible executives of the
Company may elect to defer a portion of their salary. The Company maintains an
irrevocable grantor trust (also known as a "rabbi trust") which has been
established by the Company, as grantor, pursuant to The Merrill Lynch Non-
qualified Deferred Compensation Plan Trust Agreement, dated December 21, 1993,
by and between the Company and Merrill Lynch Trust Company of America, an
Illinois corporation, as trustee, for the purpose of paying benefits under the
Non-qualified Deferred Compensation Plan.
The trust assets are held separately from other funds of the Company, but
remain subject to claims of the Company's general creditors in the event of
the Company's insolvency. As of September 30, 1998, trust account balances for
Paul Hoagland and Dennis Pedra were $336,375 and $724,743, respectively.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table provides information at September 30, 1998, with respect
to ownership of the Company's common stock $0.01 par value per share (the
"Company Common Stock"), by (i) each beneficial owner of five percent or more
of the Company's Common Stock, (ii) each director of the Company, (iii) each
of the Named Executive Officers and (iv) all directors and officers as a
group. For the purpose of computing the percentage of the shares of Company
Common Stock owned by each person or group listed in this table, shares which
are subject to options exercisable within 60 days after September 30, 1998
have been deemed to be outstanding and owned by such person or group, but have
not been deemed to be outstanding for the purpose of computing the percentage
of the shares of Company Common Stock owned by any other person. Except as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of Company Common
Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS
- ------------------------------------ ------------ --------
<S> <C> <C>
Puma Limited Partnership(1)............................. 727,012 24.46%
101 Park Avenue
New York, New York 10176
Thomas R. Devlin(2)..................................... 234,504 7.89%
1313 North Webb Road
P.O. Box 782170
Wichita, Kansas 67206
Benjamin R. Jacobson(3) ................................ 691,872 22.89%
595 Madison Avenue
New York, New York 10022
Stephen F. Mandel, Jr.(4)............................... 89,602 3.01%
James J. Morgan(5)...................................... 19,162 *
David A. Roosevelt...................................... 2,856 *
Dennis D. Pedra(6)...................................... 190,670 6.41%
80A Turnpike Road
Westborough, Massachusetts 01581
Paul V. Hoagland(7)..................................... 114,132 3.84%
Raymond P. Barbrick..................................... 7,467 *
Richmond A. Brittingham................................. 2,778 *
Gary S. Schwab.......................................... 7,667 *
All directors and executive officers as a group (10
persons)............................................... 1,124,618 37.21%
</TABLE>
- --------
* Less than 1%.
(1) Puma Limited Partnership, a New York limited partnership ("Puma")
previously held its interest in the Company through Puma's wholly-owned
subsidiary Holdings Group, Inc., a Delaware holding company ("HGI"). To
permit Puma to directly hold such shares, HGI was merged with and into the
Company pursuant to a merger agreement dated as of August 31, 1996 among
HGI, Puma and the Company.
(2) Includes 53,207 shares of Company Common Stock held by J.P. Acquisition
Fund II, L.P., a Delaware limited partnership ("JPAF II"), representing
Mr. Devlin's pro rata interest as a limited partner of JPAF II.
(3) Includes (a) 481,016 shares of Company Common Stock held by JPAF II, (b)
49,599 shares of Company Common Stock issuable upon exercise of
outstanding stock options exercisable within 60 days after September 30,
1998 held by Jacobson Partners and (c) 13,800 shares of Company Common
Stock held by trusts for the benefit of Mr. Jacobson's children, with
respect to which a third party is trustee and has voting control. JPAF,
Inc., a Delaware corporation, is the general partner of JPAF II and Mr.
Jacobson is president of JPAF, Inc. Mr. Jacobson is a general partner of
Jacobson Partners, which is the sole shareholder of JPAF, Inc. Mr.
Jacobson disclaims beneficial ownership of the shares described (i) in
clause (a) above, except to the extent of his general partnership interest
in JPAF II, and (ii) in clause (c) above.
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<PAGE>
(4) Includes 2,596 shares of Company Common held by Lone Spruce, L.P., 6,812
shares of Company Common Stock held by Lone Balsam, L.P. 6,812 shares of
Company Common Stock held by Lone Sequoia, L.P. and 73,382 shares of
Company Common Stock held by Lone Cypress, Ltd. Each of Lone Spruce, L.P.,
Lone Balsam, L.P. and Lone Sequoia, L.P., is a Delaware limited
partnership of which Lone Pine Associates LLC is the general partner. Mr.
Mandel is the managing member of Lone Pine Associates LLC. Lone Cypress
Ltd. is a Cayman Islands company of which Lone Pine Capital LLC is the
investment manager. Mr. Mandel is the managing member of Lone Pine Capital
LLC. Mr. Mandel disclaims beneficial ownership of all such shares.
(5) Includes 6,651 shares of Company Common Stock held by JPAF II,
representing Mr. Morgan's pro rata interest as a limited partner of JPAF
II.
(6) Includes 30,000 shares of Company Common Stock held by trusts for the
benefit of Mr. Pedra's children, with respect to which Mr. Pedra's sister
is trustee and has sole voting control. Mr. Pedra disclaims beneficial
ownership of all such shares.
(7) Includes 14,000 shares of Company Common Stock held in custodial accounts
for the benefit of Mr. Hoagland's children, with respect to which Mr.
Hoagland is custodian and has sole voting control. Mr. Hoagland disclaims
beneficial ownership of all such shares.
STOCKHOLDERS AGREEMENT
The Company and the current stockholders of the Company are parties to a
Shareholders' Agreement, dated as of December 31, 1993 (the "Stockholders
Agreement").
The Stockholders Agreement provides, among other things, that (i) a
stockholder may not transfer his or its shares in the Company, whether
voluntarily or by operation of law, other than in certain limited
circumstances specified therein, including transfers through a right of first
refusal procedure, distributions by a partnership to its partners, and gifts,
trust contributions or bequests to or in favor of family members, (ii) the
Company shall have the option to purchase the shares of any stockholder who is
a manager of the Company following the termination of such stockholder's
employment with the Company for any reason at a purchase price equal to book
value or fair market value depending upon the reason for such termination as
permitted under the Indenture, (iii) if the Company fails to exercise its
option to purchase as described in the immediately preceding clause (ii), the
remaining stockholders shall have the option to purchase the applicable
shares, (iv) in certain circumstances, a stockholder seeking to transfer
shares shall have the option to require the Company to purchase such
stockholder's shares, (v) no transfer of shares may occur unless the
transferee thereof agrees to be bound by the terms of the Stockholders
Agreement and (vi) all share certificates shall bear customary legends and all
share transfers must be in compliance with applicable securities laws.
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CERTAIN TRANSACTIONS OF THE COMPANY
Prior to the Acquisition, in consideration of certain financial advisory
services provided by Benjamin R. Jacobson to the Company, Mr. Jacobson
received from the Company a consulting fee of $200,000 per year together with
reimbursement of certain travel and other incidental expenses. In connection
with the Acquisition, and in lieu of the Company's arrangement with Mr.
Jacobson, the Company entered into a financial advisory services agreement
with Jacobson Partners, a general partnership of which Mr. Jacobson is the
managing general partner. Under this agreement, Jacobson Partners will provide
various financial advisory services to the Company, including, among other
things, assistance in preparing internal budgets, performing cash management
activities, maintaining and improving accounting and other management
information systems, negotiating financing arrangements, complying with public
reporting and disclosure requirements and communicating with creditors and
investors. In consideration of these services, Jacobson Partners will receive
a consulting fee of $500,000 per year together with reimbursement of certain
travel and other incidental expenses. The Company believes the financial
advisory services agreement was made on terms that are no less favorable to
the Company than those which could be obtained from an unrelated party. In
addition, Jacobson Partners received from the Company a $1.0 million cash fee
as compensation for Jacobson Partners' services as financial advisors in
connection with the Transactions. Jacobson Partners is the sole shareholder of
the corporate general partner of JPAF II, which owns approximately 16.2% of
the outstanding common stock of the Company. Mr. Jacobson is the Chairman of
the Board of Directors of the Company. David A. Roosevelt, an associate with
Jacobson Partners, is a Director of the Company.
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DESCRIPTION OF OTHER INDEBTEDNESS
The description set forth below does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the
provisions (including all of the definitions therein of terms not defined in
this Prospectus) of certain agreements setting forth the principal terms and
conditions of the Senior Bank Facility and the FFCA Loans, which are available
upon request from the Company.
SENIOR BANK FACILITY
In connection with, and contemporaneously with the consummation of, the
Acquisition, the Company and its direct and indirect subsidiaries entered into
the Senior Bank Facility with BankBoston, N.A. ("BankBoston"), as
administrative agent, and Chase Bank of Texas, N.A. ("Chase Texas" and,
collectively with BankBoston and such other banks, financial institutions and
other entities that are lenders under the Senior Bank Facility, the "Senior
Lenders"), as documentation agent. The Senior Bank Facility replaced the
Amended and Restated Revolving Credit and Term Loan Agreement, dated as of
October 20, 1994, between the Company and BankBoston, as amended by Amendments
No. 1, 2, 3 and 4 thereto (as so amended, the "Company Bank Facility"). The
following is a summary of certain terms provisions of the Senior Bank
Facility.
The Senior Bank Facility consists of a revolving credit facility providing
for revolving loans to the Company in an aggregate principal amount not to
exceed $20.0 million and includes a $1.0 million sub-limit for the issuance of
letters of credit for the account of the Company. Loans and letters of credit
under the Senior Bank Facility are available at any time prior to July 21,
2001 provided that the maturity date of the Senior Bank Facility may be
extended to July 21, 2002 subject to the Senior Lenders' approval.
The Senior Bank Facility is secured by first priority or equivalent security
interests in (i) substantially all of the tangible and intangible assets of
the Company, including certain real estate, (ii) all capital stock of
Bertucci's and (iii) substantially all of the tangible and intangible assets
of each direct and indirect subsidiary of the Company, including certain real
estate, other than (a) NERC SPE (as defined herein), NERC LP (as defined
herein) NERC SPE II Inc. or NERC Limited Partnership II and (b) any future
subsidiaries that are special purpose entities (and any special purpose
corporate general partners thereof) created in respect of the FFCA Loans and
similar secured financing. The Senior Bank Facility is not secured by a
security interest in any liquor licenses held by the Company or any of its
subsidiaries or in the equity securities of any such subsidiary directly
holding such licenses.
At the Company's option, the interest rates per annum applicable to the
Senior Bank Facility will be either the rate (grossed-up for maximum statutory
reserve requirements for eurocurrency liabilities) at which LIBOR deposits for
one, two, three or six months (as selected by the Company) are offered in the
interbank LIBOR market (the "LIBOR Rate") plus a margin of between 1.25% and
2.50% (depending upon the Company's ratio of debt to EBITDA) or the Base Rate
plus a margin of between 0.0% and 0.75% (depending upon the Company's ratio of
debt to EBITDA) (the "Applicable Margin"). The "Base Rate" is the higher of
(a) the rate of interest publicly announced by BankBoston as its base rate in
effect at its principal office in Boston, Massachusetts, and (b) the federal
funds effective rate plus 0.50%. At September 30, 1998, borrowings under the
Senior Bank Facility were $1,100,000.
The Company pays a per annum fee equal to 0.375% on the aggregate undrawn
portion of the Senior Bank Facility commitments.
The Senior Bank Facility contains a number of significant covenants that,
among other things, restrict the ability of the Company to dispose of assets,
incur additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into leases,
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, or engage in certain transactions with subsidiaries and
affiliates and otherwise restrict corporate activities. In addition, under the
Senior Bank Facility, the Company is required to comply with specified
financial ratios and tests, including minimum interest coverage, minimum fixed
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charge coverage, and maximum leverage ratios, minimum net worth levels and
maximum capital expenditure amounts. The Company is currently in compliance
with such financial ratios and tests. The Senior Bank Facility also contains
provisions that prohibit any modification of the Indenture in any manner
adverse to the Senior Lenders and that limit the Company's ability to
refinance the Exchange Notes without the consent of such Senior Lenders.
FFCA LOANS
On August 6, 1997, NERC Limited Partnership ("NERC LP"), a Delaware limited
partnership of which the sole general partner is NERC SPE Inc., a wholly-owned
subsidiary of the Company ("NERC SPE"), and of which the sole limited partner
is the Company, entered into a mortgage loan agreement (the "FFCA Loan") with
FFCA Acquisition Corporation, a Delaware corporation ("FFCA"), providing for
borrowings in the aggregate amount of $22.4 million, maturing on various dates
from September 2002 through September 2017, with interest on amounts
outstanding thereunder accruing at the rate of 9.67% per annum. Each of the
borrowings under the FFCA Loan is secured by a first priority mortgage on, and
security interest in, the 17 restaurant properties (the right, title and
interest in and to each of which was transferred by the Company to the NERC
LP) which were pledged by NERC LP as collateral and which are leased by the
NERC LP to the Company for an annual rent sufficient to pay debt service on
the FFCA Loan. Proceeds from the FFCA Loan were used to pay the dividend and
return of capital contribution to shareholders and to repurchase certain
outstanding shares of the Company as described in note 12 to the Company's
consolidated financial statements included elsewhere in this Prospectus.
On August 28, 1997, NERC LP obtained additional financing from FFCA in the
amount of $1.85 million, maturing on various dates from September 2007 through
September 2017, with interest at the rate of 9.701% per annum (together with
the FFCA Loan and all future financing obtained by the Company or its
subsidiaries from the FFCA, the "FFCA Loans"). This additional financing has
been collateralized by three restaurant properties which were transferred by
the Company to NERC LP and which are leased by NERC LP to the Company. The
total cost of all properties pledged to FFCA under the FFCA Loans to date is
$25.6 million.
FFCA has entered into a commitment with the Company to finance additional
restaurant properties of the Company on terms substantially similar to the
outstanding FFCA Loans (the "FFCA Commitment"). In the case of each new
financing by FFCA, the Company will establish a new subsidiary to which
restaurant properties would be transferred at the time such loan is made. Such
transferred properties will serve as collateral for the relevant new loan.
Under the FFCA Commitment, the amount of each new FFCA Loan will be based on
the sum of (i) actual restaurant construction costs, (ii) for fee properties,
the fair market value of the land, (iii) the 1% commitment fee due to FFCA and
(iv) costs, including closing costs, associated with such financing and
approved by FFCA. The maximum loan amount per restaurant is $2.0 million for a
Chili's restaurant and $2.5 million for an On The Border restaurant, reduced
by ten times the annual ground lease rent for ground leased sites.
A loan made pursuant to the FFCA Commitment will bear interest, during the
construction period, at a variable rate equal to 30-day LIBOR plus 3.00% and,
after the construction period, at the 10-year U.S. Treasury Note Rate in
effect ten (10) days prior to closing plus 3.00%.
The FFCA Commitment requires that each of the new loans be structured in the
same manner as the outstanding FFCA Loans, including the formation by the
Company of a limited partnership or limited liability company, intended to be
bankruptcy remote, to serve as the borrower. The sole assets of such
"bankruptcy remote" borrower will be the fee simple or leasehold interest in
the real estate and equipment associated with each restaurant and transferred
to the borrower by the Company, subject to a lease to the Company. Each loan
will be secured by a first priority mortgage on, and security interest in, the
restaurant premises and equipment, and the lease to the Company from the
borrower will require an annual rent sufficient to pay the debt service on the
loan.
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The outstanding FFCA Loans provide that a default by the Company under any
lease relating to properties held by an FFCA borrower will result in a default
under the FFCA Loan related to that property as well as a cross-default under
all other outstanding FFCA Loans.
The Company may enter into financing arrangements that are similar to the
FFCA Loans with other lenders who are engaged in similar secured financings.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to the Indenture dated as of July
20, 1998, as amended on July 21, 1998 (the "Indenture"), among the Company,
the Subsidiary Guarantors and United States Trust Company of New York, as
trustee (the "Trustee"). The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of the Indenture. The Indenture is limited in aggregate principal
amount to $100 million. The form and terms of the Exchange Notes are the same
as the form and terms of the Private Notes except that (i) the Exchange Notes
will have been registered under the Securities Act and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof and (ii)
holders of the Exchange Notes will not be entitled to certain rights of
holders of the Private Notes under the Exchange and Registration Rights
Agreement, which rights will terminate upon consummation of the Exchange
Offer. 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"), as in effect on the date of
the Indenture. The Exchange Notes are subject to all such terms and holders of
the Exchange Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of material provisions of the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Trust Indenture Act and the provisions of
the Indenture (a copy of which has been filed as an Exhibit to the
Registration Statement of which this Prospectus forms a part and the terms of
which are hereby incorporated by reference in this Prospectus), including the
definitions therein of certain terms used below. The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions."
The Exchange Notes will be unsecured, senior obligations of the Company,
limited to $100 million aggregate principal amount, and will mature on July
15, 2008. Each Exchange Note will bear interest at the rate per annum shown on
the front cover of this Prospectus from the Issue Date, or from the most
recent date to which interest has been paid or provided for, payable semi-
annually on January 15 and July 15 of each year commencing on January 15, 1999
to holders of record at the close of business on the January 1 or July 1
immediately preceding the interest payment date.
Interest will be computed on the basis of a 360 day year comprised of twelve
30 day months. Principal of, premium, if any, and interest on the Notes will
be payable, and the Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially will be the corporate trust office of the Trustee in New York, New
York), except that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holders as such address appears in
the Note Register. No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
The Notes will be issued in fully registered form without interest coupons,
in denominations of $1,000 and any integral multiple of $1,000. The Notes will
be represented by one or more registered notes in global form and in certain
circumstances may be represented by Notes in definitive form.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Company prior to July
15, 2003. On and after such date, the Notes will be redeemable, at the
Company's option, in whole or in part, at any time upon not less than 30 nor
more than 60 days prior notice mailed by first-class mail to each holder's
registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
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If redeemed during the 12-month period commencing on July 15 of the years
set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003............................................................ 105.375%
2004............................................................ 103.583%
2005............................................................ 101.792%
2006 and thereafter............................................. 100.000%
</TABLE>
In addition, at any time and from time to time prior to July 15, 2001, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Equity Offerings received by, or
invested in, the Company so long as there is a Public Market at the time of
such redemption, at a redemption price (expressed as a percentage of principal
amount) of 110.75% plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided,
however, that at least 65% of the original principal amount of the Notes must
remain outstanding after each such redemption; provided further, that each
such redemption occurs within 90 days of the date of closing of such Equity
Offering.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion will deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note will state the portion of the
principal amount thereof to be redeemed. A new 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 Note.
