Securities and Exchange Commission
Washington, D.C. 20549
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Schedule 13E-3
Rule 13e-3 Transaction Statement
(Pursuant To Section 13(e) of the Securities and Exchange Act of 1934)
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BACK BAY RESTAURANT GROUP, INC.
(Name of the Issuer)
BACK BAY RESTAURANT GROUP, INC.
CHARLES F. SARKIS
SRC HOLDINGS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class of Securities)
0563V103
(CUSIP Number of Class of Securities)
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FRANCIS J. FEENEY, JR., ESQ. ALFRED O. ROSE, ESQ.
HUTCHINS, WHEELER & DITTMAR ROPES & GRAY
A PROFESSIONAL CORPORATION ONE INTERNATIONAL PLACE
101 FEDERAL STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02110 (617) 951-7000
(617) 951-6600
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
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This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c)
under the Securities Exchange of 1934.
b. / / The filing of a registration statement under the Securities Act
of 1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: /X/
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CALCULATION OF FILING FEE
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Transaction Valuation(1) Amount of Filing Fee(2)
$40,973,811 $8,194.76
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(1) For purposes of calculation of the filing fee only. Assumes the purchase,
at a purchase price of not less than $10.25 per share of Common Stock, of
3,997,445 shares of Common Stock of the Issuer, representing all of such
Common Stock outstanding (assuming the exercise of options to acquire
536,636 shares of Common Stock).
(2) The amount of the filing fee equals 1/50 of 1% of the transaction value.
/X/ Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
AMOUNT PREVIOUSLY PAID: $8,194.76.
FORM OR REGISTRATION NO.: Preliminary Proxy Statement on Schedule 14A.
FILING PARTY: Back Bay Restaurant Group, Inc.
DATE FILED: December 16, 1998.
INTRODUCTION
This Rule 13e-3 Transaction Statement on Schedule 13E-3 is being filed
with the Securities and Exchange Commission (the "Commission") on behalf of Back
Bay Restaurant Group, Inc., a Delaware corporation (the "Issuer" or the
"Company"); SRC Holdings, Inc., a Delaware corporation (the "Acquiror"); and
Charles F. Sarkis, with respect to a proposed merger (the "Merger") pursuant to
which the Acquiror will be merged with and into Issuer with the Issuer as the
surviving corporation in the Merger. Charles F. Sarkis (i) beneficially owns
241,566 shares of the Issuer's common stock; (ii) owns shares representing
approximately 88.63% of the voting power and approximately 66.85% of the
outstanding shares of The Westwood Group, Inc., which in turn owns 673,451
shares, or 19.5%, of the Company's Commmon Stock; (iii) is the Sole Director and
President of the Acquiror; and (iv) is the Chairman of the Board, the President
and the Chief Executive Officer of the Issuer.
The following cross-reference sheet is being supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location of the information
required by Schedule 13E-3 in the Schedule 14A Proxy Statement of the Issuer
attached hereto as Exhibit (d)(1) and filed with the Commission concurrently
herewith. The information set forth in the Proxy Statement, including all
annexes, schedules, and exhibits thereto, is hereby expressly incorporated by
reference as set forth in the following cross-reference sheet and in the
responses to each item of this Schedule 13E-3, and such responses are qualified
in their entirety by the provisions of the Proxy Statement. The cross-reference
sheet indicates the caption in the Proxy Statement under which the responses
are incorporated herein by reference. If any such item is inapplicable or the
answer thereto is in the negative and is omitted from the Proxy Statement, it
is so indicated in the cross-reference sheet.
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CROSS-REFERENCE SHEET
Pursuant to General Instruction F to Schedule 13E-3
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ALL REFERENCES ARE TO PORTIONS OF THE SCHEDULE
14A PROXY STATEMENT (UNLESS OTHERWISE INDICATED)
SCHEDULE 13E-E ITEM AND ALL DOCUMENTS ARE INCORPORATED HEREIN BY
NUMBER AND CAPTION REFERENCE
============================== =====================================================================
1. Issuer and Class of Security Subject to the Transaction
(a) ................... Front Cover Page; "SUMMARY."
(b) ................... Front Cover Page; "SUMMARY"; "INTRODUCTION--Voting at
the Special Meeting."
(c) ................... "MARKET PRICES AND DIVIDENDS ON THE SHARES."
(d) ................... "MARKET PRICES AND DIVIDENDS ON THE SHARES."
(e) ................... Not applicable.
(f) ................... "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
2. Identity and Background
(a)-(d), (g) .......... "SUMMARY"; "SPECIAL FACTORS--Interests of Certain Persons
in the Merger; Conflicts of Interest"; Company's Annual Report on
Form 10-K and 10-K/A for the fiscal year ended December 28, 1997.
(e)-(f) ............... None.
3. Past Contacts, Transactions or Negotiations
(a)-(b) ............... "SUMMARY"; "SPECIAL FACTORS--Background of the
Merger"; "--Interests of Certain Persons in the Merger; Conflicts of
Interest"; Company's Annual Report on Form 10-K and 10-K/A for
the fiscal year ended December 28, 1997.
4. Terms of the Transaction
(a) ................... "SUMMARY"; "SPECIAL FACTORS--Interests of Certain
Persons in the Merger; Conflicts of Interest"; "--Certain Effects of
the Merger"; "--Purpose of the Merger"; "THE MERGER--
Background of the Merger"; "--Merger Consideration"; "--
Effective Time"; "--Conversion of SRC Holdings Stock"; "--
Conversion of Back Bay Common Stock; Procedures for Exchange
of Certificates"; "--Conduct of the Business Pending the Merger";
"--Conditions to the Merger"; "THE MERGER AGREEMENT."
(b) ................... "SPECIAL FACTORS--Background of the Merger"; "--Interests
of Certain Persons in the Merger; Conflicts of Interest."
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5. Plans or Proposals of the Issuer or Affiliate
(a)-(b) .......... None.
(c) .............. "SPECIAL FACTORS--Certain Effects of the Merger."
(d) .............. None.
(e) .............. "SUMMARY"; "SPECIAL FACTORS--Certain Effects of the
Merger"; "THE MERGER--Effect on Stock Options and Employee
Benefit Matters"; "--Nasdaq Delisting"; "MARKET PRICES AND
DIVIDENDS ON THE SHARES."
(f)-(g) .......... "SUMMARY"; "THE MERGER--Certain Effects of the Merger";
"--Effect on Stock Options and Employee Benefit Matters"; "--
Nasdaq Delisting."
6. Source and Amounts of Funds or Other Considerations
(a),(c) .......... "THE MERGER--Merger Financing."
(b) .............. "THE MERGER--Fees and Expenses"; "THE MERGER
AGREEMENT--Termination of the Merger Agreement;
Termination Fees."
(d) .............. Not applicable.
7. Purpose(s), Alternatives, Reasons and Effects
(a) .............. "SUMMARY"; "SPECIAL FACTORS--Fairness of the Merger;
Recommendation of the Board of Directors"; "--Purpose of the
Merger."
(b) .............. "SPECIAL FACTORS--Background of the Merger"; "--Fairness
of the Merger; Recommendation of the Board of Directors."
(c) .............. "SPECIAL FACTORS--Background of the Merger"; "--Fairness
of the Merger; Recommendation of the Board of Directors";
"--Purpose of the Merger."
(d) .............. "SUMMARY"; "SPECIAL FACTORS--Interest of Certain Persons
in the Merger; Conflicts of Interest"; "--Certain Effects of the
Merger"; "Plans for the Company After the Merger"; "THE
MERGER--Federal Income Tax Considerations"; "--Anticipated
Accounting Treatment"; "--Effect on Stock Options and Employee
Benefit Matters"; "--Nasdaq Delisting."
8. Fairness of the Transaction
(a) .............. "SUMMARY"; "INTRODUCTION--Matters to Be Considered at
the Special Meeting"; "SPECIAL FACTORS--Fairness of the
Merger; Recommendation of the Board of Directors."
(b) .............. "SPECIAL FACTORS--Background of the Merger"; "--Fairness
of the Merger; Recommendation of the Board of Directors";
"REPORT FROM BACK BAY'S FINANCIAL ADVISOR;
FAIRNESS OF THE TRANSACTION."
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(c) ............... "SUMMARY"; "INTRODUCTION--Matters to Be Considered at
the Special Meeting"; "--Voting at the Special Meeting"; "THE
MERGER--Conditions to the Merger"; "THE MERGER
AGREEMENT--Conditions to the Merger"; "--Termination of the
Merger Agreement; Termination Fees."
(d) ............... "SPECIAL FACTORS--Background of the Merger"; "--Fairness
of the Merger; Recommendation of the Board of Directors";
"REPORT FROM BACK BAY'S FINANCIAL ADVISOR;
FAIRNESS OF THE TRANSACTION."
(e) ............... "INTRODUCTION--Matters to Be Considered at the Special
Meeting"; "--Voting at the Special Meeting"; "SPECIAL
FACTORS--Background of the Merger."
(f) ............... Not applicable.
9. Reports, Opinions, Appraisals and Certain Negotiations
(a), (c) .......... "SPECIAL FACTORS--Fairness of the Merger; Recommendation
of the Board of Directors"; "REPORT FROM BACK BAY'S
FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION";
Opinion of Schroder & Co., Inc. (Exhibit (b)(1); Report of Schroder
& Co., Inc. (Exhibit (b)(2)); Report of Tucker Anthony, Incorporated
(Exhibit (b)(3)).
(b) ............... "REPORT FROM BACK BAY'S FINANCIAL ADVISOR;
FAIRNESS OF THE TRANSACTION"; Opinion of Schroder &
Co., Inc. (Exhibit (b)(1); Report of Schroder & Co., Inc. (Exhibit
(b)(2)); Report of Tucker Anthony, Incorporated (Exhibit (b)(3)).
10. Interest in Securities of the Issuer
(a) ............... "SUMMARY"; "SPECIAL FACTORS--Interests of Certain
Persons in the Merger; Conflicts of Interest"; "--Purpose of the
Merger"; "--Certain Effects of the Merger"; "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
(b) ............... "CERTAIN TRANSACTIONS IN THE COMMON STOCK."