GUARANTEES
Each Subsidiary Guarantor has fully and unconditionally guaranteed, jointly
and severally, to each holder and the Trustee, on a senior basis, the full and
prompt payment of principal of, premium, if any, and interest on the Notes,
and of all other obligations under the Indenture.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor (including, without limitation, any
Guarantees under the Senior Credit Agreement) and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Subsidiary Guarantee or pursuant to its contribution obligations
under the Indenture, result in the obligations of such Subsidiary Guarantor
under its Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Wholly-Owned Subsidiary Guarantor without
limitation. Each Subsidiary Guarantor may consolidate with or merge into or
sell all or substantially all its assets to a corporation, partnership, trust,
limited partnership, limited liability company or other similar entity other
than the Company or a Wholly-Owned Subsidiary Guarantor (whether or not
affiliated with the Subsidiary Guarantor) except that if the surviving
corporation of any such merger or consolidation is a Subsidiary of the
Company, such Subsidiary shall not be a Foreign Subsidiary. Upon the sale or
disposition of a Subsidiary Guarantor (by merger, consolidation, the sale of
its Capital Stock or the sale of all or substantially all of its assets) to a
Person (whether or not an Affiliate of the Subsidiary Guarantor) which is not
a Subsidiary of the Company, which sale or disposition is otherwise in
compliance with the Indenture (including the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"), such
Subsidiary Guarantor will be deemed released from all its obligations under
the Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee will
terminate; provided, however, that any such termination will occur only to the
extent that all obligations of such Subsidiary Guarantor under the Senior
Credit Agreement and all of its Guarantees of, and under all of its pledges of
assets or other security
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interests which secure, any other Indebtedness of the Company will also
terminate upon such release, sale or transfer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), unless the Company shall have exercised its right to redeem the
Notes as described under "--Optional Redemption", each holder will have the
right to require the Company to repurchase all or any part of such holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% (or, if there is a Public
Market at the time such person is or is deemed to have beneficial
ownership, more than 50%) of the total voting power of the Voting Stock of
the Company (or its successor by merger, consolidation or other business
combination) (for the purposes of this clause, such person shall be deemed
to beneficially own any Voting Stock of the Company held by a parent
corporation, if such person "beneficially owns" (as defined above),
directly or indirectly, more than 35% of the voting power of the Voting
Stock of such parent corporation); and (B) if there is no Public Market,
the Permitted Holders "beneficially own" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the
Company (or its successor by merger, consolidation or purchase of all or
substantially all of its assets) than such other person and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of the Company
or such successor (for the purposes of this clause, such other person shall
be deemed to beneficially own any Voting Stock of a specified corporation
held by a parent corporation, if such other person "beneficially owns" (as
defined in clause (A) above), directly or indirectly, more than 35% of the
voting power of the Voting Stock of such parent corporation and the
Permitted Holders "beneficially own" (as defined in this clause (B)),
directly or indirectly, in the aggregate a lesser percentage of the voting
power of the Voting Stock of such parent corporation and do not have the
right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
corporation); or
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company, as the
case may be, was approved by a vote of at least a majority of the directors
of the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved or is a designee of the Permitted Holders or was
nominated or elected by such Permitted Holders or any of their designees)
cease for any reason to constitute a majority of the Board of Directors of
the Company then in office; or
(iii) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act) other than a
Permitted Holder; or
(iv) the adoption by the stockholders of a plan for the liquidation or
dissolution of the Company.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes as
described under "--Optional Redemption", the Company will mail a notice to
each holder with a copy to the Trustee stating: (i) that a Change of Control
has occurred and that such
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holder has the right to require the Company to purchase such holder's Notes at
a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on a record date to receive interest on the
relevant interest payment date); (ii) the repurchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (iii) the procedures determined by the Company, consistent with
the Indenture, that a holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Agreement. Future
Indebtedness of the Company and its Subsidiaries may also contain prohibitions
of certain events that would constitute a Change of Control or require such
Indebtedness to be repurchased upon a Change of Control. Moreover, the
exercise by the holders of their right to require the Company to repurchase
the Notes could cause a default under such Indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that sufficient funds will be available when
necessary to make any required repurchases. Even if sufficient funds were
otherwise available, the terms of the Senior Credit Agreement will (and other
Indebtedness may) prohibit the Company's prepayment of Notes prior to their
scheduled maturity. Consequently, if the Company is not able to prepay the
indebtedness under the Senior Credit Agreement and any other Indebtedness
containing similar restrictions or obtain requisite consents, as described
above, the Company will be unable to fulfill its repurchase obligations if
holders of Notes exercise their repurchase rights following a Change of
Control, thereby resulting in a default under the Indenture.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of
"Change of Control" includes a disposition of all or substantially all of the
property and assets of the Company and its Restricted Subsidiaries. With
respect to the disposition of property or assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which is the choice of law under the Indenture) and is
subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person, and therefore it may be unclear as to whether
a Change of Control has occurred and whether the Company is required to make
an offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness; provided,
however, that the Company and its Restricted Subsidiaries which are Subsidiary
Guarantors may Incur Indebtedness if on the date thereof, after giving pro
forma effect to the incurrence of such Indebtedness and the intended
application of the proceeds thereof, the Interest Coverage Ratio for the
Company and its Restricted Subsidiaries is at least 2.5 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to the Senior Credit Agreement; provided that the aggregate
principal amount of all Indebtedness (with letters of credit being deemed to
have a principal amount equal to the maximum potential liability of the
Company and its Restricted Subsidiaries thereunder) outstanding
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at any time under the Senior Credit Agreement after giving effect to such
Incurrence, including all Refinancing Indebtedness Incurred to refund,
refinance or replace any other Indebtedness Incurred pursuant to this clause
(i), does not exceed an amount equal to $20.0 million; (ii) the Subsidiary
Guarantees and Guarantees of Indebtedness Incurred pursuant to paragraph (a)
or clause (i) of this paragraph (b); (iii) Indebtedness of the Company owing
to and held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted
Subsidiary owing to and held by the Company or any Wholly-Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital
Stock or any other event which results in any such Wholly-Owned Subsidiary
ceasing to be a Wholly-Owned Subsidiary or any subsequent transfer of any such
Indebtedness (except to the Company or a Wholly-Owned Subsidiary) will be
deemed, in each case, to constitute the Incurrence of such Indebtedness by the
issuer thereof; (iv) Indebtedness represented by (x) the Notes and (y) any
Indebtedness (other than the Indebtedness described in clauses (i), (ii) and
(iii)) outstanding on the Issue Date; (v) Indebtedness of a Restricted
Subsidiary Incurred and outstanding on the date on which such Restricted
Subsidiary was acquired by the Company; provided, however, that at the time
such Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to paragraph (a)
above after giving effect to the Incurrence of such Indebtedness pursuant to
this clause (v); (vi) Indebtedness under Interest Rate Agreements; provided,
however, that such Interest Rate Agreements are entered into for bona fide
hedging purposes of the Company or its Restricted Subsidiaries (as determined
in good faith by the Board of Directors or senior management of the Company)
and correspond in terms of notional amount, duration, currencies and interest
rates, as applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture or to business
transactions of the Company or its Restricted Subsidiaries on customary terms
entered into in the ordinary course of business; (vii) Indebtedness incurred
to finance or refinance the purchase price or cost of construction or
improvement of property used in the Company's business, and Capitalized Lease
Obligations, in each case secured by Liens described in clause (i) of the
definition of "Permitted Liens," provided, that the aggregate principal amount
thereof incurred in any fiscal year, shall not exceed $15.0 million; (viii)
Indebtedness in respect of performance bonds, bankers' acceptances, workers'
compensation claims, surety or appeal bonds, payment obligations in connection
with self-insurance or similar obligations, and bank overdrafts (and letters
of credit in respect thereof) provided by the Company or any Restricted
Subsidiary in the ordinary course of its business and which do not secure
other Indebtedness; (ix) 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 Subsidiary Guarantor of
Indebtedness of the Company or of another Restricted Subsidiary otherwise
permitted to be Incurred pursuant to this covenant; (x) Indebtedness incurred
by the Company or any Subsidiary Guarantor and arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, from guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of the Company or any Restricted Subsidiary
pursuant to such agreements, in each case incurred in connection with the
purchase or sale of a business or assets otherwise permitted by the Indenture;
(xi) the Incurrence by the Company or any Subsidiary Guarantor of Refinancing
Indebtedness in exchange for, or the net proceeds which are used to refund,
refinance or replace, Indebtedness that was permitted by the Indenture to be
Incurred (other than Indebtedness incurred pursuant to clause (xii) of this
paragraph (b)); and (xii) Indebtedness (other than Indebtedness described in
clauses (i)-(xi)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(xii) and then outstanding, will not exceed $10.0 million.
(c) Neither the Company nor any Restricted Subsidiary will Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the
Company unless such Indebtedness will be subordinated to the Notes to at least
the same extent as such Subordinated Obligations. No Subsidiary Guarantor will
Incur any Indebtedness under paragraph (b) above if the proceeds thereof are
used, directly or indirectly, to refinance any Subsidiary Guarantor
Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness
will be subordinated to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee to at least the same extent as such Subsidiary Guarantor
Subordinated Obligations.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, in the event that Indebtedness meets
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the criteria of more than one of the types of Indebtedness described in
paragraph (b) above, (i) the Company, in its sole discretion, will classify
such item of Indebtedness and only be required to include the amount and type
of such Indebtedness in one of such clauses and (ii) such item of Indebtedness
may be divided and classified in more than one of such clauses.
(e) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries)
except (A) dividends or distributions payable in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock and (B) dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company (and if such Restricted Subsidiary is not
a Wholly-Owned Subsidiary, to its other holders of Capital Stock on a pro rata
basis), (ii) purchase, redeem, retire or otherwise acquire for value any
Capital Stock of the Company held by Persons other than a Restricted
Subsidiary of the Company or any Capital Stock of a Restricted Subsidiary of
the Company held by any Affiliate of the Company, other than another
Restricted Subsidiary (in either case, other than in exchange for its Capital
Stock (other than Disqualified Stock)), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment, any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of purchase, repurchase or acquisition) or (iv)
make any Investment (other than a Permitted Investment) in any Person (any
such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Investment being herein referred to in
clauses (i) through (iv) as a "Restricted Payment"), if at the time the
Company or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default or an Event of Default shall have occurred and be continuing (or would
result therefrom); or (2) the Company and its Restricted Subsidiaries could
not Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) under
"--Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments declared or made subsequent to the
Issue Date would exceed the sum of: (A) 50% of Consolidated Net Income accrued
during the period (treated as one accounting period) from the Issue Date to
the end of the most recent fiscal quarter ending prior to the date of such
Restricted Payment as to which financial results are available (or, in case
such Consolidated Net Income is a deficit, minus 100% of such deficit); (B)
the aggregate Net Cash Proceeds received by the Company from the issue or sale
of its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds to the
extent (x) used to redeem Notes or (y) received from an issuance or sale of
such Capital Stock to a Subsidiary of the Company or an employee stock
ownership plan or similar trust to the extent such sale to an employee stock
ownership plan or similar trust is financed by loans from or guaranteed by the
Company or any Restricted Subsidiary unless such loans have been repaid with
cash on or prior to the date of determination); (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent
to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock of the Company (less the amount of any cash, or
other property, distributed by the Company upon such conversion or exchange);
and (D) the amount equal to the net reduction in Investments (other than
Permitted Investments) made by the Company or any of its Restricted
Subsidiaries in any Person resulting from (i) repurchases or redemptions of
such Investments by such Person, proceeds realized upon the sale of such
Investment to an unaffiliated purchaser, repayments of loans or advances or
other transfers of assets as a return of capital or similar payment (excluding
by way of dividend or distribution) by such Person to the Company or any
Restricted Subsidiary of the Company or (ii) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments (excluding Permitted Investments)
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the
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calculation of the amount of Restricted Payments; provided, however, that no
amount will be included under this clause (D) to the extent it is already
included in Consolidated Net Income.
(b) The provisions of paragraph (a) will not prohibit: (i) any purchase,
redemption, defeasance or other acquisition of Capital Stock or Subordinated
Obligations of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
or an employee stock ownership plan or similar trust to the extent such sale
to an employee stock ownership plan or similar trust is financed by loans from
or guaranteed by the Company or any Restricted Subsidiary unless such loans
have been repaid with cash on or prior to the date of determination);
provided, however, that (A) such purchase, redemption, defeasance or other
acquisition will be excluded in subsequent calculations of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale will be
excluded from clause (3)(B) of paragraph (a); (ii) any purchase, redemption,
defeasance or other acquisition of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company; provided, however, that such
purchase, redemption, defeasance or other acquisition will be excluded in
subsequent calculations of the amount of Restricted Payments; (iii) dividends
paid within 60 days after the date of declaration if at such date of
declaration such dividend would have complied with this provision; provided,
however, that such dividends will be included in subsequent calculations of
the amount of Restricted Payments; (iv) any redemptions, repurchases,
defeasances or other acquisitions of Management Equity Interests, in each case
in connection with the repurchase provisions under employee stock option
agreement or plan, stock purchase agreements, subscription agreements,
employment agreements, employee benefit plan or arrangement, stockholder
agreement or other agreements to compensate management employees; provided,
however, that such redemptions, repurchases or other acquisitions will be
included in subsequent calculations of the amount of Restricted Payments; and
provided further, however, that the aggregate amount of Restricted Payments
made pursuant to this clause (iv) shall not exceed $5.0 million in the
aggregate; and (v) repurchases of Capital Stock deemed to occur upon the
exercise of stock options if such Capital Stock represents a portion of the
exercise price hereof; provided, however, that such repurchases will be
excluded from subsequent calculations of the amount of Restricted Payments.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, Incur or suffer to
exist any Lien (other than Permitted Liens) upon any of its property or assets
(including Capital Stock), whether owned on the date of the Indenture or
thereafter acquired, securing any Indebtedness, unless contemporaneously
therewith effective provision is made to secure the Indebtedness due under the
Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's
property or assets, any Subsidiary Guarantee of such Restricted Subsidiary,
equally and ratably with (or prior to in the case of Liens with respect to
Subordinated Obligations or Subsidiary Guarantor Subordinated Obligations) the
Indebtedness secured by such Lien for so long as such Indebtedness is so
secured.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or consensual restriction on the ability
of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness or other
obligations owed to the Company, (ii) make any loans or advances to the
Company or (iii) transfer any of its property or assets to the Company, except
(a) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the date of the Indenture (including, without limitation, the
Senior Credit Agreement); (b) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date; (c) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an
agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (a) or (b) of this covenant or
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this clause (c) or contained in any amendment to an agreement referred to in
clause (a) or (b) of this covenant or this clause (c); provided, however, that
the encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such agreement or amendment are no less favorable to the
holders of the Notes than encumbrances and restrictions contained in such
agreements; (d) in the case of clause (iii) above, any encumbrance or
restriction (A) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a lease,
license or similar contract, or the assignment or transfer of any such lease,
license or other contract, (B) by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets
of the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture, (C) contained in mortgages, pledges or other security agreements
securing Indebtedness of a Restricted Subsidiary to the extent such
encumbrance or restrictions restrict the transfer of the property subject to
such mortgages, pledges or other security agreements or (D) pursuant to
customary provisions restricting dispositions of real property interests set
forth in any reciprocal easement agreements of the Company or any Restricted
Subsidiary; (e) any restriction with respect to a Restricted Subsidiary (or
any of its property or assets) imposed pursuant to an agreement entered into
for the direct or indirect sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary (or the property or
assets that are subject to such restriction) pending the closing of such sale
or disposition; (f) encumbrances or restrictions arising or existing by reason
of applicable law and (g) encumbrances or restrictions contained in agreements
relating to Indebtedness Incurred by Restricted Subsidiaries in connection
with Special Purpose Transactions.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors (including
as to the value of all non-cash consideration), of the shares and assets
subject to such Asset Disposition and (ii) at least 80% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents.
With respect to any Asset Disposition occurring on or after the Issue Date
from which the Company or any Restricted Subsidiary receives Net Available
Cash, the Company or such Restricted Subsidiary shall apply an amount equal to
100% of the Net Available Cash from such Asset Disposition at its election, to
either (i) prepay, repay or purchase Indebtedness (other than any Subordinated
Obligations or Preferred Stock) of the Company or a Wholly-Owned Subsidiary
(in each case other than Indebtedness owed to the Company or an Affiliate of
the Company) within 365 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; (ii) invest in
Additional Assets within 365 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; or (iii) make an offer
to purchase the Notes at 100% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase; provided, however, that, in
connection with any prepayment, repayment or purchase of Indebtedness pursuant
to clause (i) above, the Company or such Restricted Subsidiary will retire
such Indebtedness and will cause the related loan commitment (if any) to be
permanently reduced to the extent required by the Senior Credit Agreement.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries will not be required to apply any Net Available Cash in
accordance herewith except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
covenant exceed $1.0 million. Any Net Available Cash from an Asset Disposition
that is not invested or applied as provided and within the time period set
forth in the first sentence of this paragraph (a) will be deemed to constitute
"Excess Proceeds."
For the purposes of this covenant and for no other purpose, the following
will be deemed to be cash: (x) the assumption by the transferee of
Indebtedness (other than Subordinated Obligations) of the Company or
Indebtedness of any Restricted Subsidiary of the Company and the release of
the Company or such Restricted Subsidiary from all liability on such
Indebtedness or Indebtedness in connection with such Asset Disposition (in
which case the Company will, without further action, be deemed to have applied
such deemed cash amount in accordance with clause (i) of the preceding
paragraph) and (y) securities received by the Company or any Restricted
Subsidiary of the Company from the transferee that are promptly converted by
the Company or such Restricted Subsidiary into cash.
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(b) When the aggregate amount of Excess Proceeds exceeds $5.0 million (with
lesser amounts to be carried forward for purposes of determining whether an
Offer (as defined) is required with respect to the Excess Proceeds from any
subsequent Asset Disposition), the Company will be required to make an offer
to purchase (an "Asset Sale Offer") within ten days of such time from all
holders of the Notes in accordance with the procedures set forth in the
Indenture the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased with such Excess Proceeds. If the aggregate
purchase price of the Notes tendered pursuant to the Asset Sale Offer is less
than the Excess Proceeds, the remaining Excess Proceeds will be available to
the Company to fund other corporate purposes not otherwise prohibited by the
Indenture.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to an Asset
Sale Offer made pursuant to this covenant. To the extent that the provisions
of any securities laws or regulations conflict with provisions of this
covenant, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Indenture by virtue thereof.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless: (i) the Company or such
Restricted Subsidiary would be entitled to Incur Indebtedness in an amount
equal to the Attributable Indebtedness with respect to such Sale/Leaseback
Transaction pursuant to the covenant described under "Limitation on
Indebtedness;" (ii) the net proceeds received by the Company or any Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are at least
equal to the fair value (as determined by the Board of Directors) of such
property; and (iii) the transfer of such property is permitted by, and the
Company applies the proceeds of such transaction in compliance with, the
covenant described under "--Limitation on Sales of Assets and Subsidiary
Stock."
Limitation on Affiliate Transactions. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate
of the Company (an "Affiliate Transaction") unless: (i) the terms of such
Affiliate Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $1.0 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the Company
and by a majority of the members of such Board having no personal stake in
such transaction, if any (and such majority or majorities, as the case may be,
determines, or determine, that such Affiliate Transaction satisfies the
criteria in (i) above); and (iii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $10.0 million, the Company has
received a written opinion from an independent investment banking firm of
nationally recognized standing that such Affiliate Transaction is not
materially less favorable than those that might reasonably have been obtained
in a comparable transaction at such time on an arms-length basis from a Person
that is not an Affiliate.
(b) The foregoing paragraph (a) will not apply to (i) any Restricted Payment
permitted to be made pursuant to the covenant described under "--Limitation on
Restricted Payments," (ii) any issuance of (A) securities to any of the
Permitted Holders or (B) securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of the Company, (iii) loans or advances to employees in the ordinary
course of business of the Company or any of its Restricted Subsidiaries, (iv)
any transaction between the Company and a Wholly-Owned Subsidiary or between
Wholly-Owned Subsidiaries, (v) any fees, indemnities, loans or advances to
employees in the ordinary course of business and consistent with past
practices and (vi) payments under the Management Agreement as in effect on the
Issue Date.
Limitation on Dispositions of Capital Stock of Restricted Subsidiaries. The
Company (i) will not, and will not permit any Restricted Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any
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Capital Stock of any Restricted Subsidiary to any Person (other than the
Company or a Wholly Owned Subsidiary), unless (A) such transfer, conveyance,
sale, lease or other disposition is a sale of the common stock of such
Restricted Subsidiary and, after giving effect to the consummation thereof,
the Company owns none or more than 50% of the outstanding common stock of such
Restricted Subsidiary and (B) the Net Cash Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the covenant described above under "--Limitation on Sales of Assets and
Subsidiary Stock;" and (ii) will not permit any Restricted Subsidiary to issue
any of its Capital Stock (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares or any shares required to be
held by Persons other than the Company or a Restricted Subsidiary in
connection with the maintenance of liquor licenses) to any Person other than
to the Company or a Wholly-Owned Subsidiary, unless such issuance is an
issuance of the common stock of such Restricted Subsidiary and, after giving
effect to the consummation thereof, the Company and/or one or more Wholly-
Owned Subsidiaries owns more than 50% of the outstanding common stock of such
Restricted Subsidiary; provided, however, that this provision shall not
prohibit any pledge or collateral assignment of the Capital Stock of any
Restricted Subsidiary that is permitted under "Limitation on Liens" or the
exercise of any right or remedy by the holder of any such pledge or
assignment.
Commission Reports. Notwithstanding that the Company may not be subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Company will file with the
Commission, and provide, within 15 days after the Company is required to file
the same with the Commission, the Trustee and the holders of the Notes with
the annual reports and the information, documents and other reports (or copies
of such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) that are specified in Sections 13 and 15(d) of the
Exchange Act. In the event that the Company is not permitted to file such
reports, documents and information with the Commission pursuant to the
Exchange Act, the Company will nevertheless deliver such Exchange Act
information to the Trustee and the holders of the Notes as if the Company were
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act.
Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person, unless: (i) (A) the resulting, surviving or transferee Person
(the "Successor Company") will be a corporation, partnership, trust, limited
liability company or other similar entity organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia, (B) the Successor Company (if not the Company) will expressly
assume, by supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture, and (C) the Subsidiary Guarantees will remain in
effect after any such merger or consolidation; (ii) immediately after giving
effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Subsidiary of the Successor Company
as a result of such transaction as having been Incurred by the Successor
Company or such Subsidiary at the time of such transaction), no Default or
Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction, the Successor Company would be able
to Incur at least an additional $1.00 of Indebtedness pursuant to paragraph
(a) of "--Limitation on Indebtedness;" and (iv) the Company has delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture
(if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in
the case of a lease of all or substantially all its assets, the Company will
not be released from the obligation to pay the principal of and interest on
the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (x) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (y) the Company may merge
with an Affiliate incorporated solely for the purpose of reincorporating the
Company in another jurisdiction to realize tax or other benefits.
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Future Subsidiary Guarantors. The Company will cause each Restricted
Subsidiary (other than (i) a Foreign Subsidiary or (ii) a special purpose
entity and/or limited partnership created solely to Incur Indebtedness of the
type specified in clause (b)(vii) under "--Limitation on Indebtedness" in
connection with a Special Purpose Transaction or any special purpose corporate
general partner thereof) created or acquired by the Company to execute and
deliver to the Trustee a Subsidiary Guarantee pursuant to which such
Subsidiary Guarantor will unconditionally Guarantee, on a joint and several
basis, the full and prompt payment of the principal of, premium, if any, and
interest on the Notes on a senior basis.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for
30 days, (ii) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon special mandatory
redemption, upon required repurchase, upon declaration or otherwise, (iii) the
failure by the Company to comply with its obligations under "--Certain
Covenants--Merger and Consolidation" above, (iv) failure by the Company to
comply for 30 days after notice with any of its obligations under the
covenants described under "Change of Control" above or under covenants
described under "--Certain Covenants" above (in each case, other than a
failure to purchase Notes which will constitute an Event of Default under
clause (ii) above), (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Restricted Subsidiary is not paid within any applicable
grace period after final maturity or is accelerated by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $5.0 million (the "cross acceleration provision"), (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment or
decree for the payment of money in excess of $5.0 million is rendered against
the Company or a Significant Subsidiary and such judgment or decree remains
undischarged or unstayed for a period of 60 days after such judgment becomes
final and non-appealable (the "judgment default provision") or (ix) any
Subsidiary Guarantee ceases to be in full force and effect (except as
contemplated by the terms of the Indenture) or any Subsidiary Guarantor denies
or disaffirms its obligations under the Indenture or its Subsidiary Guarantee
(except as contemplated by the terms of the Indenture). However, a default
under clauses (iv) and (v) will not constitute an Event of Default until the
Trustee notifies the Company or the holders of 25% in principal amount of the
then outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified in clauses (iv) and (v) hereof
after receipt of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vii) above with respect to the Company) occurs and is continuing, the Trustee
or the holders of at least 25% in principal amount of the outstanding Notes by
notice to the Company and the Trustee may declare the principal of and accrued
and unpaid interest, if any, on all the Notes to be due and payable. Upon such
a declaration, such principal and accrued and unpaid interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued and unpaid interest on all the Notes
will become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered
the Trustee reasonable security or indemnity against any
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loss, liability or expense, (iv) the Trustee has not complied with such
request within 60 days after the receipt of the request and the offer of
security or indemnity and (v) the holders of a majority in principal amount of
the outstanding Notes have not given the Trustee a direction that, in the
opinion of the Trustee, is inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts with
law or the Indenture or that the Trustee determines is unduly prejudicial to
the rights of any other holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust officers in
good faith determines that withholding notice is in the interests of the
holders of Notes. In addition, the Company is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Company also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
events which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the stated rate
of or extend the stated time for payment of interest on any Note, (iii) reduce
the principal of or extend the Stated Maturity of any Note, (iv) reduce the
premium payable upon the redemption or repurchase of any Note or change the
time at which any Note may be redeemed as described under "Optional
Redemption" above, (v) make any Note payable in money other than that stated
in the Note, (vi) impair the right of any holder to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes or (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions.
Without the consent of any holder, the Company, the Subsidiary Guarantors
and the Trustee may amend the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation, partnership, trust or limited liability company of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add Guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders or to surrender any right or power conferred upon
the Company, to make any change that does not adversely affect the rights of
any holder or to comply with any requirement of the Commission in connection
with the qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to the
holders a notice briefly describing such amendment. However, the failure to
give such notice to all the holders, or any defect therein, will not impair or
affect the validity of the amendment.
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DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to replace
mutilated, destroyed, lost or stolen Notes and to maintain a registrar and
paying agent in respect of the Notes. If the Company exercises its legal
defeasance option, the Subsidiary Guarantees in effect at such time will
terminate. The Company at any time may terminate its obligations under
covenants described under "--Certain Covenants" (other than "--Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries, the judgment
default provision and the Subsidiary Guarantee provision described under "--
Events of Default" above and the limitations contained in clauses (iii) and
(iv) under "--Certain Covenants--Merger and Consolidation" above ("covenant
defeasance") and thereafter any omission to comply with such obligations shall
no longer constitute a Default or Event of Default with respect to the Notes.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, the events specified in clause (iv), (vi), (vii)
(with respect only to Significant Subsidiaries), (viii) or (ix) under "Events
of Default" above will no longer constitute an Event of Default, and payment
of the Notes may not be accelerated because of the occurrence of any such
event or because of the failure of the Company to comply with clause (iii) or
(iv) under "--Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).
CONCERNING THE TRUSTEE
United States Trust Company of New York shall be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
GOVERNING LAW
The Indenture provides that it, the Notes and the Subsidiary Guarantees will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or a Restricted Subsidiary of the Company; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of the Company; provided, however, that, in the
case of clauses (ii) and (iii), such Restricted Subsidiary is primarily
engaged in a Related Business.
"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 the purposes of this definition,
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"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required to be held by Persons other than the Company or a Restricted
Subsidiary in connection with the maintenance of liquor licenses), property or
other assets (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) the
sale of Cash Equivalents in the ordinary course of business, (iii) a
disposition of inventory in the ordinary course of business, (iv) a
disposition of obsolete or worn out equipment or equipment that is no longer
useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of
business (including, without limitation, any real property interests,
equipment or other tangible property disposed of in connection with the
relocation or closing of a restaurant), (v) transactions permitted under
"Certain Covenants--Merger and Consolidation" above, (vi) for purposes of
"Limitation on Sales of Assets and Subsidiary Stock" only, a disposition
subject to "Limitation on Restricted Payments" and (vii) any pledge or
collateral assignment of Capital Stock of any Restricted Subsidiary that is
permitted under "Certain Covenants--Limitation on Liens" or the exercise of
any right or remedies by the holder of any such pledge or assignment.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, partnership interests and limited liability company
membership interests, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation will be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof will be
the date of the last payment of rent or any other amount due under such lease
prior to the first date such lease may be terminated without penalty.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof, having maturities of not more than one year from the
date of acquisition; (ii) marketable general obligations issued by any state
of the United States of America or any political subdivision of any such state
or any public instrumentality thereof maturing within one year from the date
of acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.; (iii) certificates of deposit, time deposits,
eurodollar time deposits, overnight bank deposits or bankers' acceptances
having maturities of not more than one year from the date of acquisition
thereof issued by any commercial bank the long-term debt of which is rated at
the time of acquisition thereof at least "A" or the equivalent thereof by
Standard & Poor's Rating Group, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having capital and surplus in excess of $500
million; (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (i), (ii) and
(iii) entered into with any bank meeting the
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qualifications specified in clause (iii) above; (v) commercial paper rated at
the time of acquisition thereof at least "A-2" or the equivalent thereof by
Standard & Poor's Rating Group or "P-2" or the equivalent thereof by Moody's
Investors Service, Inc., or carrying an equivalent rating by a nationally
recognized rating agency, if both of the two named rating agencies cease
publishing ratings of investments, and in either case maturing within 270 days
after the date of acquisition thereof; and (vi) interests in any investment
company which invests solely in instruments of the type specified in clauses
(i) through (v) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated EBITDA" for any period means the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization of intangibles, (v)
other non-cash charges reducing Consolidated Net Income (excluding any such
non-cash charge to the extent it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash expense that
was paid in a prior period not included in the calculation) and (vi) Deferred
Rent. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the interest, depreciation and amortization of, a
Restricted Subsidiary of a Person will be added to Consolidated Net Income to
compute Consolidated EBITDA of such Person only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
the Consolidated Net Income of such Person.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
not included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations and the interest portion of rent expense
associated with Attributable Indebtedness in respect of the relevant lease
giving rise thereto, determined as if such lease were a capitalized lease in
accordance with GAAP, (ii) amortization of debt discount and debt issuance
cost, (iii) capitalized interest and accrued interest, (iv) non-cash interest
expense, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) interest
actually paid by the Company or any such Subsidiary under any Guarantee of
Indebtedness or other obligation of any other Person, (vii) net costs
associated with Interest Rate Agreements (including amortization of fees),
(viii) dividends in respect of all Disqualified Stock of the Company and all
Preferred Stock of Subsidiaries, in each case, held by Persons other than the
Company or a Wholly Owned Subsidiary and (ix) the cash contributions to any
employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by
such plan or trust; provided, however, that there will be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any
Restricted Subsidiary. For purposes of the foregoing, total interest expense
will be determined after giving effect to any net payments made or received by
the Company and its Subsidiaries with respect to Interest Rate Agreements.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect
to any Restricted Subsidiary of the Company that was not a Wholly-Owned
Subsidiary will be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its Consolidated Subsidiaries; provided, however, that there
will be excluded in such Consolidated Net Income: (i) any net income (loss) of
any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in (iv) below, the Company's equity in
the net income of any such Person for such period will be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to the limitations
contained in clause (iii) below) and (B) the Company's equity in a net loss of
any such Person (other than an Unrestricted Subsidiary) for such period will
be included in determining such Consolidated Net Income to the extent such
loss has been funded with cash from the Company or a Restricted Subsidiary;
(ii) any net income (loss) of any
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Person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any
net income of any Restricted Subsidiary if such Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Restricted Subsidiary, directly or indirectly,
to the Company, except that (A) subject to the limitations contained in (iv)
below the Company's equity in the net income of any such Restricted Subsidiary
for such period will be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company or another Restricted Subsidiary
as a dividend (subject, in the case of a dividend to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period will be
included in determining such Consolidated Net Income; (iv) any gain (loss)
realized upon the sale or other disposition of any property, plant or
equipment of the Company or its consolidated Subsidiaries (including pursuant
to any Sale/Leaseback Transaction) which is not sold or otherwise disposed of
in the ordinary course of business and any gain (loss) realized upon the sale
or other disposition of any Capital Stock of any Person; (v) any extraordinary
gain or loss; and (vi) the cumulative effect of a change in accounting
principles.
"Default" means any event which, after notice or passage of time or both,
would be an Event of Default.
"Deferred Rent" means the excess (deficit) of accrued rent calculated in
accordance with Statement of Financial Accounting Standards No. 13 and GAAP as
compared to amounts paid under operating lease arrangements, as set forth in
the Company's cash flow statements.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock (excluding Capital Stock which is convertible or
exchangeable solely at the option of the Company or a Restricted Subsidiary)
or (iii) is redeemable at the option of the holder thereof, in whole or in
part, in each case on or prior to the Stated Maturity of the Notes,
provided,that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable
at the option of the holder thereof prior to such Stated Maturity will be
deemed to be Disqualified Stock.
"Equity Offering" means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" will not include
endorsements for collection or deposit and
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indemnities given by the Company or any of its Subsidiaries in connection with
exhibitions, in each case, in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) will be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto); (iv)
all obligations of such Person to pay the deferred and unpaid purchase price
of property or services (except trade payables), which purchase price is due
more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services (if and
to the extent any such obligation would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP); (v) all Capitalized
Lease Obligations and all Attributable Indebtedness of such Person; (vi) the
amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to
any Subsidiary, any Preferred Stock (but excluding, in each case, any accrued
dividends); (vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of such Indebtedness will be the
lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and (ix) to the extent not otherwise included in this definition, net
obligations of such Person under Interest Rate Agreements (the amount of any
such obligations to be equal at any time to the termination value of such
agreement or arrangement giving rise to such obligation that would be payable
by such Person at such time). The amount of Indebtedness of any Person at any
date will be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided that the amount outstanding at any one time
of any Indebtedness issued with original issue discount is the principal
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP. Notwithstanding the foregoing, Indebtedness shall
exclude (i) obligations created, issued or incurred by any Person with respect
to customer subscription payments or customer deposits for trade shows and
exhibitions and (ii) any indemnification obligation of the Company to third
parties in respect of customary representations and warranties contained in
stock purchase, asset purchase or similar acquisition agreements to which the
Company is a party, if such indemnification obligation would not appear as a
liability upon a balance sheet of the Company prepared in accordance with
GAAP.
"Interest Coverage Ratio" as of any date of determination means, with
respect to any Person, the ratio of (i) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination to (ii)
Consolidated Interest Expense of such Person for such period; provided,
however, that (1) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Interest Coverage Ratio
is an Asset Disposition, the Consolidated EBITDA for such period will be
reduced by an amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period or increased by an amount equal to the Consolidated EBITDA (if
negative) directly attributable thereto for such period, (2) if since the
beginning of such period the Company or any Restricted Subsidiary (by merger
or otherwise) shall have made an Investment in any Restricted Subsidiary (or
any Person which becomes a Restricted Subsidiary or is merged with or into the
Company) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit of
a business,
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Consolidated EBITDA for such period will be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness and including the
pro forma expenses and cost reductions calculated in accordance with
Regulation S-X promulgated by the Commission) as if such Investment or
acquisition occurred on the first day of such period and (3) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) will have made any Asset Disposition or
any Investment or acquisition of assets that would have required an adjustment
pursuant to clause (1) or (2) above if made by the Company or a Restricted
Subsidiary during such period, Consolidated EBITDA for such period will be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and including the pro forma expenses and cost reductions
calculated in accordance with Regulation S-X promulgated by the Commission) as
if such Asset Disposition or Investment occurred on the first day of such
period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto, the pro forma calculations will be determined in good faith by a
responsible financial or accounting officer of the Company. Notwithstanding
anything herein to the contrary, if at the time the calculation of the
Interest Coverage Ratio is to be made, the Company does not have available
consolidated financial statements reflecting the consummation of the
Transactions for a period of at least four full fiscal quarters, all
calculations required by the Interest Coverage Ratio shall be prepared on a
pro forma basis, as though each of the Transactions (to the extent not
otherwise reflected in the consolidated financial statements of the Company)
had occurred on the first day of the most recently completed four fiscal
quarters for which such calculation is being made.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of Capital Stock
for consideration, Indebtedness or other similar instruments issued by, such
Person. For purposes of the "Limitation on Restricted Payments" covenant, (i)
"Investment" will include the portion (proportionate to the Company's equity
interest in a Restricted Subsidiary to be designated as an Unrestricted
Subsidiary) of the fair market value of the net assets of such Restricted
Subsidiary of the Company at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company will
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) the Company's "Investment"
in such Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and (ii) any property
transferred to or from an Unrestricted Subsidiary will be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors of the Company.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreement" means the management agreement, dated as of July 21,
1998, between Jacobson Partners and the Company relating to management
services to be provided to the Company by Jacobson Partners.
"Management Equity Interests" means shares of Capital Stock of the Company
or of a Subsidiary Guarantor, options, warrants or stock appreciation or
similar rights in respect of such Capital Stock, in each case held by any
current or former officer, employee or other member of management (or their
estates or beneficiaries
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under their estates) of the Company or of such Subsidiary Guarantor which were
acquired or granted or are subject to any management equity subscription
agreement, employment agreement, employee benefit plan or arrangement,
stockholder agreement, stock option agreement or similar management investor
plan or agreement and which may be required to be repurchased, redeemed or
otherwise acquired by the Company or such Subsidiary Guarantor in each case
pursuant to the terms of such agreement, plan or arrangement.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of May
13, 1998, among the Company, NERC Acquisition Corp. and Bertucci's.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of (i) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Disposition, or by applicable law be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means (i) Jacobson Partners or any Affiliate of Jacobson
Partners; (ii) any stockholder of the Company; (iii) family members or
relatives of the Persons described in clause (ii); (iv) any trusts created for
the benefit of the Persons described in clause (ii) or (iii) and (v) in the
event of the incompetence or death of any or the Persons described in clause
(ii) or (iii), such Person's estate, executor, administrator, committee or
other personal representatives or beneficiaries.