11. Contracts, Arrangements or Understandings with Respect to the Issuer's Securities
"SPECIAL FACTORS--Interests of Certain Persons in the Merger;
Conflicts of Interest."
12. Present Intention and Recommendation of Certain Persons with Regard to the Transaction
(a)-(b) ........... "INTRODUCTION--Voting at the Special Meeting"; "--Proxies";
"SPECIAL FACTORS--Background of the Merger"; "--Interests
of Certain Persons in the Merger"; "--Fairness of the Merger;
Recommendation of the Board of Directors"; "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
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13. Other Provisions of the Transaction
(a) .............. "SUMMARY--Rights of Dissenting Holders"; "APPRAISAL
RIGHTS."
(b) .............. Not applicable.
(c) .............. Not applicable.
14. Financial Information
(a)-(b) .......... "SELECTED CONSOLIDATED FINANCIAL DATA OF THE
COMPANY"; Company's Annual Report on Form 10-K and 10-K/A
for the fiscal year ended December 28, 1997; Company's Quarterly
Reports on Form 10-Q for the quarters ended March 29, 1998, June
28, 1998 and September 27, 1998.
15. Persons and Assets Employed, Retained or Utilized
(a) .............. "SPECIAL FACTORS--Interests of Certain Persons in the Merger;
Conflicts of Interest"; "--Purpose of the Merger"; "THE MERGER
AGREEMENT--Termination of the Merger Agreement;
Termination Fees."
(b) .............. "SPECIAL FACTORS--Background of the Merger"; "THE
MERGER--Fees and Expenses"; "REPORT FROM BACK BAY'S
FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION."
16. Additional Information
The Proxy Statement is incorporated herein by reference in its entirety.
17. Materials to be Filed as Exhibits
(a)(1) ........... Commitment Letter from Finova Capital Corporation, dated
November 24, 1998 (filed herewith).
(a)(2) ........... Commitment Letter from DDJ Capital Management, LLC, dated
December 3, 1998 (filed herewith).
(b)(1) ........... Opinion of Schroder & Co., Inc., dated December 2, 1998 (incorporated
by reference to Annex II to the Proxy Statement which is filed
herewith as Exhibit (d)(1)).
(b)(2) ........... Report of Schroder & Co., Inc. presented to the Special Committee of the
Board of Directors and the Board of Directors of Back Bay Restaurant
Group, Inc. on December 2, 1998 (filed herewith).
(b)(3) ........... Report of Tucker Anthony, Incorporated presented to the Special
Committee of the Board of Directors of Back Bay Restaurant Group,
Inc. on October 21, 1998 (filed herewith).
(c) .............. Agreement and Plan of Merger, dated as of December 3, 1998,
between the Issuer and the Acquiror (incorporated by reference to
Annex I to the Proxy Statement which is filed herewith as Exhibit (d)(1)).
(d)(1) ........... Schedule 14A Preliminary Proxy Statement pursuant to Section
14(a) of the Securities Exchange Act of 1934, filed December 16,
1998, by the Company (filed herewith).
(d)(2) ........... Form of Proxy (filed herewith).
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(d)(3) .......... Text of Press Release issued by the Acquiror and Issuer dated
December 3, 1998 (filed herewith).
(e) ............. Section 262 of Delaware General Corporation Law (incorporated by
reference to Annex III to the Proxy Statement which is filed herewith
as Exhibit (d)(1)).
(f) ............. Not applicable.
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Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The information concerning the Issuer and its principal
executive office set forth on the cover page to the Proxy Statement and in the
sections entitled "SUMMARY" and "INTRODUCTION" of the Proxy Statement is
incorporated herein by reference.
(b) The information concerning the shares of common stock, par
value $0.01 per share, of the Issuer (the "Shares") set forth on the cover page
to the Proxy Statement and in the sections entitled "SUMMARY" and
"INTRODUCTION--Voting at the Special Meeting" of the Proxy Statement is
incorporated herein by reference.
(c) The information concerning the principal market in which the
Shares are traded set forth in the section entitled "MARKET PRICES AND
DIVIDENDS ON THE SHARES" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in the section entitled "MARKET
PRICES AND DIVIDENDS ON THE SHARES" of the Proxy Statement is incorporated
herein by reference.
(e) Not applicable.
(f) The information concerning purchases of Shares of the Issuer
set forth in the section entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" of the Proxy Statement is incorporated herein by
reference.
Item 2. Identity and Background.
(a)-(d),(g) The persons filing this Statement are Back Bay Restaurant
Group, Inc. (the issuer of the class of equity securities that is the subject of
the Rule 13E-3 transaction (the "Issuer" or the "Company"), Charles F. Sarkis
and SRC Holdings, Inc., a newly formed Delaware corporation (the "Acquiror").
The Acquiror was organized by Charles F. Sarkis for the purpose of effecting the
Rule 13E-3 transaction described herein. The business address of the Company,
Charles F. Sarkis and Acquiror is 284 Newbury Street, Boston, Massachusetts,
02115. Mr. Sarkis is a United States citizen and is the Company's President,
Chairman of the Board and Chief Executive Officer. The information concerning
Charles F. Sarkis and Acquiror set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Interests of Certain Persons in the Merger; Conflicts of
Interest" of the Proxy Statement is incorporated herein by reference. Pursuant
to General Instruction D of Schedule 13E-3, the information set forth in the
Company's Annual Report on Form 10-K and 10-K/A for the fiscal year ended
December 28, 1997 is incorporated herein by reference.
(e)-(f) None of the Company, Charles F. Sarkis, the Acquiror, or any
executive officer, director or person controlling the Company or Acquiror (i)
during the last five years, has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors), or (ii) during the last
five years, was a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining further violations of, or
prohibiting activities, subject to, federal or state securities laws or finding
any violation of such laws.
Item 3. Past Contacts, Transactions or Negotiations.
(a)-(b) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS-- Background of the Merger," and "--Interests of Certain
Persons in the Merger; Conflicts of Interest" of the Proxy Statement is
incorporated herein by reference. Pursuant to General Instruction D of Schedule
13E-3, the information set forth in the Company's Annual Report on Form 10-K and
10-K/A for the fiscal year ended December 28, 1997 is incorporated herein by
reference.
Item 4. Terms of the Transaction.
(a) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Interests of Certain Persons in the Merger; Conflicts of
Interest," "--Certain Effects of the Merger," "--Purpose of the Merger," "THE
MERGER--Background of the Merger," "--Merger Consideration," "--Effective Time,"
"--Conversion of SRC Holdings Stock," "--Conversion of Back Bay Common Stock;
Procedures for Exchange of Certificates," "--Conduct of the Business Pending the
Merger," "--Conditions to the Merger" and "THE MERGER AGREEMENT" of the Proxy
Statement is incorporated herein by reference.
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(b) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger" and "--Interests of Certain Persons in the
Merger; Conflicts of Interest" of the Proxy Statement is incorporated herein by
reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(b) None.
(c) The information set forth in the section entitled "SPECIAL
FACTORS--Certain Effects of the Merger" of the Proxy Statement is incorporated
herein by reference.
(d) None.
(e) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Certain Effects of the Merger," "THE MERGER--Effect on Stock
Options and Employee Benefit Matters," "--Nasdaq Delisting" and "MARKET PRICES
AND DIVIDENDS ON THE SHARES" of the Proxy Statement is incorporated herein by
reference.
(f)-(g) The information set forth in the sections entitled "SUMMARY,"
"THE MERGER --Certain Effects of the Merger," "--Effect on Stock Options and
Employee Benefit Matters" and "--Nasdaq Delisting" of the Proxy Statement is
incorporated herein by reference.
Item 6. Source and Amount of Funds or Other Consideration.
(a),(c) The information set forth in the section entitled "THE
MERGER--Merger Financing" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in the sections entitled "THE
MERGER--Fees and Expenses" and "THE MERGER AGREEMENT--Termination of the Merger
Agreement; Termination Fees" of the Proxy Statement is incorporated herein by
reference.
(d) No request is made pursuant to Item 6(d) of Schedule 13E-3.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Fairness of the Merger; Recommendation of the Board of
Directors" and "--Purpose of the Merger" of the Proxy Statement is incorporated
herein by reference.
(b) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger" and "--Fairness of the Merger;
Recommendation of the Board of Directors" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger," "--Fairness of the Merger; Recommendation
of the Board of Directors" and "--Purpose of the Merger" of the Proxy Statement
is incorporated herein by reference.
(d) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Interests of Certain Persons in the Merger; Conflicts of
Interest," "--Certain Effects of the Merger," "--Plans for the Company After
the Merger," "THE MERGER--Federal Income Tax Considerations," "--Anticipated
Accounting Treatment," "--Effect on Stock Options and Employee Benefit Matters"
and "--Nasdaq Delisting" of the Proxy Statement is incorporated herein by
reference.
Item 8. Fairness of the Transaction.
(a) The information set forth in the sections entitled "SUMMARY,"
"INTRODUCTION--Matters to Be Considered at the Special Meeting" and "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors" of
the Proxy Statement is incorporated herein by reference.
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(b) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger," "--Fairness of the Merger; Recommendation
of the Board of Directors" and "REPORT FROM BACK BAY'S FINANCIAL ADVISOR;
FAIRNESS OF THE TRANSACTION" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth in the sections entitled "SUMMARY,"
"INTRODUCTION--Matters to Be Considered at the Special Meeting," "--Voting at
the Special Meeting," "THE MERGER--Conditions to the Merger," "THE MERGER
AGREEMENT--Conditions to the Merger" and "--Termination of the Merger
Agreement; Termination Fees" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in the sections entitled "SPECIAL
FACTORS--Background of the Merger," "--Fairness of the Merger; Recommendation
of the Board of Directors" and "REPORT FROM BACK BAY'S FINANCIAL ADVISOR;
FAIRNESS OF THE TRANSACTION" of the Proxy Statement is incorporated herein by
reference.
(e) The information set forth in the sections entitled
"INTRODUCTION--Matters to Be Considered at the Special Meeting," "--Voting at
the Special Meeting" and "SPECIAL FACTORS--Background of the Merger" of the
Proxy Statement is incorporated herein by reference.