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"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company or in a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is
a Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business; (iii) cash and Cash Equivalents; (iv) payroll, travel,
relocation and similar advances to cover matters that are expected at the time
of such advances ultimately to be treated as expenses for accounting purposes
and that are made in the ordinary course of business; (v) loans or advances to
employees made in the ordinary course of business not exceeding in the
aggregate, at any time, $1.0 million; (vi) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Restricted Subsidiary or in satisfaction of
judgments; (vii) Investments in a Related Business in the form of joint
ventures, operating agreements, partnership agreements or other similar or
customary agreements, interests or arrangements with unaffiliated third
parties, the aggregate outstanding amount of which does not exceed $10.0
million at any time; (viii) receivables 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; provided,
however, that such trade terms may include such concessionary trade terms as
the Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (ix) Guarantees permitted to be made pursuant to the covenant
"Limitation on Indebtedness"; (x) Investments acquired by the Company or any
Restricted Subsidiary in connection with or as a result of a bankruptcy,
insolvency, workout, reorganization, recapitalization or similar arrangement
with respect to the obligor under or issuer of any accounts receivable or
Investment held by the Company or any Restricted Subsidiary; (xi) Interest
Rate Agreements entered into in the ordinary course of business that are
permitted under clause (vi) of paragraph (b) of the covenant "Limitation of
Indebtedness"; (xii) Investments made by the Company or a Restricted
Subsidiary in connection with an Assets Disposition made in compliance with
the covenant "Limitation on Sales of Assets and Subsidiary Stock;" (xiii)
Investments made solely in exchange for the issuance of Capital Stock (other
than Disqualified Stock) of the Company; and (xiv) any Investment existing on
the date of the Indenture.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workers' compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government
bonds to secure surety or appeal bonds, performance bonds or other obligations
of a like nature to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business; (b) Liens imposed by law,
including carriers', warehousemen's and mechanics' Liens, in each case for
sums not yet due or being contested in good faith by appropriate proceedings,
or other Liens arising out of judgments or awards against such Person with
respect to which such Person is then proceeding with an appeal or other
proceedings for review; (c) Liens for taxes, assessments or other governmental
charges not yet subject to penalties for non-payment or which are being
contested in good faith by appropriate proceedings provided appropriate
reserves have been taken on the books of the Company; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute Indebtedness;
(e) encumbrances, easements, minor title defects, irregularities in title or
reservations of, or rights of others for, licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real properties or liens
incidental to the conduct of the business of such Person or to the ownership
of its properties which do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the operation
of the business of such Person; (f) Liens securing an Interest Rate Agreement
so long as the related Indebtedness is, and is permitted to be under the
Indenture, secured by a Lien on the same property securing the Interest Rate
Agreement; (g) leases and subleases of real property which do not materially
interfere with the ordinary conduct of the business of the Company or any of
its Restricted Subsidiaries; (h) judgment Liens not giving rise to an Event of
Default so long as such Lien is adequately bonded and any appropriate legal
proceedings which may
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have been duly initiated for the review of such judgment have not been finally
terminated or the period within which such proceedings may be initiated has
not expired; (i) Liens for the purpose of securing the payment (or the
refinancing of the payment) of all or a part of the purchase price of,
Capitalized Lease Obligations with respect to, or costs of construction or
improvement of, assets or property acquired or constructed in the ordinary
course of business provided that (x) the aggregate principal amount of
Indebtedness secured by such Liens is otherwise permitted to be Incurred under
the Indenture and does not exceed such costs and (y) such Liens are created
within one year of construction or acquisition of such assets or property (or
such longer period as may be permitted by the Senior Credit Agreement) and do
not encumber any other assets or property of the Company or any Restricted
Subsidiary other than such assets or property and assets affixed or
appurtenant thereto; (j) Liens arising solely by virtue of any statutory or
common law provision relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided that (x) such deposit account is not
a dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated
by the Federal Reserve Board, and (y) such deposit account is not intended by
the Company or any Restricted Subsidiary to provide collateral to the
depository institution; (k) Liens arising from Uniform Commercial Code
financing statement filings regarding operating leases entered into by the
Company and its Restricted Subsidiaries in the ordinary course of business;
(l) Liens existing on the Issue Date; (m) Liens on property or shares of stock
of a Person at the time such Person becomes a Subsidiary or is merged into or
consolidated with the Company or any Subsidiary of the Company; provided,
however, that such Liens are not created, Incurred or assumed in connection
with, or in contemplation of, such other Person becoming a Subsidiary;
provided further, however, that any such Lien may not extend to any other
property owned by the Company or any Restricted Subsidiary; (n) Liens on
property at the time the Company or a Subsidiary acquired the property,
including any acquisition by means of a merger or consolidation with or into
the Company or any Restricted Subsidiary; provided, however, that such Liens
are not created, Incurred or assumed in connection with, or in contemplation
of, such acquisition; provided further, however, that such Liens may not
extend to any other property owned by the Company or any Restricted
Subsidiary; (o) Liens securing Indebtedness or other obligations of a
Subsidiary owing to the Company or a Wholly Owned Subsidiary; (p) Liens
securing indebtedness under, or Subsidiary Guarantors relating to, the Senior
Credit Agreement; and (q) Liens securing Refinancing Indebtedness Incurred to
refinance Indebtedness that was previously so secured, provided that any such
Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in respect
thereof) that secured (or, under the written arrangements under which the
original Lien arose, could secure) the obligations to which such Liens relate.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
hereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
A "Public Market" exists at any time with respect to the common stock of the
Company if (i) the common stock of the Company is then registered with the
Commission pursuant to Section 12(b) or 12(g) of the Exchange Act and traded
either on a national securities exchange or in the National Association of
Securities Dealers Automated Quotation System and (ii) at least 15% of the
total issued and outstanding common stock of the Company has been distributed
prior to such time by means of an effective registration statement under the
Securities Act.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance", "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing
on the date of the
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Indenture or Incurred in compliance with the Indenture (including Indebtedness
of the Company that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) (x) if the Stated
Maturity of the Indebtedness being refinanced is earlier than the Stated
Maturity of the Notes, the Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being refinanced or (y)
if the Stated Maturity of the Indebtedness being refinanced is later than the
Stated Maturity of the Notes, the Refinancing Indebtedness has a Stated
Maturity later than the Notes, (ii) the Refinancing Indebtedness has an
Average Life at the time such Refinancing Indebtedness is Incurred that is
equal to or greater than the Average Life of the Indebtedness being
refinanced, and (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding (plus fees and expenses, including any
premium and defeasance costs) of the Indebtedness being refinanced (except to
the extent such increase is a result of a concurrent Incurrence of
Indebtedness permitted to be Incurred under the Indenture).
"Related Business" means the business conducted by the Company and the
Restricted Subsidiaries on the Issue Date and any business related, ancillary
or complementary thereto, in each case as determined by the Company in good
faith.
"Restaurant Property" means, with respect to any restaurant location, the
real property, land, buildings, improvements, machinery and equipment, and
structures comprising such restaurant or in which such restaurant is located.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person (other than the Company or a Restricted
Subsidiary) and the Company or a Subsidiary leases it from such Person.
"Senior Credit Agreement" means (i) the credit agreement entered into
concurrently with the consummation of the Acquisition among the Company, the
lenders parties thereto from time to time and BankBoston, N.A., as
administrative agent, and Chase Bank of Texas, N.A., as documentation agent,
and any guarantees issued thereunder, as the same may be amended, supplemented
or otherwise modified from time to time and (ii) any renewal, extension,
refunding, restructuring, replacement, restatement or refinancing thereof.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the Commission.
"Special Purpose Transaction" means a transaction between the Company or any
Restricted Subsidiary, on the one hand ("Transferor"), and a Restricted
Subsidiary, on the other ("Transferee"), in which (i) Transferor shall sell,
assign and transfer to Transferee Transferor's interests in one or more
Restaurant Properties, which interest may be in the form of fee interests,
leasehold interests or a combination thereof, (ii) the purchase price for such
interest shall consist solely of cash which shall be (x) paid by Transferee
concurrently with such transfer and (y) applied by Transferor promptly after
such transfer in repayment of outstanding Indebtedness of the Transferor and
(iii) concurrently with such transfer, Transferee, as lessor, and Transferor,
as lessee, shall enter into a lease (or sublease, if appropriate) with respect
to each transferred Restaurant Property which shall provide for rental
payments at least equal to the sum of all interest and principal due in
respect of Transferee's Indebtedness incurred by the Transferee in connection
with such Special Purpose Transaction, all lease payments, utility payments,
property taxes and other similar costs, and all other payments due in respect
of the Restaurant Property.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
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"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person. Unless otherwise specified herein, each reference to a Subsidiary
will refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in
the form prescribed in the Indenture.
"Subsidiary Guarantor" means each Subsidiary of the Company (other than (i)
a Foreign Subsidiary or (ii) NERC Limited Partnership, NERC SPE Inc., NERC
Limited Partnership II or NERC SPE II Inc.) in existence on the Issue Date and
any Restricted Subsidiary (other than (i) a Foreign Subsidiary or (ii) a
special purpose entity and/or limited partnership created solely to Incur
Indebtedness of the type specified in clause (b)(vii) under "Limitation on
Indebtedness" in connection with a Special Purpose Transaction or any special
purpose corporate general partner thereof) created or acquired by the Company
after the Issue Date.
"Subsidiary Guarantor Subordinated Obligation" means, with respect to a
Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor (whether
outstanding on the Issue Date or thereafter Incurred) which is expressly
subordinate in right of payment to the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee pursuant to a written agreement.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or owns or holds any Lien on any property of, the Company or any
Restricted Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total consolidated assets of $10,000 or
less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) under "Limitation on Indebtedness" and
(y) no Default or Event of Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which (other than directors' qualifying shares or any
shares required to be held by Persons other than the Company or a Restricted
Subsidiary in connection with the maintenance of liquor licenses) is owned by
the Company or another Wholly-Owned Subsidiary.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on July 20, 1998 (the "Issue
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The
Initial Purchasers subsequently sold the Private Notes (i) within the United
States to QIB's in reliance on Rule 144A and (ii) outside the United States
only in offshore transactions in reliance on Regulation S under the Securities
Act. As a condition to the sale of the Private Notes, the Company and the
Initial Purchasers entered into the Exchange and Registration Rights Agreement
on July 20, 1998, as amended on July 21, 1998. Pursuant to the Exchange and
Registration Rights Agreement, the Company and the Subsidiary Guarantors
agreed, unless the Exchange Offer is not permitted by applicable law or
applicable interpretation of the staff of the Commission, to use their best
efforts to (i) file with the Commission a Registration Statement on Form S-1
or Form S-4 under the Securities Act with respect to the Exchange Notes (the
"Exchange Offer Registration Statement") on or prior to 60 days after the
Issue Date relating to a registered exchange offer (the "Exchange Offer"),
(ii) cause the Exchange Offer Registration Statement to become effective under
the Securities Act within 135 days after the Issue Date and (iii) consummate
the Exchange Offer within 165 days after the Issue Date. The summary herein of
certain provisions of the Exchange and Registration Rights Agreement which
contains the material terms relating to registration rights of the holders of
the Private Notes (and the related obligations thereto of the Company), does
not purport to be complete and is subject to, and is qualified in its entirety
by, all the provisions of the Exchange and Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Exchange Offer Registration Statement
is intended to satisfy certain of the Company's obligations under the Exchange
and Registration Rights Agreement and the Purchase Agreement.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the Exchange Notes will bear a different
CUSIP number from the Private Notes, (ii) the exchange will be registered
under the Securities Act and, therefore, the Exchange Notes will not bear
legends restricting the transfer thereof and (iii) holders of the Exchange
Notes will not be entitled to certain rights under the Exchange and
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. See "--Termination of Certain Rights." The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of,
the Indenture, which also authorized the issuance of the Private Notes, such
that both series of Notes will be treated as a single class of debt securities
under the Indenture.
The Exchange Offer is not conditioned upon any minimum principal amount of
Private Notes being tendered. As of the date of this Prospectus, $100,000,000
in aggregate principal amount of the Private Notes are outstanding.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Exchange and Registration Rights Agreement and the applicable requirements of
the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder.
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The Company shall be deemed to have accepted validly tendered Private Notes
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 Private Notes for the purposes of receiving the Exchange Notes from the
Company.
If any tendered Private Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Private Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
Wednesday, December 16, 1998, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall
mean the latest date and time to which the Exchange Offer is extended, which
in no event shall be more than 48 days after the date of this Prospectus.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice and (ii) issue a
press release or other public announcement, which shall include disclosure of
the approximate number of Private Notes deposited to date, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Without limiting the manner in which the Company
may choose to make a public announcement of any delay, extension, amendment or
termination of the Exchange Offer, the Company shall have no obligation to
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to an appropriate news agency.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "--Conditions" 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, and (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 oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment 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
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.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10 3/4% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
each January 15 and July 15, commencing January 15, 1999. Holders of Exchange
Notes will receive interest on January 15, 1999 from the Issue Date. Interest
on the Private Notes accepted for exchange will cease to accrue upon the
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely
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confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Private Notes, if such procedure is available, into the Exchange Agent's
account at DTC pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, the Private Notes, the Letter of
Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
THE TENDER BY A HOLDER THAT IS NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE
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
LETTER OF TRANSMITTAL.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined herein) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "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 made 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 which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's Automated Tender Offer
Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its reasonable discretion, which determination
will
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be final and binding. The Company reserves the absolute right to reject any
and all Private Notes not properly tendered or any Private Notes 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 Private Notes. 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 Private Notes 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 Private Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
Each holder of Private Notes who wishes to exchange such Private Notes for
Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business; (ii)
it has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes within the meaning of the Securities Act;
and (iii) it is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Company or, if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Private Notes that were
acquired as a result of market-making activities or other trading activities,
it may be deemed and "underwriter" under the Securities Act and, therefore,
will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at DTC pursuant to the book-entry transfer procedures
described below, such Private Notes will be credited to an account maintained
with DTC) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus, and any financial institution
that is a participant in DTC's systems may make book-entry delivery of Private
Notes by causing DTC to transfer such Private Notes into the Exchange Agent's
account at DTC in accordance with DTC's procedures for transfer. However,
although delivery of Private Notes may be effected through book-entry transfer
at DTC, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set
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forth below under "--Exchange Agent" on or prior to the Expiration Date or
pursuant to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, 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 substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, 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 executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three New York Stock
Exchange trading 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 Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes 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 Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). 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, whose determination shall be final and binding on all
parties. Any Private Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Private Notes so withdrawn are
validly retendered. Properly withdrawn Private Notes may be retendered by
following one of the procedures described above under "The Exchange Offer--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if: (i) the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission; (ii) any action or proceeding is instituted or
threatened in any court or by any governmental agency that might materially
impair the ability of
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the Company to proceed with the Exchange Offer or any material adverse
development has occurred in any existing action or proceeding with respect to
the Company; or (iii) any governmental approval has not been obtained, which
approval the Company shall deem necessary for the consummation of the Exchange
Offer.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Private Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Private Notes, 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.
TERMINATION OF CERTAIN RIGHTS
As provided in the Exchange and Registration Rights Agreement, upon
consummation of the Exchange Offer: (i) holders of the Private Notes who were
eligible to participate in the Exchange Offer but who did not validly tender
their Private Notes upon the terms and subject to the conditions set forth in
this Prospectus and in the Letter of Transmittal shall have no further
registration rights with respect to the Notes; (ii) holders of freely
transferable Exchange Notes shall have no further registration rights with
respect to the Notes and no rights to any payment of liquidated damages in
connection with the timing of the filing or effectiveness of a Shelf
Registration Statement; and (iii) only holders of Transfer Restricted
Securities (as defined herein) shall be entitled to such liquidated damages.
Upon such consummation, the Company shall have obligations (i) to indemnify
all holders of Notes (including any broker dealers) and certain parties
related to such holders against certain liabilities (including liabilities
under the Securities Act), (ii) to provide, upon the request of any holder of
a Transfer Restricted Security, the information required by Rules 144 and 144A
under the Securities Act (including, without limitation, the requirements of
Rule 144A(d)(4)) in order to permit resales of such Private Notes pursuant to
Rules 144 and 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of Exchange Notes by broker-dealers for a period of up to 180 days
from the date the Registration Statement is declared effective or until such
earlier date on which the Exchange Notes are freely tradable and to provide
copies of the latest version of the Prospectus to such broker-dealers upon
their request during such period and (iv) to file a Shelf Registration
Statement as required by the Exchange and Registration Rights Agreement, as
described below under "--Shelf Registration."
SHELF REGISTRATION
The Exchange and Registration Rights Agreement provides that the Company and
the Subsidiary Guarantors will be required, to the extent not prohibited by
applicable law or applicable interpretation of the staff of the Commission, to
use their reasonable best efforts to (i) file the Exchange Offer Registration
Statement with the Commission on or prior to 60 days after the Issue Date and
(ii) cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act within 135 days after the Issue Date. As soon as
practicable after the effectiveness of the Exchange Offer Registration
Statement, the Company will offer to the holders of Transfer Restricted
Securities who are not prohibited by any law or policy of the Commission from
participating in the Exchange Offer the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes. The Company will keep the Exchange
Offer open for not less than 20 business days (or longer, if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Private Notes.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the Commission, the Company or the Guarantors are not permitted
to effect the Exchange Offer as contemplated hereby, (ii) any Private Notes
validly tendered pursuant to the Exchange Offer are not exchanged for Exchange
Notes within 165
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days after the Issue Date, (iii) any Initial Purchaser so requests with
respect to Private Notes not eligible to be exchanged for Exchange Notes in
the Exchange Offer, (iv) any applicable law or interpretations do not permit
any holder of Private Notes to participate in the Exchange Offer, (v) any
holder of Private Notes that participates in the Exchange Offer does not
receive freely transferable Exchange Notes in exchange for tendered Private
Notes or (vi) the Company so elects, then the Company and the Guarantors will
use their reasonable best efforts to file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of Transfer Restricted Securities by such holders who satisfy certain
conditions relating to the provision of information in connection with the
Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Private Note until (i) the date on which
such Private Note has been exchanged for a freely transferable Exchange Note
in the Exchange Offer, (ii) the date on which such Private Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such Private
Note is distributed to the public pursuant to Rule 144 under the Securities
Act or is salable pursuant to Rule 144(k) under the Securities Act.
The Company will use its reasonable best efforts to have the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement
declared effective by the Commission as promptly as practicable after the
filing thereof. Unless the Exchange Offer would not be permitted by applicable
law or a policy of the Commission, the Company will commence the Exchange
Offer and will use its reasonable best efforts to consummate the Exchange
Offer as promptly as practicable, but in any event prior to 165 days after the
Issue Date. If applicable, the Company will use its reasonable best efforts to
keep the Shelf Registration Statement effective until the earlier of two years
after the Issue Date or such time as all of the applicable Private Notes have
been sold thereunder.
LIQUIDATED DAMAGES
If (i) the applicable Registration Statement is not filed with the
Commission on or prior to 60 days after the Issue Date; (ii) the Exchange
Offer Registration Statement or the Shelf Registration Statement, as the case
may be, is not declared effective within 135 days after the Issue Date (or in
the case of a Shelf Registration Statement required to be filed (A) in
response to a change in law or the applicable interpretations of the
Commission's staff, within 45 days after publication of the change in law or
interpretation or, (B) in the case of clauses (iii), (iv) and (v) of the
second paragraph under "--Shelf Registration" above, within 45 days of the
receipt of a request for such Shelf Registration Statement; provided, however,
in each such case under clauses (A) and (B), only to the extent such 45 day
period extends such 135 day period); (iii) if required to be consummated, the
Exchange Offer is not consummated on or prior to 165 days after the Issue
Date; or (iv) the Shelf Registration Statement is filed and declared effective
within 135 days after the Issue Date (or in the case of a Shelf Registration
Statement required to be filed (A) in response to a change in law or the
applicable interpretations of the Commission's staff, within 45 days after
publication of the change in law or interpretation or, (B) in the case of
clauses (iii), (iv) and (v) of the second paragraph under "--Shelf
Registration" above, within 45 days of the receipt of a request for such Shelf
Registration Statement; provided, however, in each such case under clauses (A)
and (B), only to the extent such 45 day period extends such 135 day period)
but shall thereafter cease to be effective (at any time that the Company is
obligated to maintain the effectiveness thereof) without being succeeded
within 45 days by an additional Registration Statement filed and declared
effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company will be obligated to pay liquidated
damages to each holder of Transfer Restricted Securities, during the period of
one or more such Registration Defaults, in an amount equal to $0.192 per week
per $1,000 principal amount of the Notes constituting Transfer Restricted
Securities held by such holder until the applicable Registration Statement is
filed, the Exchange Offer Registration Statement is declared effective and the
Exchange Offer is consummated or the Shelf Registration Statement is declared
effective or again becomes effective, as the case may be. All accrued
liquidated damages shall be paid to holders in the same manner as interest
payments on the Notes on semi-annual payment dates which correspond to
interest payment dates for the Notes. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease. Notwithstanding the
foregoing, the Company may issue a notice, based upon an opinion of counsel,
that the Shelf Registration Statement is unusable pending the announcement of
a
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material corporate transaction and may issue any notice suspending the use of
the Shelf Registration Statement required under applicable securities laws to
be issued and, to the extent that the aggregate number of days in any
consecutive 12-month period for which all such notices are issued and
effective does not exceed 45 days, then liquidated damages will not be payable
as described above as a result of such suspension.