(f) There have been no other offers of which the Issuer or
affiliate is aware as described in Item 8(b)(viii) of the instructions to Item
8(b) of Schedule 13E-3.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a), (c) The information set forth in the sections entitled "SPECIAL
FACTORS--Fairness of the Merger; Recommendation of the Board of Directors," and
"REPORT FROM BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION" of the
Proxy Statement is incorporated herein by reference. Pursuant to General
Instruction D of Schedule 13E-3, the Opinion of Schroder & Co., Inc., dated
December 2, 1998, the Report of Schroder & Co., Inc., presented to the Special
Committee of the Board of Directors and the Board of Directors of the Issuer on
December 2, 1998, and the Report of Tucker Anthony, Incorporated, presented to
the Special Committee of the Directors of the Issuer on October 21, 1998,
attached at Exhibits (b)(1), (b)(2) and (b)(3) respectively, are incorporated
herein by reference. Copies of the Opinion and the Reports mentioned in this
paragraph will be made available for inspection and copying at 284 Newbury
Street, Boston, Massachusetts, 02115, during regular business hours for any
interested holder of the Company's Common Stock. Copies of the Opinion and the
Reports mentioned in this paragraph may also be transmitted to any interested
holder of the Company's Common Stock at the expense of the stockholder, if so
requested.
(b) The Acquiror engaged Tucker Anthony Incorporated ("Tucker
Anthony"), a nationally recognized investment banking firm to assist in the
preliminary review and evaluation of the Company, advise the Acquiror in the
development of an overall strategy for a transaction with the Company, assist
in the preparation and negotiation of a definitive merger agreement and
identify and contact potential capital sources.
Tucker Anthony, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of transactions. The
Acquiror selected Tucker Anthony as a financial advisor on the basis of its
experience and expertise in transactions similar to the merger contemplated in
this 13E-3 transaction, its reputation and experience with restaurants and
investment communities and its historical investment banking relationship with
the Company. Tucker Anthony served as an underwriter to the Company in
connection with the Company's 1992 initial public offering.
The attached report was presented to the Special Committee of the
Board of Directors on October 21, 1998, at the behest of the Acquiror, to
demonstrate the benefits of the Acquiror's proposal to purchase the Company
based on a review of comparable transactions in the restaurant industry,
comparable company analysis and earnings valuations. The section entitled
"REPORT FROM BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION" of the
Proxy Statement is incorporated herein by reference. Pursuant to General
Instruction D of Schedule 13E-3 the Opinion of Schroder & Co., Inc., dated
December 2, 1998, the Report of Schroder & Co., Inc., presented to the Special
Committee of the Board of Directors and the Board of Directors of the Issuer on
December 2, 1998 and the Report of Tucker Anthony, Incorporated, presented to
the Special Committee of the Board of Directors of the Issuer on October 21,
1998, attached as Exhibits (b)(1), (b)(2) and (b)(3) respectively, are
incorporated herein by reference.
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Item 10. Interest in Securities of the Issuer.
(a) The information set forth in the sections entitled "SUMMARY,"
"SPECIAL FACTORS--Interests of Certain Persons in the Merger; Conflicts of
Interest," "--Purpose of the Merger," "--Certain Effects of the Merger" and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in the section entitled "CERTAIN
TRANSACTIONS IN THE COMMON STOCK" is incorporated herein by reference.
Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities.
The information set forth in the section entitled "SPECIAL
FACTORS--Interests of Certain Persons in the Merger; Conflicts of Interest" of
the Proxy Statement is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard
to the Transaction.
(a)-(b) The information set forth in the sections entitled
"INTRODUCTION--Voting at the Special Meeting," "--Proxies," "SPECIAL
FACTORS--Background of the Merger," "--Interests of Certain Persons in the
Merger; Conflicts of Interest," "--Fairness of the Merger; Recommendation of
the Board of Directors" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT" of the Proxy Statement is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in the sections entitled "SUMMARY--
Rights of Dissenting Holders" and "APPRAISAL RIGHTS" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
Item 14. Financial Information.
(a)-(b) The information set forth in the section entitled "SELECTED
CONSOLIDATED FINANCIAL DATA OF THE COMPANY" of the Proxy Statement, is
incorporated herein by reference. Pursuant to General Instruction D of Schedule
13E-3, the Company's Annual Report on Form 10-K and 10-K/A for the fiscal year
ended December 28, 1997 and the Company's Quarterly Reports on Form 10-Q for
the quarters ended March 29, 1998, June 28, 1998 and September 27, 1998 are
incorporated herein by reference.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in the sections entitled "SPECIAL
FACTORS--Interests of Certain Persons in the Merger; Conflicts of Interest,"
"--Purpose of the Merger" and "THE MERGER AGREEMENT--Termination of the Merger
Agreement; Termination Fees" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in the sections entitled, "SPECIAL
FACTORS--Background of the Merger," "THE MERGER--Fees and Expenses" and "REPORT
OF BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION" of the Proxy
Statement is incorporated herein by reference.
Item 16. Additional Information.
The Proxy Statement is incorporated herein by reference in its entirety.
Item 17. Material to Be Filed as Exhibits.
(a)(1) Commitment Letter from Finova Capital Corporation, dated
November 24, 1998 (filed herewith).
(a)(2) Commitment Letter from DDJ Capital Management, LLC, dated
December 3, 1998 (filed herewith).
11
<PAGE>
(b)(1) Opinion of Schroder & Co., Inc., dated December 2, 1998
(incorporated by reference to Annex II to the Proxy Statement
which is filed herewith as Exhibit (d)(1)).
(b)(2) Report of Schroder & Co., Inc. presented to the Special
Committee of the Board of Directors and the Board of
Directors of Back Bay Restaurant Group, Inc. on December 2,
1998 (filed herewith).
(b)(3) Report of Tucker Anthony, Incorporated presented to the
Special Committee of the Board of Directors of Back Bay
Restaurant Group, Inc. on October 21, 1998.
(c) Agreement and Plan of Merger dated as of December 3, 1998,
between the Issuer and the Acquiror (incorporated by reference
to Annex I to the Proxy Statement which is filed herewith as
Exhibit (d)(1)).
(d)(1) Schedule 14A Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934, filed December 16, 1998, by
the Company (filed herewith).
(d)(2) Form of Proxy (filed herewith).
(d)(3) Text of Press Release issued by the Acquiror and Issuer dated
December 3, 1998 (filed herewith).
(e) Section 262 of Delaware General Corporation Law (incorporated
by reference to Annex III to the Proxy Statement which is
filed herewith as Exhibit (d)(1)).
(f) Not applicable.
12
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Back Bay Restaurant Group, Inc.
Dated: December 16, 1998 By: /s/ Francis P. Bissaillon
------------------------------
Executive Vice President
and Chief Financial Officer
S-1
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
CHARLES F. SARKIS
Dated: December 16, 1998 /s/ Charles F. Sarkis
------------------------------
Name: Charles F. Sarkis
S-2
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
SRC HOLDINGS, INC.
Dated: December 16, 1998 /s/ Charles F. Sarkis
------------------------------
Name: Charles F. Sarkis
Title: President
HWD: 372063-1
S-3
November 24, 1998
Mr. Charles F. Sarkis
284 Newbury Street
Boston, Massachusetts 02115
Dear Mr. Sarkis:
You have advised FINOVA Capital Corporation ("FINOVA") that you have
formed a single purpose acquisition company ("Acquisition Co.") with The
Westwood Group, Inc. ("Westwood") and certain members of management of Back Bay
Restaurant Group, Inc., a Delaware corporation ("Back Bay"), as investors, which
will seek to acquire (the "Acquisition") Back Bay. The Acquisition will be
accomplished through a tender offer (the "Tender Offer") to be made by
Acquisition Co. for up to 2,726,000 shares of common stock of Back Bay for a
purchase price per share of $10.25 in cash pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") to be entered into between Acquisition Co. and
Back Bay. Immediately prior to the completion of the Tender Offer, all other
shares of common stock of Back Bay then outstanding will be contributed (the
"Contribution") to Acquisition Co. pursuant to a Non-Tender Voting and Shares
Exchange Agreement (the "Non-Tender Voting and Shares Exchange Agreement") to be
entered into among you, Westwood, certain other shareholders of Back Bay and
Acquisition Co. In the event that the sum of the shares of Back Bay owned by
Acquisition Co. plus the shares of Back Bay tendered in the Tender Offer is at
least equal to 90% of the issued and outstanding shares of Back Bay, the shares
tendered in the Tender Offer will be accepted for payment and immediately
thereafter Acquisition Co. will merge (the "Short Form Merger") with and into
Back Bay pursuant to Section 253 of the Delaware General Corporation Law
("DGCL"). In the event that the sum of the shares of Back Bay owned by
Acquisition Co. plus the shares of Back Bay tendered in the Tender Offer is less
than 90% of the issued and outstanding shares of Back Bay, Acquisition Co. may
elect to seek the approval of the shareholders of Back Bay to a merger (the
"Long Form Merger") of Acquisition Co. with and into Back Bay pursuant to
Section 251 of the DGCL on economic terms identical to those contained in the
Tender Offer. The Short Form Merger and the Long Form Merger are each
hereinafter are referred to as the "Merger."
FINOVA is pleased to advise you that it has approved a $30,000,000
senior term loan (the "Loan") in connection with the Tender Offer and Merger on
the terms and conditions set forth below.
1. Borrower: Acquisition Co., which will be merged with and into Back Bay
with Back Bay as the surviving corporation immediately prior to the
Closing (as defined below).
2. Guarantors: The repayment of the Loan will be unconditionally, jointly
and severally guaranteed by all of the subsidiaries of Back Bay (the
"Subsidiaries"). Borrower and the Subsidiaries sometimes hereinafter
are referred to collectively as the "Companies." Borrower's business
will consist solely of the ownership of all of the issued and
outstanding capital stock of the Subsidiaries. The Subsidiaries'
business consists of the ownership and operation of thirty-four
existing casual dining restaurants ("Stores") at the locations
described on Exhibit A
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 2
attached hereto and operated under the Papa.Razzi, Joe's American Bar &
Grill, Charley's Eating & Drinking Saloon, Abe & Louie's, The Famous
Atlantic Fish Company, Hillary's and J.C. Hillary's tradenames and the
construction and operation of additional Stores.
3. Use of Proceeds: The proceeds of the Loan, together with $8,000,000 of
the proceeds of the Subordinated Debt (as defined below) presently
anticipated to be provided by DDJ Capital Management, LLC will be used
(i) to consummate the Tender Offer and Merger, (ii) to refinance all
existing indebtedness of the Companies, (iii) to pay all transaction
costs and (iv) any remainder, for working capital, including the
construction and/or renovation of new Stores.
4. Loan Terms:
a. Disbursement: The Loan shall be disbursed in full to or as
directed by Borrower at the time (the "Closing") the Merger
has occurred and all other conditions precedent to such
disbursement set forth in the documents (the "Loan Documents")
to be executed in connection with the Loan have been
satisfied. The date upon which the Closing occurs is
hereinafter referred to as the "Closing Date." In no event
shall FINOVA be required to disburse the Loan if the Merger
has not become effective.
b. Term: The outstanding principal balance of the Loan, together
with all accrued and unpaid interest thereon, shall be due and
payable on the last day of the 27th quarter following the
quarter in which the Closing occurs (the "Maturity Date").
c. Interest Rate: The Loan shall bear interest at a per annum
rate equal to the highest yield on seven year Treasury Notes
with a maturity date closest to the Maturity Date as published
in The Wall Street Journal on the Friday before the Closing
Date, plus 4.25% per annum. Interest shall be calculated based
on a 360 day year and charged for the actual number of days
elapsed. For any period in which an event of default (an
"Event of Default") under the Loan Documents exists, the Loan
shall bear interest at the rate described above plus 3.0% per
annum.
d. Payments: Accrued and unpaid interest on the Loan shall be
payable monthly in arrears. The principal balance of the Loan
shall be payable in consecutive quarterly installments
commencing on the first day of the quarter following the
quarter in which the Closing occurs and on the first business
day of each quarter thereafter, except for the final
installment which shall be payable on the Maturity Date.
Except for the installment payable on the Maturity Date, each
installment shall be in an amount equal to the amount set
forth below opposite the quarter in which such installment is
due:
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 3
Quarters following
the quarter in which Amount of each
the Closing occurs quarterly installment
1-4 $351,000
5-8 $644,250
9-12 $762,000
13-16 $996,000
17-20 $1,172,250
21-27 $1,787,250
The final installment shall be in an amount equal to the
remaining principal balance of the Loan and all accrued and
unpaid interest thereon. If any payment is past due for a
period in excess of five days, Borrower shall pay on demand to
FINOVA a late charge of 5.0% of the amount of such overdue
payment. Principal payments on the Loan may not be reborrowed.
5. Prepayments:
a. Mandatory Prepayments from Excess Cash Flow: Not later than 90
days after the end of each fiscal year of Borrower commencing
with the fiscal year following the Closing, Borrower shall pay
to FINOVA as a prepayment of the Loan an amount equal to 50%
of the Excess Cash Flow for such fiscal year. As used herein,
the term "Excess Cash Flow" for any fiscal year shall mean the
Operating Cash Flow (as defined below) for such fiscal year
less Total Debt Service (as defined below) for such fiscal
year.
b. Mandatory Prepayments from Key Man Life Insurance: All
proceeds of key man life insurance required to be maintained
under the Loan Documents shall be applied as a mandatory
prepayment of the Loan.
c. Voluntary Prepayments: Subject to the conditions set forth in
the Loan Documents, the principal balance of the Loan may be
prepaid in whole, but not in part, at any time after the
second anniversary of the Closing Date upon not less than 30
days' prior written notice to FINOVA, provided that any
prepayment made during the third through seventh years
following the Closing Date shall be accompanied by a
prepayment premium (a "Prepayment Premium") of (i) 4.0% of the
amount prepaid during the third loan year, (ii) 3.5% of the
amount prepaid during the fourth loan year, (iii) 2.5% of the
amount prepaid during the fifth loan year, (iv) 1.5% of the
amount prepaid during the sixth loan year and (v) 0.5% of the
amount prepaid during the seventh loan year. Notwithstanding
the foregoing, subject to the conditions set forth in the Loan
Documents the principal balance of the Loan may be prepaid in
whole, but not in part, at any time prior to the second
anniversary of the Closing Date concurrently with a sale of
substantially all of the assets of the Companies or a merger
of Borrower with an acquiring company provided that any such
prepayment is accompanied by a prepayment premium of 15% of
the amount prepaid.
d. No Prepayment Premium: No Prepayment Premium shall be payable
on any payments described in Sections 6a or 6b above or as a
result of any refinancing of the Loan provided by FINOVA.
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 4
e. Application of Prepayments: Prepayments of the principal
balance of the Loan shall be applied to required installments
of the principal balance pro rata to the remaining
installments.
6. Closing Fee: Borrower shall pay to FINOVA a closing fee of $320,000
upon the Closing.
7. Security; Landlord's Agreements: As security for the Loan, FINOVA shall
be granted a (i) a perfected first lien on all of each Company's
existing and after-acquired personal property, including, without
limitation, all of each Company's trademarks, tradenames, service marks
and other intellectual property, (ii) a perfected first mortgage lien
on all of the existing and after- acquired real property owned by each
Company, (iii) a perfected first leasehold mortgage lien on all
existing and after-acquired real property leased by each Company from
you or any of such Company's other affiliates (the "Affiliate Real
Property"), (iv) a perfected first lien on all of the issued and
outstanding capital stock and warrants, options and other rights to
acquire capital stock of the Subsidiaries and (v) all proceeds of the
foregoing. FINOVA shall receive a landlord's agreement substantially in
the form of Exhibit B attached hereto (a "Landlord's Agreement") from
the landlords under all leases of Affiliate Real Property. Borrower
shall use its best efforts to cause to be granted to FINOVA a leasehold
mortgage or to deliver to FINOVA a Landlord's Agreement from the
landlord under the applicable lease with respect to at least two other
locations leased by any Company prior to Closing. Borrower shall use
its best efforts after the Closing to obtain Landlord's Agreements from
the landords under all other leases under which any Company is a
lessee.
8. Other Loan Terms: The Loan Documents shall contain such representations
and warranties, conditions precedent, financial and other covenants,
events of default and remedies customarily required by FINOVA for
transactions of this type, including but not limited to the following:
a. Business Activities: Borrower shall be prohibited from
engaging in any business or activity other than the ownership
of all of the issued and outstanding capital stock of the
Subsidiaries. The Subsidiaries shall be prohibited from
engaging in any business or activity other than the ownership,
operation, franchising or joint venture of Papa.Razzi, Joe's
American Bar & Grill, Charley's Eating & Drinking Saloon, Abe
& Louie's, The Famous Atlantic Fish Company, Hillary's and
J.C. Hillary's restaurants and related ancillary activities.
b. Development of New Stores: Borrower shall obtain FINOVA's
prior written approval for the construction and/or renovation
of any new Stores other than those described on Exhibit C
attached hereto, which approval shall not be unreasonably
withheld or conditioned but may be subject, among other
things, to FINOVA's reasonable satisfaction with the locations
of such new Stores, the terms of any applicable real estate
leases, the demographics of such new Stores, the proposed
construction and/or renovation budget (cap plan) therefor, the
financial projections for the first year of operation thereof
and the results of an environmental database search on the
applicable
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 5
sites. Borrower shall not seek to develop any new Stores if
any Event of Default exists and is continuing or if any event
has occurred or proceeding shall be pending which could
reasonably be expected to result in a material adverse change
in the overall financial condition or operating performance of
the Companies taken as a whole. Borrower shall deliver to
FINOVA all Uniform Commercial Code financing statements and
other documents reasonably required by FINOVA to perfect its
security interest in such new Stores.
c. Minimum Interest Coverage Ratio: The Companies' Interest
Coverage Ratio as of the last day of any fiscal quarter set
forth below shall not be less than the ratio set forth
opposite such fiscal quarter (which fiscal quarters end on the
last Sunday of the applicable period):
Fiscal Quarter
Ending On or About Ratio
------------------ -----
June 30, 1999 1.75:1.00
September 30, 1999 1.75:1.00
December 31, 1999 1.75:1.00
March 31, 2000 1.75:1.00
June 30, 2000 2.00:1.00
September 30, 2000 2.00:1.00
December 31, 2000 2.25:1.00
March 31, 2001 2.25:1.00
June 30, 2001 and each
fiscal quarter thereafter 2.50:1.00
As used herein, the term:
"Interest Coverage Ratio" as of the last day of any
fiscal quarter shall mean the ratio of (i) Operating Cash Flow
for the four consecutive fiscal quarters ending on such last
day (or, in the case of fiscal quarters ending on or prior to
the last day of the third fiscal quarter following the fiscal
quarter in which the Closing occurs, for the period from the
Closing Date to such last day treated as a single accounting
period) to (ii) Total Interest Expense for the four
consecutive fiscal quarters ending on such last day (or, in
the case of fiscal quarters ending on or prior to the last day
of the third fiscal quarter following the fiscal quarter in
which the Closing occurs, for the period from the Closing Date
to such last day treated as a single accounting period).
"Maintenance Capital Expenditures" for any period
shall mean all expenditures by the Companies incurred in the
ordinary course in connection with the repair, replacement,
remodeling and upgrading of the furniture, fixtures and
equipment at existing Stores.
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 6
"Operating Cash Flow" for any period shall mean,
without duplication, the Companies' consolidated net income
(or loss) plus, to the extent deducted in determining such net
income, depreciation, amortization, interest expense and
accrued but unpaid taxes for such period as determined in
accordance with GAAP, excluding the effects of extraordinary
gains or losses, less Maintenance Capital Expenditures for
such period.
"Total Interest Expense" for any period shall mean
all cash payments of interest made or required to be made on
all indebtedness for borrowed money of the Companies during
such period.
d. Minimum Senior Debt Service Coverage Ratio: The Companies'
Senior Debt Service Coverage Ratio as of the last day of any
fiscal quarter commencing with the fiscal quarter ending on or
about June 30, 1999 shall not be less 1.50:1.00.