Holders of the Private Notes will be required to make certain
representations to the Company (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
Private Notes included in the Shelf Registration Statement and benefit from
the provisions regarding liquidated damages set forth in the preceding
paragraphs. A holder who sells Private Notes pursuant to the Shelf
Registration Statement generally will 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 Securities Act in connection with such sales and will be bound by the
provisions of the Exchange and Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
FEES AND EXPENSES
The Exchange and Registration Rights Agreement provides that the Company
shall pay all expenses incident to the Exchange Offer (including the expense
of one counsel to the holders of the Notes) and will indemnify certain holders
of the Notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act.
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 telegraph, 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 acceptances 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. Such expenses include registration fees, fees and
expenses of the Exchange Agent and the Trustee, accounting and legal fees and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
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
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Except as set forth under
"--Termination of Certain Rights," failure of a holder of Private Notes to
participate in the Exchange Offer will not alter the rights of such holder
with respect to such Private Notes. Holders of the Private Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another
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exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel if the Company so requests), (v) to the Company or
(vi) pursuant to an effective registration statement and, in each case, in
accordance with any applicable securities laws of any state of the United
States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal, and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Overnight Courier (or By Hand after By Hand before 4:30 p.m.:
United States Trust Company 4:30 p.m. on the Expiration Date): United States Trust Company
of New York United States Trust Company of New York
P.O. Box 844 of New York 111 Broadway, Lower Level
Cooper Station 770 Broadway, 13th Floor New York, New York 10006
New York, New York 10276-0844 New York, New York 10003 Attn: Corporate Trust Services
Attn: Corporate Trust Services Attn: Corporate Trust Services
</TABLE>
By Facsimile for Eligible Institutions:
United States Trust Company of New York
(212) 780-0592
Attn: Corporate Trust Services
Confirm by Phone (800) 548-6565
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Securities, based on existing
interpretations by the staff of the Commission set forth in the Exxon Capital
Holdings Corporation Line of No-Action Letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Private Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery requirements of the Securities
Act; provided that the holder is acquiring Exchange Notes in the ordinary
course of its business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Company, as required by the Exchange and Registration
Rights Agreement, that such conditions have been met. The Company believes
that none of the registered holders of the Private Notes is an affiliate (as
such term is defined in Rule 405 under the Securities Act) of the Company. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in the distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Letter of
Transmittal 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 Securities Act. This Prospectus, as it may
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be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Private
Notes, where such Private Notes were acquired by such broker-dealer as a
result of market-making or other trading activities. The Company has agreed to
make this Prospectus (as it may be amended or supplemented) available to any
broker-dealer, upon request, for use in connection with any such resale, for a
period of up to 180 days after the Registration Statement is declared
effective by the Commission or until such earlier date on which all the
Exchange Notes are freely tradable. However, any broker-dealer who acquired
the Private Notes directly from the Company other than as a result of market-
making activities or ordinary trading activities may not fulfill its
prospectus delivery requirements with this Prospectus, but must comply with
the registration and prospectus delivery requirements of the Securities Act.
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PLAN OF DISTRIBUTION
Based on existing interpretation by the staff of the Commission set forth in
the Exxon Capital Holdings Corporation Line of No-Action Letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that the holder is acquiring
Exchange Notes in the ordinary course of its business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the Exchange and Registration Rights Agreement, that such
conditions have been met. The Company believes that none of the registered
holders of the Private Notes is an affiliate (as such term is defined in Rule
405 under the Securities Act) of the Company.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Letter of
Transmittal 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 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 received in exchange for Private Notes, where
such Private Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed to make
this Prospectus (as it may be amended or supplemented) available to any
broker-dealer, upon request, for use in connection with any such resale, for a
period of up to 180 days after the Registration Statement is declared
effective by the Commission or until such earlier date on which all the
Exchange Notes are freely tradable. However, any broker-dealer who acquired
the Notes directly from the Company may not fulfill its prospectus delivery
requirements with this Prospectus, but must comply with the registration and
prospectus delivery requirements of the Securities Act. In addition, until
February 14, 1999 (90 days after commencement of the Exchange Offer), all
dealers effecting transactions in the Exchange Notes, whether or not
participating in the Exchange Offer, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
The Company will not receive any proceeds from any sale of the Exchange
Notes by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own accounts pursuant to the Exchange Offer may be
sold for time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of such resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in the distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of the happening of any event which makes any
statement in the Prospectus untrue in any material respect or which requires
the making of any changes in the Prospectus in order to make the statements
therein not misleading (which notice the Company agrees to deliver promptly to
such broker-dealer), such broker-dealer will suspend use of the Prospectus
until the Company has amended or supplemented the Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such broker-dealer. If the Company shall give
114
<PAGE>
any such notice to suspend the use of the Prospectus, it shall extend the 180-
day period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including the date when
the broker-dealers shall have received copies of the supplemented or amended
Prospectus necessary to permit resales of the Exchange Notes.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Exchange and Registration Rights
Agreement (including the expenses of one counsel for the holders of the Notes
in connection therewith), other than commissions or concessions of any broker-
dealers, and will indemnify the holders (including any broker-dealers) and
certain parties related to the holders against certain liabilities, including
liabilities under the Securities Act.
115
<PAGE>
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of material U.S. federal income tax
considerations relevant to the exchange of Private Notes for Exchange Notes,
but does not purport to be a complete analysis of all potential tax effects.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes may be applied retroactively in a manner that could adversely
affect a holder of the Exchange Notes. The description does not consider the
effect of any applicable foreign, state, local or other tax laws or estate or
gift tax considerations.
THE PRECEDING DISCUSSION OF UNITED STATES FEDERAL TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT HIS
OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT OF
EXCHANGING PRIVATE NOTES FOR EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The exchange of Private Notes for Exchange Notes in the Exchange Offer
should not constitute a taxable event to holders of Private Notes for United
States federal income tax purposes because the Exchange Notes should not be
considered to differ materially in kind or extent from the Private Notes and
because the exchange will occur by operation of the terms of the Private
Notes. If, however, the exchange of the Private Notes for the Exchange Notes
were treated as an exchange for United States federal income tax purposes,
such exchange should constitute a non-taxable recapitalization for United
States federal income tax purposes. Accordingly, the Exchange Notes should
have the same issue price as the Private Notes, and a holder should have the
same adjusted tax basis and holding period in the Exchange Notes as the holder
had in the Private Notes immediately before the exchange.
116
<PAGE>
ERISA CONSIDERATIONS
Each of the Company and its affiliates and the Trustee may be considered a
"party in interest" (within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) or a "disqualified person" (within
the meaning of Section 4975 of the Code) with respect to many employee benefit
plans ("Plans") that are subject to ERISA. Any purchaser proposing to acquire
Exchange Notes with assets of any Plan should consult with its counsel. The
purchase and/or holding of Exchange Notes by a Plan that is subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of Section 4975 of the Code (including individual retirement
arrangements and other plans described in Section 4975(e)(1) of the Code) and
with respect to which the Company, the Trustee or any affiliate is a service
provider (or otherwise is a party in interest or a disqualified person) may
constitute or result in a prohibited transaction under ERISA or Section 4975
of the Code, unless such Exchange Notes are acquired pursuant to and in
accordance with an applicable exemption, such as Prohibited Transaction Class
Exemption ("PTCE") 84-14 (an exemption for certain transactions determined by
an independent qualified professional asset manager), PTCE 91-38 (an exemption
for certain transactions involving bank collective investment funds), PTCE 90-
1 (an exemption for certain transactions involving insurance company pooled
separate accounts), PTCE 95-60 (an exemption for transactions involving
certain insurance company general accounts), or PTCE 95-23 (an exemption for
certain transactions determined by an in-house asset manager).
INDEPENDENT AUDITORS
The audited financial statements of NE Restaurant Company, Inc. included in
this Prospectus for the years ended December 31, 1995, 1996 and 1997 have been
audited by Arthur Andersen LLP, independent public accountants, as stated in
their reports thereto, and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
The audited financial statements of Bertucci's, Inc. included in this
Prospectus for the years ended, December 30, 1995, December 28, 1996 and
December 27, 1997 have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their reports thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Stroock & Stroock & Lavan LLP, New York, New York.
117
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NE RESTAURANT COMPANY, INC.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June
30, 1998 (unaudited)................................................... F-3
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1997 and for the six months ended June 30,
1997 (unaudited) and June 30, 1998 (unaudited)......................... F-4
Statements of Changes in Stockholders (Deficit) Equity for each of the
three years in the period ended December 31, 1997 and for the six
months ended June 30, 1998 (unaudited)................................. F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 and for the six months ended June 30,
1997 (unaudited) and
June 30, 1998 (unaudited).............................................. F-6
Notes to Financial Statements........................................... F-7
BERTUCCI'S, INC.
Report of Independent Public Accountants................................ F-17
Consolidated Balance Sheets as of December 28, 1996, and December 27,
1997................................................................... F-18
Consolidated Statements of Operations for the years ended December 30,
1995, December 28, 1996, and December 27, 1997......................... F-19
Consolidated Statements of Shareholders' Equity for the years ended
December 30, 1995, December 28, 1996, and December 27, 1997............ F-20
Consolidated Statements of Cash Flows for the years ended December 30,
1995, December 28, 1996, and December 27, 1997......................... F-21
Notes to Consolidated Financial Statements.............................. F-22
Consolidated Condensed Balance Sheets as of July 11, 1998 (unaudited)... F-31
Consolidated Condensed Statements of Operations for the twenty-eight
weeks ended July 12, 1997 (unaudited) and July 11, 1998 (unaudited).... F-32
Consolidated Condensed Statements of Shareholders' Equity for the
twenty-eight weeks ended July 11, 1998 (unaudited)..................... F-33
Consolidated Condensed Statements of Cash Flows for the twenty-eight
weeks ended July 12, 1997 (unaudited) and July 11, 1998 (unaudited).... F-34
Notes to Consolidated Condensed Financial Statements for the twenty-
eight weeks ended July 11, 1998........................................ F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NE Restaurant Company, Inc.:
We have audited the accompanying consolidated balance sheets of NE
Restaurant Company, Inc. (the "Company") and its subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholders' (deficit) equity and cash flows for each of the three years in
the period ended December 31, 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 NE Restaurant Company,
Inc. and its subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 20, 1998
F-2
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................ $ 410,929 $ 247,675 $ --
Marketable securities............... -- -- 3,434,610
Credit card receivables............. 408,921 297,221 394,287
Inventories......................... 707,169 592,143 569,760
Prepaid expenses and other current
assets............................. 302,289 184,494 --
Pre-opening costs, net of
accumulated amortization........... 338,525 159,728 342,184
Deferred taxes, current............. 68,452 111,504 111,504
----------- ------------ ------------
Total current assets.............. 2,236,285 1,592,765 4,852,345
----------- ------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Land and land right................. 3,792,524 3,792,524 3,792,524
Buildings........................... 4,213,426 4,216,126 4,264,168
Leasehold improvements.............. 13,923,838 16,623,160 16,729,123
Furniture and equipment............. 13,712,979 15,155,666 15,696,392
----------- ------------ ------------
35,642,767 39,787,476 40,482,207
Less--Accumulated depreciation...... (7,070,313) (9,992,744) (11,623,376)
----------- ------------ ------------
28,572,454 29,794,732 28,858,831
Construction work in process........ 823,767 1,157,813 3,939,178
----------- ------------ ------------
Net property and equipment........ 29,396,221 30,952,545 32,798,009
DEFERRED TAXES, NONCURRENT............ 71,197 62,388 62,388
OTHER ASSETS:
Liquor licenses..................... 1,175,423 1,195,887 1,211,698
Restricted investments.............. 489,053 931,676 1,275,340
Other assets........................ 971,845 2,601,565 2,925,885
----------- ------------ ------------
$34,340,024 $ 37,336,826 $ 43,125,665
=========== ============ ============
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
CURRENT LIABILITIES:
Current portion of mortgage loan
payable............................ $ -- $ 632,538 $ 668,679
Accounts payable.................... 2,611,430 3,987,794 3,658,185
Accrued expenses.................... 4,544,733 5,298,000 5,531,241
Capital lease obligation--current
portion............................ 76,059 79,997 72,647
----------- ------------ ------------
Total current liabilities......... 7,232,222 9,998,329 9,930,752
LINE-OF-CREDIT LOANS.................. 14,875,000 13,500,000 18,058,000
CAPITAL LEASE OBLIGATION, NET OF
CURRENT PORTION...................... 321,891 232,490 195,722
MORTGAGE LOAN PAYABLE, NET OF CURRENT
PORTION.............................. -- 23,463,313 23,108,561
DEFERRED RENT AND OTHER LONG-TERM
LIABILITIES.......................... 2,453,665 3,249,548 3,996,578
----------- ------------ ------------
Total liabilities................. 24,882,778 50,443,680 55,289,613
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value
Authorized--4,000,000 shares
Issued--2,006,000 shares........... 20,000 20,060 20,060
Less--Treasury stock--689,344
shares, at cost.................... -- (8,017,070) (8,017,070)
Additional paid-in capital.......... 4,447,933 22,440 22,440
(Accumulated deficit) retained
earnings........................... 4,989,313 (5,132,284) (4,189,378)
----------- ------------ ------------
Total stockholders' (deficit)
equity........................... 9,457,246 (13,106,854) (12,163,948)
----------- ------------ ------------
$34,340,024 $ 37,336,826 $ 43,125,665
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............... $60,300,069 $70,094,027 $81,363,751 $38,872,372 $45,049,038
----------- ----------- ----------- ----------- -----------
COST OF SALES AND
EXPENSES:
Cost of sales......... 18,095,226 21,203,336 23,383,851 11,334,082 12,721,827
Operating expenses.... 30,101,147 34,267,183 40,931,889 19,444,087 22,677,939
General and
administrative
expenses............. 3,448,949 3,678,875 4,206,862 2,012,996 2,298,308
Deferred rent,
depreciation and
amortization......... 3,200,140 3,679,095 3,910,946 2,055,475 1,989,313
Taxes other than
income............... 2,871,328 3,207,253 3,828,798 1,889,788 2,081,765
----------- ----------- ----------- ----------- -----------
Total cost of sales
and expenses....... 57,716,790 66,035,742 76,262,346 36,736,428 41,769,152
----------- ----------- ----------- ----------- -----------
Income from
operations........... 2,583,279 4,058,285 5,101,405 2,135,944 3,279,886
INTEREST EXPENSE, NET... 462,756 1,053,432 1,917,605 606,792 1,863,939
----------- ----------- ----------- ----------- -----------
Income before income
tax expense.......... 2,120,523 3,004,853 3,183,800 1,529,152 1,415,947
INCOME TAX EXPENSE...... 699,338 1,046,407 1,083,470 543,007 473,041
----------- ----------- ----------- ----------- -----------
Net income............ $ 1,421,185 $ 1,958,446 $ 2,100,330 $ 986,145 $ 942,906
=========== =========== =========== =========== ===========
BASIC AND DILUTED
EARNINGS PER SHARE..... $ 0.71 $ 0.98 $ 1.22 $ 0.49 $ 0.72
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 2,000,000 2,000,000 1,722,918 2,000,000 1,316,656
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NE RESTAURANT COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK (ACCUMULATED TOTAL
------------------ ---------------------- ADDITIONAL DEFICIT) STOCKHOLDERS'
NUMBER OF $.01 PER NUMBER OF PAID-IN RETAINED (DEFICIT)
SHARES SHARE SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- --------- ----------- ----------- ------------ ------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... 2,000,000 $20,000 -- $ -- $ 4,447,933 $ 1,609,682 $ 6,077,615
Net income............ -- -- -- -- -- 1,421,185 1,421,185
--------- ------- -------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1995................... 2,000,000 20,000 -- -- 4,447,933 3,030,867 7,498,800
Net income............ -- -- -- -- -- 1,958,446 1,958,446
--------- ------- -------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 2,000,000 20,000 -- -- 4,447,933 4,989,313 9,457,246
Net income............ -- -- -- -- -- 2,100,330 2,100,330
Issuance of common
stock................ 6,000 60 -- -- 22,440 -- 22,500
Cash dividend and
return of capital.... -- -- -- -- (4,447,933) (12,221,927) (16,669,860)
Purchase of treasury
stock................ -- -- (716,429) (8,332,069) -- -- (8,332,069)
Sale of treasury
stock................ -- -- 27,085 314,999 -- -- 314,999
--------- ------- -------- ----------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1997................... 2,006,000 20,060 (689,344) (8,017,070) 22,440 (5,132,284) (13,106,854)
Net income............ -- -- -- -- -- 942,906 942,906
--------- ------- -------- ----------- ----------- ------------ ------------
BALANCE, JUNE 30, 1998.. 2,006,000 $20,060 (689,344) $(8,017,070) $ 22,440 $ (4,189,378) $(12,163,948)
========= ======= ======== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NE RESTAURANT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 1,421,185 $ 1,958,446 $ 2,100,330 $ 983,970 $ 942,906
------------ ----------- ----------- ----------- ----------
Adjustments to
reconcile net income to
net cash provided by
(used in) operating
activities--
Depreciation and
amortization......... 2,871,187 3,298,345 3,557,686 2,055,475 1,989,313
Deferred taxes....... 40,053 (271,789) (34,243) 1,891,159 --
Deferred rent........ 328,953 380,750 353,260 173,061 403,366
Changes in operating
assets and
liabilities--
Refundable income
taxes.............. (111,960) 133,091 -- (1,489,276) --
Inventories........ (229,607) (53,740) 115,026 78,432 22,383
Prepaid expenses,
credit card
receivables and
other current
assets............. (111,347) (219,213) 229,495 (502,402) 87,428
Accrued expenses... 718,503 931,398 753,267 (2,534,557) 233,241
Accounts payable... 677,148 (412,554) 1,376,364 1,690,138 (329,609)
------------ ----------- ----------- ----------- ----------
Total
adjustments....... 4,182,930 3,786,288 6,350,855 1,362,030 2,406,122
------------ ----------- ----------- ----------- ----------
Net cash provided
by (used in)
operating
activities........ 5,604,115 5,744,734 8,451,185 2,346,000 3,349,028
------------ ----------- ----------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
and equipment.......... (10,359,463) (7,946,034) (4,478,755) (1,308,471) (3,476,095)
Development and
franchise fees paid.... (400,000) (160,000) (320,000) (280,000) (60,000)
Acquisition of liquor
licenses............... (133,296) (61,937) (20,464) (5,186) (15,811)
Decrease (increase) in
other assets and
liabilities............ -- (115,125) 65,595 324,180 (443,662)
Additions to pre-
opening costs.......... (864,990) (730,021) (392,371) (190,079) (361,796)
Acquisition of
marketable securities.. -- -- -- -- (3,434,610)
------------ ----------- ----------- ----------- ----------
Net cash used in
investing
activities........ (11,757,749) (9,013,117) (5,145,995) (1,459,556) (7,791,974)
------------ ----------- ----------- ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings of mortgage
loans.................. -- -- 24,250,000 -- --
Repayment of mortgage
loans.................. -- -- (154,149) -- (318,611)
Financing costs........ -- -- (1,439,402) -- --
Cash dividend paid..... -- -- (12,221,927) -- --
Return of capital...... -- -- (4,447,933) -- --
Issuance of common
shares................. -- -- 22,500 -- --
Repurchase of treasury
stock.................. -- -- (8,260,827) -- --
Sale of treasury
shares................. -- -- 243,757 -- --
Principal payments
under capital lease
obligations............ -- (23,223) (85,463) (42,373) (44,118)
Net (payments)
borrowings under line
of credit.............. 6,290,000 3,305,000 (1,375,000) (1,255,000) 4,558,000
------------ ----------- ----------- ----------- ----------
Net cash (used in)
provided by
financing
activities........ 6,290,000 3,281,777 (3,468,444) (1,297,373) 4,195,271
------------ ----------- ----------- ----------- ----------
NET (DECREASE) INCREASE
IN CASH................. 136,366 13,394 (163,254) (410,929) (247,675)
CASH, BEGINNING OF
PERIOD.................. 261,169 397,535 410,929 410,929 247,675
------------ ----------- ----------- ----------- ----------
CASH, END OF PERIOD..... $ 397,535 $ 410,929 $ 247,675 $ -- $ --
============ =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for interest,
net of amounts
capitalized............ $ 393,682 $ 1,067,325 $ 1,946,811 $ 700,156 $ 621,787
============ =========== =========== =========== ==========
Cash paid during the
period for income
taxes.................. $ 756,314 $ 1,151,186 $ 1,217,812 $ 205,000 $ 457,000
============ =========== =========== =========== ==========
</TABLE>
During 1996, a capital lease obligation of approximately $400,000 was incurred
when the Company entered into a lease for new equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
NE Restaurant Company, Inc. (a Delaware corporation) (the "Company") was
incorporated on January 1, 1994. On January 1, 1994, the partners of NE
Restaurant Holdings Group (the "Group") transferred 100% of their respective
partnership interests in exchange for an aggregate of 2,000,000 shares of the
common stock of the Company. All significant leases, franchise agreements and
other contracts were assigned from the Group to the Company.