As used herein, the term:
"Senior Debt Service" for any period shall mean all
payments of principal and interest made or required to be made
on all senior indebtedness for borrowed money of the Companies
during such period.
"Senior Debt Service Coverage Ratio" as of the last
day of any fiscal quarter shall mean the ratio of (i)
Operating Cash Flow for the four consecutive fiscal quarters
ending on such last day (or, in the case of fiscal quarters
ending on or prior to the last day of the third fiscal quarter
following the fiscal quarter in which the Closing occurs, for
the period from the Closing Date to such last day treated as a
single accounting period) to (ii) Senior Debt Service for the
four consecutive fiscal quarters ending on such last day (or,
in the case of fiscal quarters ending on or prior to the last
day of the third fiscal quarter following the quarter in which
the Closing occurs, for the period from the Closing Date to
such last day treated as a single accounting period).
e. Minimum Total Debt Service Coverage Ratio: The Companies'
Total Debt Service Coverage Ratio as of the last day of any
fiscal quarter commencing with the fiscal quarter ending on or
about June 30, 1999 shall not be less 1.25:1.00.
As used herein, the term:
"Total Debt Service" for any period shall mean all
payments of principal and cash interest made or required to be
made all indebtedness for borrowed money of the Companies
during such period.
"Total Debt Service Coverage Ratio" as of the last
day of any fiscal quarter shall mean the ratio of (i)
Operating Cash Flow for the four consecutive fiscal quarters
ending on such last day (or, in the case of fiscal quarters
ending on or prior to the last day of the third fiscal quarter
following the fiscal quarter in which the Closing occurs,
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 7
for the period from the Closing Date to such last day treated
as a single accounting period) to (ii) Total Debt Service for
the four consecutive fiscal quarters ending on such last day
(or, in the case of fiscal quarters ending on or prior to the
last day of the third fiscal quarter following the fiscal
quarter in which the Closing occurs, for the period from the
Closing Date to such last day treated as a single accounting
period) .
f. Maximum Leverage Ratio: The Companies' Leverage Ratio as of
the last day of any fiscal quarter set forth below shall not
exceed the ratio set forth below opposite such fiscal quarter:
Fiscal Quarter
Ending On or About Ratio
------------------ -----
June 30, 1999 4.25:1.00
September 30, 1999 4.25:1.00
December 31, 1999 4.25:1.00
March 31, 2000 4.00:1.00
June 30, 2000 4.00:1.00
September 30, 2000 4.00:1.00
December 31, 2000 4.00:1.00
March 31, 2001 3.75:1.00
June 30, 2001 3.75:1.00
September 30, 2001 3.75:1.00
December 31, 2001 3.75:1.00
March 31, 2002 and each
fiscal quarter thereafter 3.50:1.00
As used herein, the term:
"EBITDA" for any period shall mean, without
duplication, the Companies' consolidated earnings before
interest, taxes, depreciation and amortization for such period
as determined in accordance with GAAP, excluding the effects
of extraordinary gains or losses.
"Leverage Ratio" as of the last day of any fiscal
quarter shall mean the ratio of (i) the aggregate amount of
all senior indebtedness for borrowed money of the Companies as
of such last day to (ii) EBITDA for the four consecutive
fiscal quarters ending on such last day.
g. Capital Expenditures: The Companies shall be prohibited from
making any (i) Maintenance Capital Expenditures in excess of
$1,500,000 in any fiscal year and (ii) other capital
expenditures except (A) from proceeds of the Loan not used to
consummate the Tender Offer, refinance the existing
indebtedness of the Companies or to pay transaction costs and
from other cash on hand as of the Closing in excess of
$1,000,000
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 8
and (B) for any fiscal year, in an amount up to the remainder
of (x) 50% of the Excess Cash Flow for such fiscal year minus
(y) the amount paid on account of PIK interest on the
Subordinated Debt permitted pursuant to Section 10a below for
such any fiscal year. For the purposes of this section,
Maintenance Capital Expenditures shall not include
"Reimbursable Capital Expenditures," which shall be defined to
include such capital expenditures as those reimbursable from
insurance proceeds, landlord contributions and the like.
h. Other Indebtedness: The Companies shall be prohibited from
incurring any indebtedness for borrowed money or operating
lease obligations with respect to leased equipment other than
(i) the Loan, (ii) purchase money debt, capital leases and
operating leases with respect to equipment located in the
Stores provided that the value of all equipment made subject
to such purchase money debt, capital leases or operating
leases does not exceed $200,000 per annum and (iii)
subordinated, unsecured indebtedness for borrowed money in an
amount not to exceed $8,000,000 (the "Subordinated Debt"). The
Subordinated Debt shall (i) not mature prior to the date which
is six months after the Maturity Date, (ii) not require any
amortization prior to its maturity and (iii) bear interest at
a rate per annum not in excess of 18.75%, consisting of not
more than 12.5% per annum of current pay interest and 6.25 %
per annum of PIK interest.
i. No Other Liens: No liens other than liens in favor of FINOVA
and other liens permitted under the Loan Documents shall be
permitted.
j. Dividends and Distributions; Payments of Subordinated Debt:
Borrower shall not make any dividends or other distributions
to its shareholders or principal payments on the Subordinated
Debt while the Loan is outstanding; provided that to the
extent permitted by the terms and conditions of the documents
(the "Subordinated Debt Documents") executed in connection
with the Subordinated Debt, so long as no Event of Default
exists and is continuing or would be created by the making of
any such payment and the aggregate amount of such payments do
not exceed in any fiscal year an amount to be agreed upon by
Borrower and FINOVA prior to the Closing, Borrower may redeem
common stock issued to employees of the Companies upon the
cessation of their employment with the Companies.
k. Mergers, Acquisitions, Sales of Assets and Investments: The
Companies shall be prohibited from consummating any mergers,
acquisitions, consolidations or asset sales (other than in the
ordinary course of business) and shall be subject to FINOVA's
customary restrictions on investments.
l. Amendment of Certain Documents: Without the prior written
consent of FINOVA, the Companies shall not amend (i) any terms
of their organizational documents if such amendment would (A)
alter voting control over the Companies or (B) require any
mandatory dividends or redemptions on any of the Companies'
capital stock, (ii) any material terms of any leases to which
they are subject, (iii) any terms of the
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 9
Subordinated Debt Documents or (iv) any terms of the Merger
Agreement or the Non- Tender Voting and Shares Exchange
Agreement or the documents executed in connection therewith.
m. Transactions with Affiliates: Transactions with affiliates
shall be prohibited without the prior written consent of
FINOVA, which consent may be conditioned, among other things,
upon such transactions being no less favorable to the
Companies than could be obtained on an arm's length basis from
a third party not affiliated with the Companies.
n. Management Compensation: The annual total cash compensation
payable to you, as Chairman of the Board, President and Chief
Executive Officer of Borrower, Mark L. Hartzfeld, the Chief
Operating Officer of Borrower, Francis Bissaillon, the Chief
Financial Officer of Borrower, and Anne Marie LaGrotteria, the
Vice President of Operations and Training of Borrower, which
individuals will comprise the senior management of the
Companies, or their successors holding equivalent positions,
shall be subject to limits to be agreed upon by Borrower and
FINOVA prior to the Closing. It is understood that Borrower
shall have the right to establish a bonus pool from which
incentive bonuses of up to 100% of annual salary may be paid
to such individuals.
o. Change of Management and Control: While the Loan is
outstanding, you shall (i) maintain voting control over the
Companies, including the right to elect a majority of the
board of directors of Borrower and (ii) continue to be
actively engaged in the day to day management of the
Companies.
p. Financial Reporting: Borrower shall provide fiscal quarterly
financial reports to FINOVA within 45 days after the end of
each fiscal quarter and annual audited financial statements
within 90 days after the end of each fiscal year of the
Companies.
9. General Conditions: Prior to the Closing, Borrower shall satisfy the
following conditions, and such other conditions as are customarily
required by FINOVA for transactions of this type:
a. Execution of Loan Documents: FINOVA shall have received
executed originals of such Loan Documents as FINOVA may
require, each in form and content satisfactory to FINOVA,
including, without limitation, a Subordination Agreement
between FINOVA and the holder of the Subordinated Debt. The
Subordination Agreement shall provide, among other things,
that while the Loan remain outstanding (i) no principal
payments shall be made on the Subordinated Debt, (ii) no cash
payments of interest on the Subordinated Debt shall be made
(A) if any Event of Default exists and is continuing or would
be created by the making of any such payment or (B) in excess
of 12.5% per annum, provided that within 90 days after the end
of each fiscal year commencing with the fiscal year following
the Closing Borrower may pay on account of accrued and unpaid
PIK interest (whether or not capitalized) on the Subordinated
Debt up to 25% of the Excess Cash Flow for such fiscal year
and (iii) the holders of the Subordinated Debt shall not take
any action to collect the Subordinated Debt.
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 10
b. Consummation of Transactions: The Contribution, the Tender
Offer and the Merger each shall have been consummated and the
terms and conditions of all documents executed in connection
therewith, including without limitation the Merger Agreement
and the Non-Tender Voting and Shares Exchange Agreement, shall
be in form and substance satisfactory to FINOVA. FINOVA shall
be deemed to have approved the Merger Agreement if the final
form thereof is in substantially the same form as the draft
dated November 9, 1998 previously provided to FINOVA. No party
to such documents shall have waived or failed to perform any
material covenant or agreement to be performed by it at or
prior to the consummation of such transactions. FINOVA shall
be satisfied that the Acquisition has been consummated in
accordance with all requirements of applicable state and
federal securities laws.
c. Subordinated Debt: Borrower shall have received not less than
$8,000,000 in proceeds of the Subordinated Debt, and the terms
and conditions of the Subordinated Debt Documents shall
conform to the requirements of this commitment letter and
otherwise be in form and substance satisfactory to FINOVA.
d. Minimum EBITDA: The EBITDA of Back Bay for the twelve month
period ending as of the last day of the second month prior to
the month in which the Closing Date occurs shall not be less
than $8,000,000.
e. Collateral: FINOVA shall have received satisfactory evidence
that (i) each Company has good and marketable title to all of
its properties, (ii) there is good and marketable title to all
of the issued and outstanding capital stock of the Companies
and (iii) FINOVA has obtained valid and perfected first
priority liens on all property constituting security for the
Loan, free and clear of any liens other than liens permitted
under the Loan Documents. Such evidence shall include such
UCC, state and federal tax lien, pending suit and judgment
searches, and surveys (with respect to any real estate upon
which a fee or leasehold mortgage is granted to FINOVA) and
title insurance (with respect to any real estate upon which a
fee or leasehold mortgage is granted to FINOVA) as FINOVA may
require. All surveys shall be in sufficient form and detail so
as to permit the title company to delete all survey exceptions
from the title insurance policies and to provide extended
coverage. FINOVA shall have received a certification from the
surveyor that none of the Companies' restaurants are located
in a flood plain or, if any are so located, flood plain
insurance satisfactory to FINOVA.
f. Licenses and Agreements: FINOVA shall have received
satisfactory evidence that (i) each Company is the holder of
all licenses (including liquor licenses) and a party to all
agreements necessary to operate its restaurant business as
presently conducted and (ii) no event has occurred that could
reasonably be expected to result in the revocation, or
adversely affect the renewal in the ordinary course, of any
such license or agreement.
g. Authority and Consents: FINOVA shall have received
satisfactory evidence that all governmental and other
approvals, authorizations and consents required for the
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 11
consummation of the Contribution, the Tender Offer, the Merger
and the execution and delivery of the Merger Agreement, the
Non-Tender Voting and Shares Exchange Agreement, the
Subordinated Debt Documents and the Loan Documents have been
obtained.
h. Financial Reports; Other Information; Inspections: FINOVA
shall have received and found satisfactory such financial
reports and other information with respect to the Companies
subsequent to the fiscal period ending September 27, 1998 as
FINOVA may require demonstrating the satisfaction of the
conditions contained in Paragraph 10d and 10m, together with a
pro forma balance sheet as of the Closing Date consistent with
the requirements of this commitment letter and the projections
previously delivered to FINOVA.
i. Opinions of Counsel: FINOVA shall have received such opinions
of counsel for the Companies as FINOVA reasonably may require.
j. Insurance: Borrower shall have obtained such insurance,
written by such insurers and in such form and amounts as
FINOVA shall require, and FINOVA shall have received evidence
of the foregoing. FINOVA shall have been named loss payee with
respect to all policies of casualty insurance of Borrower and
an additional insured on all policies of liability insurance
of Borrower. Borrower shall have obtained not less than
$5,000,000 of key man life insurance on you and shall have
assigned its rights to the proceeds of such insurance to
FINOVA. Such insurance may be replaced at any time with key
man life insurance on you comparable in amount and terms and
issued by an insurer of comparable creditworthiness.
k. Environmental Matters: FINOVA shall be satisfied with the
results of such reports concerning the environmental
conditions of the facilities of the Companies as FINOVA may
require, including an environmental assessment pursuant to
ASTM current standards of any real estate owned by any Company
and issued not more than six months prior to funding and an
environmental database search with respect to any real estate
leased by any Company. Each such assessment shall be prepared
by an environmental engineer acceptable to FINOVA and
demonstrate that each location complies with all federal and
state environmental laws and regulations.
l. No Material Adverse Change: No material adverse change shall
have occurred in the financial condition or business of any
Company since September 27, 1998. No judgment, order,
injunction or other restraint prohibiting or imposing
materially adverse conditions on the Tender Offer or the
consummation of the Merger shall exist. No litigation or
governmental proceeding or investigation shall be pending
which in the opinion of FINOVA could, if adversely determined,
have a material adverse effect on Borrower's financial
condition, business or prospects.
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 12
m. Margin Regulations: The Loan and all loans made by or stock
issued to other parties shall be in full compliance with all
applicable requirements of law, including Regulations G, T, U
and X of the Board of Governors of the Federal Reserve System.
10. Indemnity: Prior to the Closing, you, and from and after the Closing,
Borrower, shall indemnify and hold harmless FINOVA, its affiliates and
each of its directors, officers and advisors (each, an "Indemnified
Party") from and against any and all claims, damages, liabilities,
costs and expenses (including all reasonable fees and expenses of
counsel) which may be incurred by or asserted against an Indemnified
Party in connection with any investigation, litigation or proceeding
arising out of or related to the Loan, the Tender Offer, the Merger,
the Contribution or the Acquisition, whether or not an Indemnified
Party is a party to such investigation, litigation or proceeding and
whether or not the Tender Offer, the Merger, the Contribution or the
Acquisition or the Loan are consummated, except to the extent such
claim, damage, loss, liability or expense is found in a final judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's own gross negligence or willful misconduct.
11. Fees and Expenses: You and Borrower shall pay all fees and expenses
incurred in connection with the Loan, including the fees and expenses
of any broker utilized by Borrower to arrange the Loan, UCC, state and
federal tax lien, pending suit and judgment search charges, title
insurance premiums, recording charges and the attorneys' fees and
expenses and all other out-of-pocket expenses of FINOVA. If the Closing
does not occur prior to the termination of this Commitment, you and
Borrower shall pay to FINOVA on demand all such expenses incurred by
FINOVA ("FINOVA's Expenses"). Upon the request of FINOVA, you
immediately shall deposit with FINOVA such amount as FINOVA determines
is necessary to cover FINOVA's Expenses.
12. Deposits: Prior to the date of this Commitment, you have deposited with
FINOVA the sum of $20,000 (such amount hereinafter is referred to as
the "Initial Deposit"). The Initial Deposit has been fully earned by
FINOVA by the issuance of this commitment letter and is non-
refundable. Concurrently with your acceptance of this commitment, you
shall deposit with FINOVA the additional sum of $30,000 (such amount,
together with any additional deposits made pursuant to Paragraph 12,
hereinafter is referred to as the "Deposit"). The Deposit shall be (i)
applied to the Loan Fee, together with the Initial Deposit, if the
Closing occurs, (ii) retained by FINOVA as liquidated damages in the
event that on or before June 30, 1999 you (A) elect not to consummate
the Acquisition, (B) do not proceed with the financing herein
contemplated or (C) are unable to satisfy the conditions described in
Section 10 above or (iii) returned to you, less FINOVA's Expenses, in
the event the Closing does not occur prior to the termination of this
Commitment due solely to the fault of FINOVA.
13. Break-Up Fee: In the event that the Closing does not occur prior to the
termination of this Commitment for any reason other than the sole fault
of FINOVA and the Acquisition is consummated with financing provided by
a source other than FINOVA, you agree to pay to FINOVA, in addition to
FINOVA's Expenses and FINOVA's rights to retain the Initial Deposit
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 13
and the Deposit, a break-up fee of $160,000 concurrently with the
initial disbursement of such financing.
14. Choice of Law, Jury Waiver and Jurisdiction: This Commitment and the
Loan Documents shall be governed by the laws and decisions of the State
of Arizona, except to the extent it is mandatory that the laws of the
state where the applicable premises are located govern the creation,
perfection and enforcement of liens on real property. The parties waive
the right to trial by jury of any controversy arising among them. Any
actions or proceedings initiated by you or any Company arising out of
this Commitment or the Loan Documents shall be litigated either in the
Superior Court of Maricopa County, Arizona or in the United States
District Court for the District of Arizona and you and such Company
shall submit and consent to jurisdiction in any action or proceeding
commenced by FINOVA in any such court. Provisions to the foregoing
effect shall be included in all of the Loan Documents, including, but
not limited to, any Loan Documents executed by guarantors and third
parties.
15. Sale or Assignment: FINOVA shall have the right to assign or
participate all or any portion of its interests in the Loan, to one or
more other lenders, and may disclose to such other lenders all
information relating to the Companies as FINOVA may deem appropriate in
connection with such assignments and participations.
16. Confidentiality: By accepting delivery of this Commitment, you agree
that this letter is for your confidential use only and that neither the
existence of this letter nor the terms hereof will be disclosed by you
to any person other than the officers, directors, employees,
accountants, attorneys and other advisers of Borrower, the provider of
the Subordinated Debt and the Special Committee of the Board of
Directors of Back Bay and its advisors on a confidential, "need to
know" basis.
17. Acceptance, Expiration and Term: This Commitment shall not become
effective unless there is delivered to FINOVA on or before 5:00 p.m. on
November 30, 1998 at its offices at 115 West Century Road, Paramus, New
Jersey 07652, to the attention of William J. McKinney, a copy of this
Commitment executed by you. If the Closing does not occur on or before
June 30, 1999, or the date to which the Closing is extended by written
agreement between you and FINOVA, except for your obligations pursuant
to Paragraphs 10, 11, 12 and 13 above, this Commitment shall terminate.
This Commitment supersedes FINOVA's prior commitment letters dated
October 20, 1998 and November 19, 1998.
[remainder of this page intentionally left blank]
<PAGE>
Mr. Charles Sarkis
November 24, 1998
Page 14
We welcome the opportunity to be of service to you by offering this
financing and look forward to working with you.
Very truly yours,
FINOVA Capital Corporation
By: /s/ William J. McKinney
-----------------------
William J. McKinney
Vice President
ACCEPTED and AGREED this
___ day of November, 1998
/s/ Charles F. Sarkis
- -------------------------------
CHARLES F. SARKIS, individually
December 3, 1998
Mr. Charles F. Sarkis
Chairman and CEO
SRC Holdings, Inc.
284 Newbury Street
Boston, MA 02115
Dear Mr. Sarkis:
Further to our discussions, attached as Exhibit A is a term sheet describing the
terms of a proposed issue of Senior Subordinated Notes (the "Notes") to be
issued in connection with a proposed acquisition of substantially all of the
outstanding common shares of Back Bay Restaurant Group, Inc ( "Back Bay") by a
privately held, newly formed entity controlled by present management of Back Bay
("SRC Holdings, Inc.", or the "Company") , at a purchase price of $10.25 per
share ("Proposed Acquisition"). Certain funds and accounts managed or advised by
DDJ Capital Management, LLC and its affiliates (collectively, "DDJ") hereby
commit to purchase, and the Company commits to issue, $8 million aggregate
principal amount of the Notes on the terms set forth on Exhibit A and subject to
the conditions set forth below.