The Company was formed to acquire and operate restaurants situated in
Massachusetts, New Hampshire, Maine, Vermont, Rhode Island, Connecticut and
portions of New York. The restaurants, which operate under the name of Chili's
and On The Border, are operated under franchise agreements with Brinker
International (a Texas corporation) ("Brinker"). The restaurants offer a full
bar and dining service featuring a limited menu of broadly appealing food
items prepared daily according to special Chili's and On The Border recipes.
On August 6, 1997, the Company formed a wholly-owned limited partnership,
NERC Limited Partnership ("NERCLP"), to obtain the mortgage loans discussed
below. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain reclassifications have been made to prior year financial statements
to make them consistent with the current year's presentation.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Statements
The accompanying consolidated financial statements as of June 30, 1998 and
for the six months ended June 30, 1997 and 1998 are unaudited, but in the
opinion of management, include all adjustments consisting of normal recurring
adjustments necessary for a fair presentation of results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. Results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998.
Inventories
Inventories are carried at the lower of first-in, first-out cost or market
value, and consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Food..................................................... $287,226 $358,508
Liquor................................................... 304,917 348,661
-------- --------
Total inventory........................................ $592,143 $707,169
======== ========
</TABLE>
F-7
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method to charge the
cost of properties to expense over the estimated useful lives of the assets.
The lives used are as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- --------------------------
<S> <C>
Buildings 31-40 years
Leasehold improvements Term of the lease (ranging
between 10-20 years)
Furniture and equipment 5-7 years
</TABLE>
Included in furniture and equipment in the accompanying consolidated balance
sheets is smallwares. The Company capitalizes a normal complement of
smallwares for each location prior to the store's opening date and expenses
all smallwares purchased after each store's opening date.
Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company's
long-lived assets consist primarily of real estate and leasehold improvements
related to its restaurant operations. SFAS No. 121 requires management to
consider whether long-lived assets have been impaired by comparing gross
future cash flows expected to be generated from utilizing these assets to
their carrying amounts. If cash flows are not sufficient to recover the
carrying amount of the assets, an impairment has occurred and the assets
should be written down to their fair market value. Significant estimates and
assumptions regarding future sales, cost trends, productivity and market
maturity are required to be made by management in order to test for impairment
under this standard. Based on current facts, estimates and assumptions,
management believes that no assets are impaired under this standard. There is
no assurance that management's estimates and assumptions will prove correct.
Land Right
In 1994, the Company executed an agreement to prepay the rent associated
with a 99-year lease for land in Southington, Connecticut. Prepaid rental
payments totaled $735,000 and are reflected as a land right in the
accompanying consolidated balance sheets. The lease is renewable for an
additional 99 years for a payment of $1.
Capitalized Interest
The Company capitalizes interest costs during the construction period on
capital expenditures funded by debt. Total interest costs incurred and amounts
capitalized are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Total interest expense.................... $1,961,428 $1,151,490 $793,953
Less--Amount capitalized.................. 43,823 98,058 331,197
---------- ---------- --------
Interest expense, net of amounts
capitalized........................... $1,917,605 $1,053,432 $462,756
========== ========== ========
</TABLE>
Liquor Licenses
Liquor licenses purchased are accounted for at the lower of cost or market.
Annual renewal fees are expensed as incurred.
F-8
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other Assets
Other assets are comprised partially of development and franchise fees (see
Note 9). Development fees are amortized over seven years, and franchise fees
are amortized over the life of the franchise agreements (20 years).
Accumulated amortization of these assets amounts to approximately $303,000 and
$204,000 at December 31, 1997 and 1996, respectively.
Underwriting, legal and other direct costs incurred in connection with the
issuance of the mortgages discussed below have been capitalized and are being
amortized over the life of the related mortgages.
Other assets also include investments restricted for the payment of certain
officers' deferred compensation. These investments are stated at market value
at December 31, 1997 and 1996. Since these securities are from time to time
bought and sold at the discretion of the officers they are classified as
trading securities.
Advertising
Advertising costs, included in selling, general and administrative expenses,
are expensed when incurred. Advertising expense was approximately $2,310,887,
$1,579,114 and $1,234,897 for the years ended December 31, 1997, 1996 and
1995, respectively.
Pre-opening Costs
Capitalized pre-opening costs include the direct and incremental costs
typically associated with the opening of a new restaurant. These costs
primarily consist of costs incurred to develop new restaurant management
teams; travel and lodging for both the training and opening unit management
teams; and the food, beverage and supplies costs incurred to perform role-play
testing of all equipment, concept systems and recipes. Subsequent to the
restaurant opening, costs are amortized over a 12-month period. Accumulated
amortization of these costs at December 31, 1997 and 1996 amounted to
approximately $188,000 and $336,000, respectively.
Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued occupancy costs............................. $ 687,622 $ 578,299
Accrued payroll and related benefits................ 2,305,483 1,839,860
Accrued interest.................................... 71,199 100,325
Accrued advertising................................. 421,855 455,110
Accrued royalty..................................... 362,947 294,783
Unredeemed gift certificates........................ 772,164 511,418
Accrued sales tax................................... 378,568 309,049
Accrued construction costs.......................... -- 225,083
Other accrued liabilities........................... 298,162 230,806
---------- ----------
$5,298,000 $4,544,733
========== ==========
</TABLE>
Marketable Securities
Marketable Securities consists of 430,000 shares of common stock of
Bertucci's, Inc. No provision has been made to adjust the carrying amount of
these Securities to market value as the cost of the Securities will be
reflected at the stated value in the purchase accounting in respect of the
acquisition of Bertucci's, Inc. by the Company. The market value of these
Securities at June 30, 1998 was $4,407,500.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable,
line of credit loans and long-term debt. The carrying amounts of the Company's
cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to
F-9
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the short-term nature of these instruments. The fair value of marketable
securities as of June 30, 1998 was $4,407,500. The line of credit loans bear
interest at a variable market rate and therefore, the carrying amount
approximates fair value. The fair value of the Company's mortgage loans based
on quoted market prices for similar issues approximates the current carrying
value.
New Accounting Pronouncements
In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, although early application is encouraged.
Initial application of SOP 98-5 should be as of the beginning of the fiscal
year in which it is first adopted and should be reported as a cumulative
effect of a change in accounting principle.
The Company currently intends to adopt SOP 98-5 on January 1, 1999. Upon
adoption, the Company estimates it will incur a cumulative effect of a change
in accounting principle that will range from $300,000 to $1 million. This
estimate primarily includes unamortized preopening costs which were previously
amortized over the 12-month period subsequent to a restaurant opening.
(3) INCOME TAXES
The Company accounts for income taxes under the liability method. The
components of the provision for income taxes for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Current--
Federal................................. $ 704,254 $1,016,485 $398,491
State................................... 304,834 301,711 260,794
---------- ---------- --------
1,009,088 1,318,196 659,285
---------- ---------- --------
Deferred--
Federal................................. 56,835 (278,597) 30,576
State................................... 17,547 6,808 9,477
---------- ---------- --------
74,382 (271,789) 40,053
---------- ---------- --------
Total provision for income taxes...... $1,083,470 $1,046,407 $699,338
========== ========== ========
</TABLE>
A reconciliation of the amount computed by applying the statutory federal
income tax rate of 34% to income before taxes for the years ended December 31,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Income tax expense computed at federal
statutory rate.......................... $1,082,492 $1,020,821 $720,978
State taxes, net of federal benefit...... 212,771 204,326 186,289
FICA tax credit.......................... (216,253) (180,756) (211,902)
Targeted jobs tax credit................. (1,897) -- --
Other.................................... 6,357 2,016 3,973
---------- ---------- --------
Income tax provision................... $1,083,470 $1,046,407 $699,338
========== ========== ========
</TABLE>
F-10
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Deferred rent................................. $ 933,407 $ 791,150
Deferred and accrued compensation............. 425,952 385,594
Other......................................... 13,882 43,954
----------- -----------
1,373,241 1,220,698
----------- -----------
Deferred tax liabilities--
Accelerated tax depreciation.................. (984,220) (825,941)
Pre-opening costs............................. (64,322) (136,324)
Liquor licenses............................... (150,807) (118,784)
----------- -----------
(1,199,349) (1,081,049)
----------- -----------
Total net deferred tax assets............... $ 173,892 $ 139,649
=========== ===========
Current portion................................. $ 111,504 $ 68,452
=========== ===========
Noncurrent portion.............................. $ 62,388 $ 71,197
=========== ===========
</TABLE>
No valuation allowance has been provided as the Company estimates that all
of the tax assets will be realized.
(4) LINE-OF-CREDIT LOANS
During 1997, the Company amended and restated its existing bank line of
credit with BankBoston, N.A. (the "Bank"). The new bank line-of-credit
agreement (the "Agreement"), secured by cash flows of the Company, is in
effect until November 30, 2001, under which the Company may borrow up to
$20,000,000 in base rate loans or Eurodollar loans, as defined, less
outstanding letters of credit and lease obligations payable to the Bank. On
November 30, 2001, the Company must pay the Bank the entire unpaid principal
of and interest on the line of credit. The Company pays a commitment fee of
.250% on the unused portion of the line of credit. Borrowings bear interest at
the bank's base rate, as defined in the Agreement, plus an applicable margin
based on current funded debt leverage ratio, for base rate loans, and the
Eurodollar rate, as defined in the Agreement, plus an applicable margin based
on current funded debt leverage ratio, for a Eurodollar loan. The weighted-
average interest rate of the line of credit outstanding during 1997 was 7.7%.
Loans can be converted into a loan of another type in the amount of $500,000
and $100,000 increments thereafter, as the Company deems beneficial.
The loan agreement contains various restrictive covenants that, among other
things, require minimum earnings before interest, taxes, depreciation and
amortization, restrict total borrowings and the amount of borrowings used for
capital expenditures, and require certain levels of net worth, as defined. The
Company was in compliance with these covenants at December 31, 1997.
F-11
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) CAPITAL LEASE OBLIGATION
During 1996, the Company entered into a capital lease with the Bank for
restaurant equipment. At the expiration of the lease in 2001, the Company may
purchase the equipment at the then fair market value.
The minimum lease payments due under the lease as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
LEASE
PAYMENTS TO
BE MADE
-----------
<S> <C>
Year Ending December 31,
1998................................ $ 92,398
1999................................ 92,398
2000................................ 92,398
2001................................ 69,301
--------
346,495
Less--Interest...................... 34,008
--------
$312,487
========
</TABLE>
(6) MORTGAGE LOANS
On August 6, 1997, NERCLP entered into a loan agreement (the "Loan
Agreement") with FFCA Acquisition Corporation ("FFCA") in the aggregate amount
of $22,400,000 (the "Initial FFCA Loans"), evidenced by promissory notes
maturing on various dates from September 2002 through September 2017, with
interest at 9.67% per annum. Proceeds from the FFCA Loans were used to pay the
Company for real estate assets sold and transferred to NERCLP. The Company
then used the sale proceeds to make certain payments to its shareholders (see
Note 12 for further discussion). NERCLP mortgaged 17 restaurant properties to
FFCA as collateral for the Initial FFCA Loans. On or about August 28, 1997,
NERCLP obtained additional financing from FFCA in the aggregate amount of
$1,850,000 (the "Additional FFCA Loans", which together with the Initial FFCA
Loans are hereinafter referred to as the "FFCA Loans"), evidenced by
promissory notes maturing on various dates from September 2007 through
September 2017, with interest at 9.701% per annum. The Additional FFCA Loans
were collateralized by mortgages on three restaurant properties. The net book
value of all properties covered by mortgages granted to FFCA on the dates of
borrowing was $25,897,000. For the year ended December 31, 1997, interest
related to the FFCA Loans was $708,000.
The Loan Agreement with FFCA contains a restrictive covenant that requires
the maintenance of a Fixed Charge Coverage Ratio of 1.25:1, as determined on
each December 31, with respect to each of the FFCA mortgaged restaurant
properties. "Fixed Charge Coverage Ratio" is defined in the Loan Agreement to
mean the ratio of (a) the sum of net income, depreciation and amortization,
interest expense and operating lease expense, less a corporate overhead
allocation equal to 5% of gross sales, for an FFCA mortgaged restaurant
property to (b) the sum of FFCA debt service payments, equipment lease and
equipment loan payments and ground lease rental payments for such restaurant
property. If the Fixed Charge Coverage Ratio is not achieved, NERCLP is
required to pay FFCA an amount sufficient to comply with the Fixed Charge
Coverage Ratio. NERCLP was in compliance with this covenant as of December 31,
1997.
Existing loan documents between FFCA and NERCLP are cross-defaulted and
cross-collateralized with all other loan agreements, existing or forthcoming,
between FFCA and NERCLP or the Company, subject to certain limited exceptions.
F-12
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The loan payments due under the mortgage loan as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
LOAN
PRINCIPAL
PAYMENTS TO
BE MADE
-----------
<S> <C>
Year Ending December 31,
1998................................ $ 632,538
1999................................ 701,666
2000................................ 772,627
2001................................ 850,754
2002................................ 904,904
Thereafter.......................... 20,233,362
-----------
$24,095,851
===========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into numerous lease arrangements, primarily for
restaurant land, equipment and buildings, which are noncancelable and expire
on various dates through 2017.
Some operating leases contain rent escalation clauses whereby the rent
payments increase over the term of the lease. Rent expense includes base rent
amounts, percentage rent payable periodically, as defined in each lease, and
rent expense accrued to recognize lease escalation provisions on a straight-
line basis over the lease term. Rent expense recognized in restaurant expenses
in the accompanying consolidated statements of income was approximately
$3,955,000, $3,324,000 and $3,286,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The excess of accrued rent over amounts paid is
classified as deferred rent in the accompanying consolidated balance sheets.
The approximate minimum rental payments due under all noncancelable
operating leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
RENTAL
PAYMENTS TO
BE MADE
-----------
<S> <C>
Year Ending December 31,
1998................................ $ 3,842,238
1999................................ 3,890,099
2000................................ 3,774,633
2001................................ 3,821,976
2002................................ 3,915,520
Thereafter.......................... 32,096,919
-----------
$51,341,385
===========
</TABLE>
Certain leases require the payment of an additional amount, calculated as a
percentage of annual sales, as defined in the lease agreement, which exceeds
annual minimum rentals. The percentage rent factors generally range from 3% to
6% of sales.
F-13
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contingencies
The Company is subject to various legal proceedings that arise in the
ordinary course of business. Based on discussion with the Company's legal
counsel, management believes that the amount of ultimate liability with
respect to these actions will not be material to the financial position or
results of operations of the Company.
(8) RELATED PARTIES
Under the terms of the corporation agreements, the stockholders have
consented to the payment of an ongoing financial consulting fee to Jacobson
Partners, Limited Partnership ("Jacobson"), a stockholder of the corporation.
The amounts paid to Jacobson for financial consulting fees were $160,000 for
each of the three years ended December 31, 1997, and are included in general
and administrative expenses in the accompanying consolidated statements of
income. In addition, Jacobson was paid $400,000 for consulting fees associated
with obtaining the above mentioned mortgages.
The Company has a nonqualified deferred compensation plan (the "Plan") for
certain officers and management personnel, which allows them to defer
receiving a portion of their compensation. This compensation is not taxable to
the employee or deductible to the Company for tax purposes until the
compensation is paid. An officer of the Company, who is also a participant in
the Plan, is the trustee of the Plan.
(9) FRANCHISE AND DEVELOPMENT AGREEMENTS
All of the Company's restaurants operate under franchise agreements with
Brinker. The agreements provide, among other things, that the Company pay an
initial franchise fee of $40,000 per restaurant and a royalty fee ranging from
2% to 4% of sales. The initial franchise fee is payable in two installments of
$20,000. The first installment is due on or before the construction
commencement date. The second installment is due at least 10 days prior to the
date on which the restaurant opens for business. The initial franchise fees
are capitalized and amortized over the term of the franchise agreement.
Royalty fees averaged 3.8% of sales in 1997, 3.9% in 1996 and 3.8% in 1995. In
addition, the Company is required to pay an advertising fee to Brinker of .5%
of sales and spend an additional 2% of sales on local advertising. In return,
Brinker is obligated to provide certain support for restaurant operations,
siting and promotion. Royalty and advertising fees are expensed as incurred.
In 1991, the Company entered into a development agreement with Brinker
whereby the Company was granted the exclusive right to develop additional
Chili's franchises within a certain geographic territory. In 1995, the Company
paid $150,000 to renew the agreement, which now expires in 2000. The Company
is required to develop a certain number of Chili's restaurants during the term
of the agreement in order to maintain its exclusive development rights. The
agreement is renewable at the Company's option for payment of additional sums
at the expiration date.
Also during 1995, the Company paid $50,000 to Brinker in exchange for both
the right to open its first On The Border franchise and the option to enter
into an On The Border development agreement in the future. In 1997, the
Company elected the option to enter into the On The Border development
agreement, and the above $50,000 fee was applied against the cost of the
development agreement.