DDJ's purchase, and the Company's issuance, of the Notes will be subject to the
prior satisfaction of the following conditions, in addition to each of the
conditions set forth in the attached term sheet and in definitive documentation
with respect to the purchase of the Notes: (i) satisfactory review of
documentation in connection with the formation of the Company, and the accuracy
and completeness in all material respects of all the information provided to DDJ
with respect to the Proposed Acquisition, the Company, Back Bay, its
subsidiaries, and their respective assets; (ii) closing of the Proposed
Acquisition and financing thereof on terms consistent with (A) those outlined
previously to DDJ, and (B) the draft commitment letter from the Senior Lender
dated November 24, 1998, attached hereto (with the exception of the description
of the subordination provisions set forth in Paragraph 9.a - "General
Conditions: Execution of Loan Documents", which provisions have not been agreed
upon by DDJ), and with documentation satisfactory to DDJ, (iii) the absence of
any material adverse change in the business, financial condition or prospects of
the Company or Back Bay from such information that has been provided to DDJ
prior to the date hereof; (iv) confirmation satisfactory to DDJ that, in
entering into and performing its obligations under the transaction documents and
consummating the purchase of the Notes as contemplated herein and on the terms
provided in the transaction documents, DDJ will not violate any federal or state
statutes or regulations or regulatory policies to which it may be subject or
<PAGE>
any DDJ internal policies; (v) negotiation, execution and delivery of
documentation satisfactory to DDJ and the Company with respect to the Notes and
the purchase thereof, including, without limitation, a definitive securities
purchase agreement, guarantees, and legal opinions prior to closing, with such
documentation to contain covenants, agreements, representations and warranties,
indemnification, and other terms satisfactory to DDJ.
This letter is issued solely to the Company and may not be assigned or otherwise
transferred to, or enforced by, any other person without the prior written
consent of DDJ. The existence of and terms of this proposal are confidential and
may disclosed to no one without DDJ's consent (except to the provider of Senior
Indebtedness and the Special Committee of the Board of Directors of Back Bay on
a confidential, "need to know" basis). The terms of this letter may not be
modified or otherwise changed except pursuant to a written agreement signed by
DDJ and the Company. This letter shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachusetts. This
letter may be executed in any number of counterparts, each of which shall be an
original, but all of which shall constitute one instrument. This letter
(including the term sheet attached hereto as Exhibit A) sets forth the entire
understanding between the Company and DDJ and supersedes all prior agreements
and understandings relating to the subject matter hereof.
Effective upon the execution of this letter agreement, the Company agrees to
indemnify and hold harmless DDJ Capital Management, LLC, each fund or separate
account it manages, and all affiliates, members, officers and advisers (each an
"Indemnified Party") from and against any and all claims, damages, liabilities,
costs and expenses (including all reasonable fees and expenses of counsel) in
excess of $25,000 (the "Deductible") which may be incurred by or asserted
against an Indemnified Party in connection with any investigation, litigation or
proceeding arising out of or related to this letter or the Notes, or the Tender
Offer, the Merger, the Contribution or the Acquisition (each as defined in the
Commitment Letter dated November 24, 1998 issued by FINOVA Capital Corporation),
whether or not an Indemnified Party is a party to such investigation, litigation
or proceeding and whether or not the Tender Offer, the Merger, the Contribution
or the Acquisition or the issuance of Notes are consummated, except to the
extent such claim, damage, loss, liability or expense is found in a final
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's own gross negligence or willful misconduct.
<PAGE>
If this letter accurately reflects your understanding with respect to the
matters set forth herein, please execute and return the enclosed copy hereof,
whereupon the Company's obligations with respect to reimbursement of DDJ's
expenses, the payment of $160,000 described on Exhibit A under "Commitment Fee"
and the indemnification set forth above will become binding, whether or not the
transaction closes. Such reimbursement and fee minus any amount of the
Deductible incurred will be refunded if the transaction does not close as a
result of a breach by DDJ of this agreement.
DDJ CAPITAL MANAGEMENT, LLC
By: /s/ Wendy Schnipper-Clayton
-----------------------
Name: Wendy Schnipper-Clayton
Title:
AGREED AND ACCEPTED:
SRC HOLDINGS, INC.
By: /s/ Charles F. Sarkis
----------------------------------
Name: Charles F. Sarkis
Title: President
<PAGE>
EXHIBIT A
SRC Holdings, Inc.
Senior Subordinated Notes
Term Sheet
----------
Issue: Senior Subordinated Notes (the "Notes")
Issuer: SRC Holdings, Inc., a privately-held, newly
formed entity controlled by present
management of Back Bay Restaurant Group,
Inc.
Guarantors: All material subsidiaries, including Back
Bay Restaurant Group, Inc.
Purchaser: One or more affiliates of DDJ Capital
Management, LLC or its designees.
Commitment Amount: $8 million.
Issue Date: Contemporaneous with completion of
contemplated buyout transaction but no later
than June 30, 1998.
Maturity Date: 7 years and 3 months
Commitment Fee: $280,000, of which $160,000 shall be due and
payable upon signing of commitment letter
and $120,000 shall be due and payable on the
earlier to occur of the following: (i)
funding of the transaction, or (ii) the
Issuer elects not to proceed with the
contemplated transaction and the Issuer (or
any of the contemplated principals of the
Issuer or any entity in which any of such
principals, alone or together, have a
significant interest) instead proceeds with
any other transaction involving the purchase
of a significant portion of the outstanding
common shares of Back Bay Restaurant Group,
Inc. The initial $160,000 in Commitment Fees
shall be non-refundable, provided, however,
that in the event Purchaser elects not to
proceed with the contemplated transaction
pursuant to conditions precedent set forth
as items (i), (iii), or (iv) in the second
paragraph of the commitment letter,
Purchaser shall refund that portion, if any,
of the Commitment Fees previously paid in
excess of the amount required to pay
Purchasers legal fees and third party
expenses (all of which the Borrower shall be
liable for in any case) and any amounts
constituting the Deductible (as defined in
the letter agreement to which this Exhibit A
is attached).
Cash-Pay Interest Rate: 12.50%, payable quarterly in arrears.
Additional Interest: As additional consideration for purchasing
the Notes, the Purchaser shall be entitled
to additional interest totaling 6.25% per
annum, payable quarterly in arrears, at the
Issuer's option, in cash or additional
Senior Subordinated Notes (i.e.,
pay-in-kind).
<PAGE>
Additional Consideration: As additional consideration for purchasing
the Notes, the Purchaser shall be entitled
to receive 1% of the equity in the Company,
(on a fully diluted basis following merger).
Prepayment Option: The Notes will be redeemable prior to
maturity at the option of the Issuer in
minimum principal amounts of $1 million at
the following prices (expressed as a
percentage of principal amount redeemed) if
optionally redeemed during the applicable
period following the Issue Date set forth
below, in each case plus accrued interest,
and all other amounts associated with such
principal amounts redeemed:
Prior to 3rd Anniversary
Make-Whole @ Treasury + 75 bps
From 3rd to 4th Anniversary
106.500%
From 4th to 5th Anniversary
104.250%
From 5th to 6th Anniversary
102.125%
From 6th to Maturity
100.000%
Ranking: The Notes will be senior obligations of the
Issuer and the Guarantees will be senior
obligations of the Guarantors provided
however, that both the Notes and the
Guarantees will be subordinated only to
senior bank indebtedness not to exceed $30
million pursuant to an intercreditor
agreement between the Purchaser and the
senior bank lender with terms satisfactory
to the Purchaser.
Covenants: The Notes will have covenants satisfactory
to Purchaser, including (i) negative pledge
provisions, (ii) prohibition on restricted
payments, (iii) limitation on indebtedness,
(iv) asset sale provisions, (v) change of
control put, (vi) limitation on transactions
with affiliates, (vii) cross-default to
other indebtedness and material licenses and
contracts, (viii) financial covenants (to be
determined based on senior bank covenants,
including cash flow sweep provisions and
capital expenditure provisions), and (ix)
such other covenants reasonably required by
the Purchaser consistent with the type of
transactions contemplated.
Documentation and
Other Costs: Purchaser's attorneys shall prepare all
documentation and the Issuer shall pay all
reasonable legal fees and other third-party
expenses of the Purchaser.
Materials Prepared for The Special Committee of The Board of Directors
BACK BAY
[LOGO]
RESTAURANT
GROUP, INC.
Back Bay Restaurant Group
December 2, 1998
<PAGE>
Preface
This report has been prepared by Schroder & Co. Inc. ("Schroders") for the
Special Committee of the Board of Directors of Back Bay Restaurant Group ("Back
Bay" or the "Company") in connection with Schroders' opinion (the "Opinion") as
to the fairness, from a financial point of view, of the consideration to be
received by the public stockholders of the Company other than Charles F. Sarkis,
The Westwood Group, or Back Bay's management (the "Transaction Consideration"),
in the acquisition by SRC Holdings, Inc., a company formed by Charles F. Sarkis
and certain members of Back Bay's management (the "Acquiror"), of all of the
outstanding shares of Common Stock of Back Bay it does not currently own (the
"Transaction"). This report and the Opinion are for the information of the
Special Committee of the Board of Directors of the Company solely for its use in
evaluating the fairness from a financial point of view of the Transaction
Consideration and may not be used for any other purpose or referred to without
our prior written consent.
The Opinion does not constitute a recommendation as to any action the Special
Committee of the Board of Directors of the Company or any stockholder of the
Company should take in connection with the Transaction or any aspect thereof. In
rendering the Opinion, we have not been engaged as an agent or fiduciary of the
Company's stockholders or of any other third party. The Opinion relates solely
to the fairness from a financial point of view of the Transaction Consideration.
We express no opinion as to the structure, terms or effect of any other aspect
of the Transaction or as to the merits of the underlying decision by the Company
to engage in the Transaction.
In rendering the Opinion, we have assumed and relied upon the accuracy and
completeness of all information supplied or otherwise made available to us by
Back Bay or obtained by us from other sources, and upon the assurance of Back
Bay's management that they are not aware of any information or facts that would
make the information provided to us incomplete or misleading. We have not
independently verified such information, undertaken an independent appraisal of
the assets or liabilities (contingent or otherwise) of Back Bay, or been
furnished with any such appraisals. With respect to financial forecasts for Back
Bay, we have been advised by Back Bay, and we have assumed, without independent
investigation, that they have been reasonably prepared and reflect Back Bay
management's currently available estimates and judgment as to the expected
future financial performance of Back Bay.