(10) 401(K) PROFIT SHARING PLAN
The Company maintains a defined contribution plan (the "401(k) Plan")
whereby substantially all employees of the Company may defer a portion of
their current salary, on a pretax basis, to the 401(k) Plan. The Company may
also make a discretionary profit sharing contribution to the 401(k) Plan that
is allocated, based on a formula as defined by the 401(k) Plan, to the 401(k)
Plan participants. Discretionary contributions made by the Company for the
years ended December 31, 1997, 1996 and 1995 were approximately $67,000,
$43,000 and $59,000, respectively. Two officers of the Company are also the
401(k) Plan's trustees.
F-14
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTION PLAN
On September 15, 1997, the Board of Directors of the Company established the
1997 Equity Incentive Plan, which included a nonqualified stock option plan
(the "Option Plan"), for certain key employees and directors. The Option Plan
will be administered by the Board of Directors of the Company and may be
modified or amended by the Board of Directors in any respect.
Between September 15, 1997 and December 4, 1997, 331,123 options were
granted. The options are exercisable as follows:
<TABLE>
<S> <C>
Two years beyond options grant date............... 25%
<CAPTION>
Three years beyond option grant date.............. 50%
Four years beyond option grant date............... 75%
Five years beyond option grant date............... 100%
</TABLE>
The Company accounts for the Option Plan under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized since the
options are granted at fair market value.
Had compensation cost for the Option Plan been determined consistent with
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net income
As reported.......................... $2,100,330
Pro Forma............................ 2,041,288
EPS--
As reported.......................... $ 1.22
Pro Forma............................ 1.18
</TABLE>
A summary of the Option Plan at December 31, 1997, and changes during the
year then ended, is presented in the table and narrative below.
<TABLE>
<CAPTION>
1997
-----------------
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Outstanding at beginning of year.... -- $ --
Granted............................. 331,123 11.63
Exercised........................... -- --
Forfeited........................... -- --
Expired............................. -- --
------- ------
Outstanding at end of year.......... 331,123 $11.63
======= ======
Exercisable at end of year.......... -- --
Weighted average fair value of each
option granted..................... -- $ 3.06
</TABLE>
The 331,123 options outstanding at December 31, 1997 have a remaining
weighted average contractual life of approximately five years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 1997: weighted average risk-free interest rates of 6.1 percent;
weighted average expected lives of five years; and expected volatility of 0%.
F-15
<PAGE>
NE RESTAURANT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12) STOCKHOLDERS' EQUITY
In August 1997, the Company made a dividend and return of capital payout to
shareholders of $8.31 per share from additional paid-in capital, with the
excess payout being charged to retained earnings. In addition, the Company
repurchased 716,429 shares of common stock at $11.63 per share. The Company's
repurchase of shares of common stock was recorded as treasury stock, at cost,
and resulted in a reduction of Stockholders' (Deficit) Equity.
(13) SUBSEQUENT EVENTS (UNAUDITED)
On July 21, 1998, the Company completed its acquisition of Bertucci's, Inc.
pursuant to the terms of an Agreement and Plan of Merger dated as of May 13,
1998. The Company purchased all the outstanding shares of Bertucci's, Inc.
common stock at a price of $10.50 per share. The total purchase price is
approximately $98 million.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bertucci's, Inc.:
We have audited the accompanying consolidated balance sheets of Bertucci's,
Inc. (a Massachusetts corporation) and subsidiaries as of December 28, 1996
and December 27, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 27, 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 Bertucci's, Inc. and
subsidiaries as of December 28, 1996 and December 27, 1997 and the results of
its operations and its cash flows for each of the three years in the period
ended December 27, 1997, in accordance with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 12, 1998
F-17
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
DECEMBER 28, DECEMBER 27,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 4,265,596 $ 5,755,306
Inventories........................................ 1,048,361 1,221,698
Accounts receivable................................ 179,280 241,547
Note receivable.................................... 76,455 4,057
Other receivables.................................. -- 831,756
Prepaid expenses and other current assets.......... 474,641 678,799
Deferred pre-opening costs......................... 510,082 433,706
Prepaid taxes...................................... 1,026,685 1,103,661
------------ ------------
Total current assets............................. 7,581,100 10,270,530
------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Land............................................... 2,902,012 2,902,012
Buildings and improvements......................... 10,359,565 10,474,081
Leasehold improvements............................. 72,416,258 76,044,989
Machinery and equipment............................ 35,673,484 39,971,654
Construction in progress........................... 250,238 222,555
------------ ------------
121,601,557 129,615,291
Less--Accumulated depreciation..................... 29,704,655 38,089,819
------------ ------------
Net property and equipment....................... 91,896,902 91,525,472
PREPAID TAXES........................................ 1,274,686 1,865,003
OTHER ASSETS......................................... 1,775,741 1,855,188
------------ ------------
$102,528,429 $105,516,193
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--current............................. $ 25,000 $ 25,000
Accounts payable................................... 4,179,347 5,982,594
Accrued expenses................................... 1,077,565 2,384,181
Accrued payroll and employee benefits.............. 3,297,703 3,738,477
Accrued taxes...................................... 1,858,788 1,880,364
------------ ------------
Total current liabilities........................ 10,438,403 14,010,616
DEFERRED RENT........................................ 6,064,085 6,609,921
NOTES PAYABLE........................................ 50,000 25,000
LONG-TERM DEBT....................................... 18,437,500 13,500,000
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value--Authorized--
200,000 shares, none issued....................... -- --
Common stock, $.005 par value--Authorized--
15,000,000 shares Issued and outstanding--
8,790,428 shares at December 28, 1996 and
8,896,016 shares at December 27, 1997............. 43,952 44,480
Additional paid-in capital......................... 44,841,296 45,165,440
Retained earnings.................................. 22,653,193 26,160,736
------------ ------------
Total shareholders' equity....................... 67,538,441 71,370,656
------------ ------------
$102,528,429 $105,516,193
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales.............................. $120,259,850 $128,044,405 $136,719,498
------------ ------------ ------------
Cost and Expenses:
Cost of sales........................ 31,059,985 32,484,063 34,100,501
Operating expenses................... 60,672,341 65,986,007 71,652,188
General and administrative expenses.. 8,239,250 7,719,582 8,828,601
Depreciation and amortization........ 9,083,381 8,781,155 8,625,607
Taxes other than income.............. 6,267,958 6,632,779 6,990,344
Restaurant closing expense........... 5,336,000 -- --
------------ ------------ ------------
Total costs and expenses........... 120,658,915 121,603,586 130,197,241
------------ ------------ ------------
Operating income (loss).............. (399,065) 6,440,819 6,522,257
Interest Expense, net.................. 1,253,241 1,297,700 1,037,273
Interest Income........................ 21,464 14,809 32,059
------------ ------------ ------------
Income (loss) before income tax
expense (benefit)................... (1,630,842) 5,157,928 5,517,043
Income Tax Expense (Benefit)........... (744,893) 1,933,101 2,009,500
------------ ------------ ------------
Net income (loss).................... $ (885,949) $ 3,224,827 $ 3,507,543
============ ============ ============
Weighted Average Shares Outstanding
Basic................................ 8,728,442 8,790,428 8,807,940
============ ============ ============
Diluted.............................. 8,728,442 8,853,745 8,899,944
============ ============ ============
Earnings (Loss) per Common Share
Basic................................ $ (0.10) $ 0.37 $ 0.40
============ ============ ============
Diluted.............................. $ (0.10) $ 0.36 $ 0.39
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
BERTUCCI'S INC. AND ACQUISITION SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TOTAL
NUMBER OF $0.005 PAID-IN RETAINED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
--------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 8,710,943 $43,555 $44,488,415 $20,314,315 $64,846,285
Exercise of options..... 3,000 15 10,538 -- 10,553
Issuance of stock....... 14,499 72 120,979 -- 121,051
Net loss................ -- -- -- (885,949) (885,949)
--------- ------- ----------- ----------- -----------
Balance, December 30,
1995................... 8,728,442 43,642 44,619,932 19,428,366 64,091,940
Exercise of options..... 37,500 187 98,892 -- 99,079
Issuance of stock....... 24,486 123 122,472 -- 122,595
Net income.............. -- -- -- 3,224,827 3,224,827
--------- ------- ----------- ----------- -----------
Balance, December 28,
1996................... 8,790,428 43,952 44,841,296 22,653,193 67,538,441
Exercise of options..... 76,750 384 193,993 -- 194,377
Issuance of stock....... 28,838 144 130,151 -- 130,295
Net income.............. -- -- -- 3,507,543 3,507,543
--------- ------- ----------- ----------- -----------
Balance, December 27,
1997................... 8,896,016 $44,480 $45,165,440 $26,160,736 $71,370,656
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------
DECEMBER 30, DECEMBER 28, DECEMBER 27,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................... $ (885,949) $ 3,224,827 $ 3,507,543
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Depreciation and amortization..... 9,277,795 9,073,727 8,950,291
Loss on restaurant closing........ 5,336,000 -- --
Increase in inventories........... (172,197) (97,796) (173,337)
Decrease (increase) in prepaid
expenses and other current
assets, accounts receivable,
notes receivable, and other
assets........................... 125,622 (2,798) (989,252)
Increase (decrease) in accounts
payable.......................... (1,427,603) (63,976) 1,803,247
Increase in accrued expenses and
deferred rent.................... 2,134,647 229,624 2,293,226
Increase (decrease) in accrued,
deferred and prepaid taxes....... (3,649,742) 1,701,681 (645,717)
------------ ------------ -----------
Net cash provided by operating
activities....................... 10,738,573 14,065,289 14,746,001
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pre-opening costs...... (1,332,814) (918,553) (488,751)
Additions to property and
equipment.......................... (14,308,842) (9,461,931) (8,013,734)
Purchases of liquor licenses........ (7,000) -- (115,978)
------------ ------------ -----------
Net cash used in investing
activities....................... (15,648,656) (10,380,484) (8,618,463)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............ 121,051 122,595 130,295
Exercise of stock options........... 10,553 99,079 194,377
Proceeds from debt.................. 5,437,500 -- --
Paydown of debt..................... -- (1,000,000) (4,937,500)
Decrease in notes payable........... (25,000) (25,000) (25,000)
------------ ------------ -----------
Net cash provided by (used in)
financing activities............. 5,544,104 (803,326) (4,637,828)
------------ ------------ -----------
Net increase in cash and cash
equivalents.......................... 634,021 2,881,479 1,489,710
Cash and cash equivalents, beginning
of year.............................. 750,096 1,384,117 4,265,596
------------ ------------ -----------
Cash and cash equivalents, end of
year................................. $ 1,384,117 $ 4,265,596 $ 5,755,306
Supplemental disclosures of cash flow
information:
Cash paid during the year for--
Interest, net of amount
capitalized...................... $ 1,154,376 $ 1,357,786 $ 1,140,994
Income taxes...................... $ 2,329,311 $ 340,104 $ 2,943,547
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(1) ORGANIZATION AND OPERATION
Bertucci's, Inc. is a holding company for four wholly owned subsidiaries,
Bertucci's Restaurant Corp. (Bertucci's), Bertucci's Securities Corp.,
Berestco, Inc. and Sal and Vinnie's Sicilian Steakhouse, Inc. (collectively,
the Company). Bertucci's, Inc. provides managerial, financial and other
services to Bertucci's and assists in its daily operations. Bertucci's
Securities Corp. holds all of the Company's short-term investments. Berestco,
Inc. is a real estate holding company for the corporate headquarters in
Wakefield, Massachusetts.
Bertucci's operates 84 restaurants that feature original recipe gourmet
pizza prepared in brick ovens and other Italian-style foods. The restaurants
are located in Connecticut, Georgia, Illinois, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and
Washington, DC. In addition, the Company also operates Sal & Vinnie's Sicilian
Steakhouse, which was opened in the first quarter of 1997, in Norwood, MA.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Bertucci's, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are highly liquid securities with an original maturity of
not more than 90 days.
Inventories
Inventories consist of supplies and food and are carried at the lower of
first-in, first-out cost or market value.
Fair Value of Financial Instruments
Bertucci's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt. The
carrying amounts of Bertucci's cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to the short-term nature of
these instruments. Long-term debt bears interest at a variable market rate;
therefore, the carrying amount approximates fair value.
Property and equipment
Property and equipment are recorded at cost. Bertucci's provides for
depreciation using the straight-line method for financial reporting purposes
over the expected useful lives of the assets. The useful lives are five to ten
years for machinery and equipment and three years for equipment under capital
lease. Buildings and leasehold improvements are amortized over the remaining
period of the lease or 20 years, whichever is shorter.
F-22
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
Capitalized Interest
Interest was capitalized on major capital expenditures on funds borrowed
during the period of construction. Total interest costs incurred and amounts
capitalized were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------
DECEMBER DECEMBER DECEMBER
30, 1995 28, 1996 27, 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total interest costs..................... $1,389,142 $1,365,545 $1,098,301
Interest capitalized..................... (135,901) (67,845) (61,028)
---------- ---------- ----------
Interest expense, net.................... $1,253,241 $1,297,700 $1,037,273
========== ========== ==========
</TABLE>
Stock-Based Compensation
Effective December 31, 1995, Bertucci's adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Bertucci's has elected to continue to account for stock options
at intrinsic value with disclosure of the effects of fair value accounting on
net income and earnings per share on a pro forma basis.
Long-Lived Assets
In 1996, Bertucci's adopted SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Bertucci's
long-lived assets consist primarily of real estate and leasehold improvements
related to its restaurant operations. SFAS No. 121 requires management to
consider whether long-lived assets have been impaired by comparing gross
future cash flows expected to be generated from utilizing these assets to
their carrying amounts. If cash flows are not sufficient to recover the
carrying amount of the assets, an impairment has occurred and the assets
should be written down to their fair market value. Significant estimates and
assumptions regarding future sales, cost trends, productivity and market
maturity are required to be made by management in order to test for impairment
under this standard. Based on current facts, estimates and assumptions,
management believes that no assets are impaired under this standard. There is
no assurance that management's estimates and assumptions will prove correct.
Fiscal Year
Bertucci's fiscal year is the 52- or 53-week period ended on the Saturday
closest to December 31. References to 1995, 1996 and 1997, are for the 52-week
periods ended December 30, 1995, December 28, 1996 and December 27, 1997,
respectively.
Deferred Pre-opening Costs
Costs related to the opening of new restaurants, such as pre-opening payroll
and various training expenses, are deferred until the restaurants open and are
amortized over the subsequent 12 months.
Income Taxes
Bertucci's follows the LIABILITY method of accounting for income taxes as
set forth in SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No.109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-23
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
Earnings Per Common Share
During 1997, Bertucci's adopted the provisions of SFAS No. 128, EARNINGS PER
SHARE, which is effective for financial statements for periods ending after
December 15, 1997. SFAS No. 128 requires replacement of primary earnings per
share (EPS) with basic EPS, which is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding. Diluted EPS, which gives effect to all dilutive potential common
shares outstanding, is also required.
Reclassifications
Certain prior-year amounts have been reclassified to confirm with the
current year's presentation.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued two new statements in
June 1997. SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards
for reporting and display of comprehensive income and its components. SFAS No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
establishes standards for the way that public business enterprises report
information and operating segments in annual financial statements and requires
reporting of selected information in interim financial reports. Both
statements are effective for fiscal years beginning after December 15, 1997.
(3) STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Under the 1987 Incentive Stock Option Plan, Bertucci's may grant stock
options for the purchase of up to 775,000 shares of common stock at an
exercise price equal to the fair market value of the common stock on the date
of the grant. The plan provides for options to be exercisable in four annual
installments. All options must be exercised within 10 years of the date of
grant. At December 27, 1997, 478,050 of these options were outstanding.
In 1989, the Board of Directors of Bertucci's approved the issuance of
150,000 shares of time-accelerated restricted stock options to members of
senior management. These options are fully vested and exercisable through
November, 1999. Options are exercisable at a price equal to the fair market
value of the common stock on the date of the grant. At December 27, 1997,
43,000 of these options were outstanding.
On March 25, 1992, the Board of Directors approved an Employee Stock
Purchase Plan permitting eligible employees to purchase common stock semi
annually on June 30 and December 31, through payroll deductions of up to 8% of
each participating employee's compensation, at 85% of the average trading
price during the six-month period, but not less than specified minimums. At
December 26, 1992, 100,000 shares were reserved for the plan. At December 27,
1997, 14,000 of these options were outstanding.
In July 1993, the Board of Directors of Bertucci's established the 1993
Stock Option Plan for Non-Employee Directors. Under this plan, Bertucci's may
grant stock options for the purchase of up to 75,000 shares of common stock at
an exercise price equal to the fair market value of the common stock on the
date of the grant. Each director is entitled to receive options to purchase
3,000 shares of Common Stock of Bertucci's per year. At December 27, 1997,
32,000 of these options were outstanding.
In 1997, Bertucci's amended the 1993 Stock Option Plan for Non-Employee
Directors pursuant to which the number of shares reserved for issuance will be
increased from 75,000 shares of Common Stock to 155,000 shares of Common
Stock. Also, in 1997, Bertucci's amended and restated the 1992 Stock Purchase
Plan pursuant to which the number of shares reserved for issuance will be
increased from 100,000 shares of Common Stock to 200,000 shares of Common
Stock and the term of the plan will be extended indefinitely.
F-24
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
In 1997, Bertucci's adopted the 1997 Stock Option Plan that provides for the
grant of incentive options and non-qualified options for the purchase of an
aggregate of 250,000 shares of Bertucci's Common Stock by the employees of
Bertucci's. The exercise price for options granted under the 1997 Plan shall
be the mean between the high and low sales prices of Bertucci's common stock
on the NASDAQ exchange on the date of the grant for the immediately preceding
business day. Options granted under the 1997 Plan shall not be exercisable
before the first anniversary of the date of grant. At December 27, 1997,
14,000 of these options were outstanding. No option shall be exercisable after
ten years from the date on which it was granted.
The following table summarizes Bertucci's option transactions for the three
years ended December 27, 1997:
<TABLE>
<CAPTION>
EXERCISABLE
-----------------
SHARES WEIGHTED- WEIGHTED-
SUBJECT TO AVERAGE AVERAGE
OPTIONS PRICE SHARES PRICE
---------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994.... 517,400 $ 7.79 294,150 $5.76
Granted........................... 237,000 4.88
Exercised......................... (3,000) (1.17)
Forfeited......................... (197,000) (12.70)
-------- -------
Outstanding at December 30, 1995.... 554,400 4.97 356,475 $5.48
Granted........................... 24,000 5.66
Exercised......................... (37,500) (1.33)
Forfeited......................... (23,500) (4.88)
-------- -------
Outstanding at December 28, 1996.... 517,400 5.27 378,200 $5.43
Granted........................... 195,500 5.49
Exercised......................... (76,750) (2.07)
Forfeited......................... (69,100) (9.26)
-------- -------
Outstanding at December 27, 1997.... 567,050 $ 5.30 294,350 $5.30
======== =======
</TABLE>
The following table summarizes information as of December 27, 1997,
concerning outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.00-2.00.............. 43,000 1.30 $ 1.33 43,000 $ 1.33
$4.00-6.00.............. 394,550 8.60 $ 5.16 121,850 $ 4.87
$6.00-8.00.............. 127,000 3.90 $ 6.79 127,000 $ 6.79
$15.00-19.00............ 2,500 4.90 $18.50 2,500 $18.50
------- -------
567,050 294,350 $ 5.30
======= =======
</TABLE>
Bertucci's accounts for stock option and stock purchase plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost
has been recognized since options are granted with exercise prices equal to
the fair market value of the common stock at the date of grant. Had
compensation cost for these plans
F-25
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
been determined consistent with SFAS No. 123, Bertucci's pro forma net income
(loss) and earnings (loss) per common share for the years ended December 30,
1995, December 28, 1996 and December 27, 1997 would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported............................. $ (885,949) $3,224,827 $3,507,543
Pro forma............................... $(1,096,693) $2,953,734 $3,442,776
Earnings (loss) per share
As Reported
Basic................................. $ (.10) $ 0.37 $ 0.40
Diluted............................... $ (.10) $ 0.36 $ 0.39
Pro forma
Basic................................. $ (.13) $ 0.34 $ 0.39
Diluted............................... $ (.13) $ 0.33 $ 0.39
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may be greater as additional options are granted. The weighted-average
fair value of the options granted in 1996 and 1997 were $4.53 and $5.49
respectively. The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Expected volatility................................ 68% 68% 53%
Risk-free interest rate............................ 6.35% 6.36% 6.36%
Expected life...................................... 9 years 10 years 10 years
Expected dividend yield............................ 0% 0% 0%
</TABLE>
(4) LINE OF CREDIT
Bertucci's has a bank line of credit, refinanced in November 1997, in effect
until November 30, 2002, under which it may borrow up to $22.5 million.
Bertucci's pays a commitment fee to the bank and interest is calculated using
LIBOR plus an applicable LIBOR margin. The applicable LIBOR margin and the
applicable commitment fee rate for any fiscal quarter shall be determined as
of the last day of the previous fiscal quarter based on the ratio of
consolidated total funded debt to consolidated EBITDA. Based on the
determination of the aforementioned ratio, Bertucci's will pay between .50%
and 1.25% as a LIBOR Margin and between .125% and .250% as an applicable
commitment fee rate. There are no compensating balance arrangements or legal
restrictions as to the withdrawal of these funds. At December 28, 1996 and
December 27, 1997 the amounts outstanding under this line of credit were $18.4
million and $13.5 million, respectively, and the interest rates were 6.75% and
6.79%.
F-26
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
(5) INCOME TAXES
The components of the provision (benefit) for income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------
DECEMBER DECEMBER DECEMBER
30, 1995 28, 1996 27, 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................... $ 1,635,906 $ 507,107 $1,888,928
State................................. 731,922 325,210 793,380
----------- ---------- ----------
2,367,828 832,317 2,682,308
----------- ---------- ----------
Deferred:
Federal............................... (2,346,138) 829,655 (507,092)
State................................. (766,583) 271,129 (165,716)
----------- ---------- ----------
(3,112,721) 1,100,784 (672,808)
----------- ---------- ----------
Total provision (benefit) for income
taxes.............................. $ (744,893) $1,933,101 $2,009,500
=========== ========== ==========
</TABLE>
A reconciliation of the amount computed by applying the statutory federal
income tax rate of 34% to income before income taxes is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------
DECEMBER DECEMBER DECEMBER
30, 1995 28, 1996 27, 1997
--------- ---------- ----------
<S> <C> <C> <C>
Income tax expense (benefit) computed
at federal statutory rate............. $(554,486) $1,753,695 $1,875,795
State taxes, net of federal benefit.... (22,876) 393,584 364,125
FICA tax credit........................ (333,792) (353,760) (297,000)
Other.................................. 166,261 139,582 66,580
--------- ---------- ----------
Income tax provision (benefit)....... $(744,893) $1,933,101 $2,009,500
========= ========== ==========
</TABLE>
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 28, 1996 and December 27, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------
DECEMBER DECEMBER
28, 1996 27, 1997
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Deferred rent....................................... $2,462,019 $2,683,628
Accrued workers' compensation....................... 705,331 705,331
Accrued vacation.................................... 202,793 230,481
Accrued restaurant closing costs.................... 18,270 --
Other............................................... 311,307 346,686
---------- ----------
$3,699,720 $3,966,126
========== ==========
Deferred Tax Liabilities:
Deferred state taxes................................ $ -- $ 56,349
Pre-opening costs................................... 206,280 178,837
Property and equipment.............................. 1,082,806 632,871
Other............................................... 109,263 138,565
---------- ----------
$1,398,349 $ 950,273
========== ==========
</TABLE>
F-27
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
(6) COMMITMENTS AND CONTINGENCIES
Operating Leases
Bertucci's has entered into numerous operating lease arrangements, primarily
for its restaurants, with initial terms ranging from 2 to 40 years. Many of
these leases contain renewal options ranging from 5 to 20 years.
The minimum rental commitments under all noncancelable operating leases as
of December 27, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR ------------
<S> <C>
1998.......................................................... $ 10,889,170
1999.......................................................... 10,602,282
2000.......................................................... 10,179,670
2001.......................................................... 10,278,866
2002.......................................................... 9,679,007
Thereafter.................................................... 56,372,316
------------
Total....................................................... $108,001,311
============
</TABLE>
Deferred rent liability, including current portion, was approximately
$6,161,000 and $6,732,000 at December 28, 1996 and December 27, 1997,
respectively. Restaurant rental expense included in the accompanying
consolidated statements of operations consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
DECEMBER DECEMBER
DECEMBER 30, 28, 27,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Base rent expense....................... $8,704,028 $ 9,685,370 $10,337,978
Percentage rent expense................. 200,930 209,026 226,120
Straight-line expense................... 1,032,645 489,512 545,835
---------- ----------- -----------
Total rent expense.................... $9,937,603 $10,383,908 $11,109,933
========== =========== ===========
</TABLE>
Government Regulation
Bertucci's is subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic
beverages to such person. While Bertucci's carries liquor liability coverage
as part of its existing comprehensive general liability insurance, a judgment
against Bertucci's under a dram-shop statute in excess of Bertucci's liability
coverage could have a material adverse effect on Bertucci's.
Litigation
From time to time, lawsuits are filed against Bertucci's in the ordinary
course of business. After consulting with legal counsel, management does not
believe that the result of any pending litigation would have a material
adverse effect on Bertucci's financial statements or its business.
(7) TRANSACTIONS WITH RELATED PARTIES
During 1992, Bertucci's purchased property for a restaurant site in
Westport, Connecticut, for approximately $1.2 million from an affiliate of a
partnership whose general partner is a director of Bertucci's. The director
was not involved in the purchase negotiation of that particular property and
management believes that the price paid represented fair market value.
F-28
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
Bertucci's has entered into an agreement with its president pursuant to
which, upon the death of the president, his estate will have the right, but
not the obligation, to cause Bertucci's to purchase shares of Bertucci's
common stock held by the estate at their fair market value. The purchase price
will be payable out of and to the extent of, the proceeds of a $3.0 million
life insurance policy on the president's life held by Bertucci's. If the
estate chooses to sell such shares to a third party within a specified time
after the president's death, Bertucci's shall have the right of first refusal
with respect to the purchase of such shares.
During 1992, the president of Bertucci's made a personal loan amounting to
$837,175, to the Orange, Connecticut landlord, with whom Bertucci's has an
operating lease. The repayment terms require Bertucci's to make the rental
payments directly to the president through the year 2002. Bertucci's paid
approximately $150,000 per year in 1995, 1996 and 1997, related to this
agreement.
In March 1997, Bertucci's leased a building and real property for the first
Sal and Vinnie's Sicilian Steakhouse location from Bertucci's president and
purchased all furniture, fixtures and equipment currently at the facility for
their appraised value of $650,000. In conjunction with this transaction,
Bertucci's loaned to its president approximately $637,500, which was repaid
during 1997.
(8) BENEFIT PLANS
In 1990, an incentive plan was established in which general, district and
restaurant managers participate. Awards under the plan are tied to achievement
of specific operating targets. Expenses under the plan were approximately
$597,000, $647,000 and $909,000 in 1995, 1996 and 1997, respectively.
In March of 1997, Bertucci's implemented a 401(k) plan for management and
office employees. Currently there are 183 participants in the plan and
Bertucci's made matching contributions of approximately $62,000 to the plan in
1997.
(9) OTHER RECEIVABLES
The Company has recorded as "Other receivables" amounts due from landlords
relating to construction allowances for locations opened during 1997. The
Company is awaiting reimbursement of these amounts.
(10) EPS CALCULATIONS
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
BASIC 1995 1996 1997
----- ---------- ---------- ----------
<S> <C> <C> <C>
Net income................................ $ (885,949) $3,224,827 $3,507,543
Weighted average shares................... 8,728,442 8,790,428 8,807,940
---------- ---------- ----------
Basic earnings per share.................. $ (0.10) $ 0.37 $ 0.40
========== ========== ==========
<CAPTION>
DILUTED 1995 1996 1997
------- ---------- ---------- ----------
<S> <C> <C> <C>
Net income................................ $ (885,949) $3,224,827 $3,507,543
Weighted average shares................... 8,728,442 8,790,428 8,807,940
Effect of stock options................... -- 63,317 92,004
---------- ---------- ----------
Weighted average shares as adjusted....... 8,728,442 8,853,745 8,899,944
========== ========== ==========
Basic earnings per share.................. $ (0.10) $ 0.36 $ 0.39
========== ========== ==========
</TABLE>
F-29
<PAGE>
BERTUCCI'S, INC. AND ACQUISITION SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 27, 1997
Options to purchase 129,500 shares of common stock at prices ranging from
$6.69 to $18.50 per share were outstanding during 1997, but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. These options,
which expire June 2001 through May 2006 were still outstanding at the end of
1997.
(11) MERGER AGREEMENT
Subsequent to year-end, the Company had entered into a definitive merger
agreement with a group led by Bertucci's president. Pursuant to the
transaction, the group was to acquire all of the outstanding shares of
Bertucci's common stock (other than stock currently owned by the president)
for a purchase price of approximately $54 million, or $8.00 per share in cash.
The closing of the merger was subject to approval by the stockholders of
Bertucci's and other necessary regulatory authorities and customary closing
conditions. See Note 13.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
16 WEEKS TWELVE WEEKS ENDED
ENDED -------------------------------------------
APRIL 22, JULY 15, OCTOBER 7, DECEMBER 30,
------------ ------------ ------------ --------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
----
Net sales............... $ 35,446 $ 28,521 $ 28,211 $ 28,082
Operating income
(loss)................. 1,734 1,105 1,300 (4,538)
Net income (loss)....... 902 525 610 (2,923)
Earnings (loss) per
share.................. $ 0.10 $ 0.06 $ 0.07 $ (0.33)
<CAPTION>
16 WEEKS TWELVE WEEKS ENDED
ENDED -------------------------------------------
APRIL 20, JULY 13, OCTOBER 5, DECEMBER 28,
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
1996
----
Net sales............... $ 38,259 $ 30,235 $ 29,549 $ 30,001
Operating income........ 1,290 1,414 1,543 2,193
Net income.............. 549 685 792 1,199
Earnings per share...... $ 0.06 $ 0.08 $ 0.09 $ 0.14
<CAPTION>
16 WEEKS TWELVE WEEKS ENDED
ENDED -------------------------------------------
APRIL 19, JULY 12, OCTOBER 4, DECEMBER 27,
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
1997
----
Net sales............... $ 40,337 $ 31,643 $ 32,663 $ 32,076
Operating income........ 1,942 1,453 1,723 1,403
Net income.............. 1,003 764 973 768
Earnings per share...... $ 0.11 $ 0.09 $ 0.11 $ 0.09
</TABLE>
(13) SUBSEQUENT EVENTS (UNAUDITED)
The transaction referred to in Note 11 has been superseded by the
acquisition of Bertucci's by NERC Acquisition Corp. ("Acquisition Sub"), a
subsidiary of NE Restaurant Company, Inc. ("NERCO"), pursuant to the Agreement
and Plan of Merger dated as of May 13, 1998, among NERCO, Acquisition Sub and
Bertucci's. See Note 11.
F-30
<PAGE>
BERTUCCI'S INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 11, DECEMBER 27,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 3,670 $ 5,755
Inventories............................................. 1,205 1,222
Accounts receivable..................................... 208 242
Note receivables........................................ 6 4
Other receivables....................................... 600 832
Prepaid expenses........................................ 784 678
Deferred preopening costs............................... 420 434
Prepaid taxes........................................... 1,104 1,104
-------- --------
Total current assets.................................. 7,997 10,271
-------- --------
PROPERTY AND EQUIPMENT, at cost
Land.................................................... 2,902 2,902
Buildings............................................... 10,481 10,474
Leasehold improvements.................................. 78,178 76,045
Machinery and equipment................................. 41,998 39,972
Construction in progress................................ 821 222
-------- --------
134,380 129,615
Less--Accumulated depreciation.......................... 42,812 38,090
-------- --------
Net property and equipment............................ 91,568 91,525
PREPAID TAXES............................................. 1,865 1,865
OTHER ASSETS.............................................. 4,629 1,855
-------- --------
$106,059 $105,516
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable-current...................................... $ 25 $ 25
Accounts payable........................................... 4,550 5,983
Accrued expenses........................................... 1,441 2,384
Accrued payroll and employee benefits...................... 3,608 3,738
Accrued taxes.............................................. 2,778 1,880
-------- --------
Total current liabilities................................ 12,402 14,010
DEFERRED RENT................................................ 6,870 6,610
NOTES PAYABLE................................................ -- 25
LONG-TERM DEBT............................................... 13,500 13,500
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized - 200,000 shares, none issued................... -- --
Common stock, $.005 par value -
Authorized - 15,000,000 shares
Issued and outstanding -
8,896,016 shares at December 27, 1997 and
8,912,821 shares at July 11, 1998.......................... 45 45
Additional paid-in capital................................. 45,259 45,165
Retained earnings.......................................... 27,983 26,161
-------- --------
Total shareholders' equity............................... 73,287 71,371
-------- --------
$106,059 $105,516
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-31
<PAGE>
BERTUCCI'S, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
---------------------------------
JULY 11, JULY 12,
1998 1997
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NET SALES.................................... $ 78,481 $ 71,980
---------------- ----------------
COST AND EXPENSES:
Cost of Sales.............................. 19,488 17,946
Operating expenses......................... 41,327 37,776
General and administrative expenses........ 5,315 4,332
Depreciation and amortization.............. 4,958 4,707
Taxes other than income.................... 4,103 3,824
---------------- ----------------
Total costs and expenses................. 75,191 68,585
---------------- ----------------
Operating income......................... 3,290 3,395
INTEREST EXPENSE, net........................ 482 621
INTEREST INCOME.............................. 8 8
---------------- ----------------
Income before income tax expense........... 2,816 2,782
INCOME TAX EXPENSE........................... 994 1,015
---------------- ----------------
Net income................................. $ 1,822 $ 1,767
================ ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING AND DILUTIVE POTENTIAL
COMMON SHARES.............................. 9,004,585 8,899,082
================ ================
EARNINGS PER SHARE
BASIC AND DILUTED INCOME
PER COMMON SHARES.......................... $ 0.20 $ 0.20
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-32
<PAGE>
BERTUCCI'S, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES PAR CAPITAL EARNINGS EQUITY
------- ---- ---------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, December 27, 1997...... $ 8,896 $ 45 $45,165 $26,161 $71,371
Issuance of stock............. 9 -- 49 -- 49
Exercise of options........... 8 -- 45 -- 45
Net Income.................... -- -- -- 1,822 1,822
------- ---- ------- ------- -------
BALANCE, July 11, 1998.......... $ 8,913 $ 45 $45,259 $27,983 $73,287
======= ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-33
<PAGE>
BERTUCCI'S, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-EIGHT
WEEKS ENDED
------------------
<S> <C> <C>
JULY 11, JULY 12,
1998 1997
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 1,822 $ 1,767
Adjustments to reconcile net income to net cash provided
by operating activities.................................
Depreciation and amortization.......................... 4,722 4,890
(Increase) decrease in inventories..................... 16 (36)
Increase (decrease) in prepaid expenses, accounts
receivable, notes receivable and other assets......... 177 (337)
Decrease in accounts payable............................. (1,433) 6
Increase (decrease) in accrued expenses and deferred
rent.................................................... (813) 1,614
Increase (decrease) in accrued, deferred and prepaid
taxes................................................... 898 (142)
-------- --------
Net cash provided by operations........................ 5,389 7,762
-------- --------
CASH FLOWS USED FROM INVESTING ACTIVITIES:
Merger costs............................................. (2,336) --
Additions (reductions) to preopening costs............... 13 (104)
Additions to property and equipment...................... (4,764) (2,954)
Purchases of liquor licenses............................. (456) (110)
-------- --------
Net cash used by investing activities.................. (7,543) (3,168)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................. 94 106
Paydown of debt.......................................... -- (3,938)
Decrease in notes payable................................ (25) (25)
-------- --------
Net cash provided by (used by) financing activities.... 69 (3,857)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (2,085) 737
CASH AND CASH EQUIVALENTS, beginning of period............. 5,755 4,266
-------- --------
CASH AND CASH EQUIVALENTS, end of period................... $ 3,670 $ 5,003
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Interest, net of amount capitalized.................... $ 550 $ 656
======== ========
Income taxes........................................... $ 318 $ 1,360
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-34
<PAGE>
BERTUCCI'S, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 18, 1998
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated condensed
financial statements contain all normal recurring adjustments necessary for a
fair presentation. The results of operations for the twenty-eight-week period
ended July 11, 1998 are not necessarily indicative of the results to be
expected for the full year.
The significant accounting policies followed by the Company are set forth in
the notes to Consolidated Financial Statements in the Company's 1997 Form 10-K
filed with the Securities and Exchange Commission. These financial statements
should be read in conjunction with the financial statements included in the
1997 Form 10-K.
2. EARNINGS PER SHARE
During 1997, the Company adapted the provisions of SFAS No. 128, Earnings
Per Share, which was effective for financial statements for periods ending
after December 15, 1997. SFAS No. 128 requires replacement of primary earnings
per share (EPS) with basic EPS, which is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding. Diluted EPS, which gives effect to all dilutive potential common
shares outstanding, is also required. For the twenty-eight-week periods ended
July 11, 1998, and July 12, 1997, basis and diluted earnings are the same
amount at $0.21 and $0.20, respectively.
3. SUBSEQUENT EVENTS (UNAUDITED)
On July 21, 1998, NE Restaurant Company, Inc. completed its acquisition of
the Company pursuant to the terms of an Agreement and Plan of Merger dated as
of May 13, 1998. NE Restaurant Company, Inc. (through its wholly-owned
subsidiary, NERC Acquisition Corp.) purchased all the outstanding shares of
the Company's common stock at a price of $10.50 per share. The total purchase
price is approximately $98 million.
F-35
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THE OFFER CONTAINED HEREIN OTHER THAN THOSE CON-
TAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OF-
FER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
UNTIL FEBRUARY 14, 1999 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PAR-
TICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................................................... iv
Certain Definitions....................................................... v
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 22
Use of Proceeds........................................................... 30
Capitalization............................................................ 31
Unaudited Pro Forma Financial Data........................................ 32
Selected Financial Data of the Company.................................... 40
Selected Financial Data of Bertucci's..................................... 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company................................................ 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Bertucci's................................................. 52
Business.................................................................. 57
Management................................................................ 70
Security Ownership of Certain Beneficial Owners and Management............ 75
Certain Transactions of the Company....................................... 77
Description of Other Indebtedness......................................... 78
Description of Exchange Notes............................................. 81
The Exchange Offer........................................................ 104
Plan of Distribution...................................................... 114
U.S. Federal Income Tax Considerations.................................... 116
Erisa Considerations...................................................... 117
Independent Auditors...................................................... 117
Legal Matters............................................................. 117
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
NE RESTAURANT COMPANY, INC.
10 3/4% SENIOR NOTES DUE 2008
---------------
PROSPECTUS
---------------
November 12, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