We have reviewed various analytical methodologies for their applicability to the
evaluation of the fairness, from a financial point of view, of the Transaction
Consideration; we believe that the analytical methodologies contained herein are
the relevant methodologies for such evaluation. Our conclusion is based on all
the analyses and factors presented herein taken as a whole and also on
application of our experience and judgment. Such conclusion may involve
significant elements of subjective judgment and qualitative analysis. We
therefore give no opinion as to the value or merit standing alone of any one or
more parts of the material that follows. Our only opinion is the formal written
opinion that we have expressed as to the fairness from a financial point of view
of the Transaction Consideration. The Opinion, the analyses contained herein and
all conclusions drawn from such analyses are necessarily based upon market,
economic and other conditions that exist and can be evaluated as of the date of
this presentation, and on information available to us as of the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting the Opinion which may come or be brought to our
attention after the date hereof unless specifically requested to do so.
<PAGE>
Contents
Transaction Overview I
Overview of Financials II
Stock Price Performance III
Valuation Analysis IV
Recommendation V
Appendices
Schroder & Co. Inc. Fairness Opinion Letter A
Selected Comparable Mergers and Acquisitions Analysis B
Comparable Company Analysis C
Discounted Cash Flow Analysis D
Leveraged Buyout Analysis E
<PAGE>
Section I
Transaction Summary
<PAGE>
Schroders Role
Transaction Overview
[bullet] Acted as financial advisor to the Company, April 1997 to May 1998
[bullet] Acted as financial advisor to the Special Committee, May 1998 to
present
[bullet] Reviewed historical and projected financial data
[bullet] Performed due diligence, including meeting with management and
visiting restaurants
[bullet] Performed numerous investment banking valuation analyses
[bullet] Led negotiations of Transaction
[bullet] Reviewed documentation
1
<PAGE>
Review of
Schroders'
Engagement
Transaction Overview
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Date Event Description
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
April 22, 1997 Schroders engaged by Back Bay Assist the Company in examining strategic alternatives: (i)
the acquisition of other restaurant groups; (ii) a
recapitalization; (iii) a sale; and (iv) a management
buyout
April 7, 1998 Charles F. Sarkis reveals his Schroders informed Charles F. Sarkis to advise the Board
intentions for a management of Directors of his intentions and seek authority to
buyout proceed.
June 2 Schroders engaged by the Special Schroders presented its credentials to the Special
Committee Committee who then decided to engage Schroders to
represent them in the Transaction.
June 23 Schroders Presentation to the Schroders recommended to sell the Company in order to
Special Committee maximize shareholder value. Indicated Mr.Sarkis as the
best buyer. Also provided a preliminary valuation range of
probably $10-$12 per share.
August 5 Charles F. Sarkis Presentation to Mr. Sarkis presented historical performance and
the Special Committee projections and informed the Special Committee that he
was interested in making an offer for Back Bay. Informal
exclusivity period, until September, given to Mr. Sarkis
to present a firm offer.
September 25 Initial informal offer Schroders received informal initial offer of $9.50 per
share. Schroders indicated its reservations for the offer
price and suggested additional structural changes to the
proposal.
October 19 Schroders and the Special The purchase price had not been increased from the last
Committee receive formal offer meeting but the proposal did reflect all the structural
changes recommended by Schroders.
October 21 Presentation to the Special Schroders updated the Special Committee on the current
Committee market conditions and reviewed the proposal following
management's formal presentation.
- ----------------------------------------------------------------------------------------------------------------------
2
<PAGE>
Review of
Schroders'
Engagement
Transaction Overview (continued)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Date Event Description
- ----------------------------------------------------------------------------------------------------------------------
October 23 Conference Call Negotiating session with Mr. Sarkis' advisors.
October 26 Revised Offer Received Buyer's advisors circulated a revised offer of $10.00 per
share after Schroders' indication of the original offer
being unacceptable.
October 28 Conference Call Special Committee discussed the revised offer dated
October 26.
October 30 Revised Offer Received Schroders negotiated with the Buyer for a price of $10.25
per share. A number of terms remained unsettled. The
Special Committee authorized its representatives to
negotiate on that basis.
November 25/27/30 Special Committee Meetings Special Committee negotiated remaining terms.
December 2 Special Committee Meeting Schroders delivered its fairness opinion to the Special
Committee.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
Key Terms of
the Merger
Agreement
Transaction Overview
[bullet] $10.25 in cash
[bullet] Fully financed offer
[diamond] Senior debt financing from FINOVA
[diamond] Mezzanine financing from DDJ Capital Management
[bullet] Break-up fee of $2.5 million ($0.62 per share), representing 6.5% of
the fully diluted equity value
[bullet] No shop provision
[bullet] Fiduciary out for the Board of Directors
[bullet] Requires approval of over 50% of the unaffiliated shareholders
4
<PAGE>
Ownership
Structure
Transaction Overview
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Options Total
-------------------------------------------------------------------------------------------------
($ in thousands) Amount Value * Amount Value * Amount Value * %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholders Not Tendering
Mr. Sarkis and affiliates 884,184 9,063 92,500 549 976,684 9,611 24.4%
Participating Management 5,500 56 198,415 1,177 203,915 1,233 5.1%
---------- ------ ------- ------- --------- ------- -----
Sub-total 889,684 9,119 290,915 1,725 1,180,599 10,844 29.5%
Shareholders Tendering
Finneran 782,486 8,020 0 0 782,486 8,020 19.6%
Other Public Shareholders 1,788,239 18,329 0 0 1,788,239 18,329 44.7%
Other Management 0 0 248,852 1,476 248,852 1,476 6.2%
---------- ------ ------- ------- --------- ------- -----
Sub-total 2,570,725 26,349 248,852 1,476 2,819,577 27,825 70.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,460,409 35,469 539,767 3,201 4,000,176 38,669 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
* Options have an average exercise price of $4.32
5
<PAGE>
Implied
Enterprise
Value
Transaction Overview
- --------------------------------------------------------------------------
Back Bay Enterprise Value
- --------------------------------------------------------------------------
($ in millions except share and option price)
Shares Outstanding 3,460,409
Stock Price $10.25
---------
$35.5
In the Money Options 539,767
Net Option Price (stock price - option exercise price) $5.93
---------
$3.2
---------
Equity Value $38.7
Debt and Other
Bank debt & other liabilities $4.0
Cash & cash equivalents (0.3)
Sellers' Transaction Fees 1.0
---------
Total Debt and Other $4.7
- --------------------------------------------------------------------------
Total Enterprise Value $43.3
- --------------------------------------------------------------------------
6
<PAGE>
Multiples
Implied by the
Offer
Transaction Overview
-----------------------------------------------------------------------------
Purchase Price Multiples
($10.25 per Share Price)
-----------------------------------------------------------------------------
LTM 1998E 1999P
Purchase Price / Net Income 15.3x 16.3x 10.0x
EV / Net Sales 0.4x 0.4x 0.4x
EV / EBITDA 5.3x 5.0x 4.1x
EV / EBIT 10.6x 10.0x 6.9x
Purchase Price / Book Value 1.3x - -
-----------------------------------------------------------------------------
7
<PAGE>
Premium
Analysis
Transaction Overview
[bullet] The $10.25 cash price to be paid to Back Bay's stockholders in the
Proposed Transaction represents a significant premium over Back Bay's
current and recent share prices.
- --------------------------------------------------------------------------------
Proposed Transaction's Premium to Back Bay's Stock Price
- --------------------------------------------------------------------------------
Period to December 1, 1998 Back Bay $10.25 Proposal
Stock Price Premium
One Day $8.75 17%
Average last trade - One Month $8.64 19%
Average last trade - Three Months $7.60 35%
Average last trade - Six Months $7.62 35%
Average last trade - Twelve Months $7.11 44%
- --------------------------------------------------------------------------------
8
<PAGE>
Section II
Overview of Financials
<PAGE>
Segment
Overview
Overview of Financials
- --------------------------------------------------------------------------------
1998E Sales 1998E Store EBITDA
- --------------------------------------------------------------------------------
Other 27% Other 22%
Papa Razzi 34% Papa Razzi 31%
Joe's 39% Joe's 31%
- -------------------------------------------------------------------------------
1998E ($ in 000s) Units Sales EBITDA Margin
- -------------------------------------------------------------------------------
Joe's 10 $38,676 $8,150 21.1%
Papa.Razzi 14 33,965 5,455 16.1%
Other 10 26,560 3,816 14.4%
Unallocated Store Costs - - (3,591) (3.6%)
------ -----
Store EBITDA - - 13,830 13.9%
Corporate G&A - - (5,200) (5.2%)
- -------------------------------------------------------------------------------
Total 34 $99,201 $8,630 8.7%
- -------------------------------------------------------------------------------
10
<PAGE>
Historical
Results and
Projections
Overview of Financials
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1993A 1994A 1995A 1996A 1997A 1998E(1) 1999P(1) 2000P(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No. Units 27 32 33 34 34 34 36 37
Sales $74.2 $85.8 $93.5 $87.8 $94.9 $99.2 $111.3 $114.4
Growth - 15.6% 9.0% (6.1%) 8.1% 4.5% 12.2% 2.8%
EBITDA 8.6 5.5 0.9 5.5 7.6 8.6 10.6 11.0
Margin 11.6% 6.4% 0.9% 6.2% 8.0% 8.7% 9.5% 9.6%
EBIT 4.6 1.0 (4.0) 1.5 3.3 4.3 6.2 6.8
Margin 6.2% 1.2% (4.3%) 1.7% 3.5% 4.4% 5.6% 5.9%
Net Income $3.5 $0.5 ($2.8) $0.5 $1.7 $2.4 $3.9 $4.4
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) Base case projections for years 1998-2000.
11
<PAGE>
Key Projection
Assumptions
Overview of Financials
[bullet] Same store sales growth of 3.9% in 1999 and approximately 1.0% going
forward
[diamond] Papa.Razzi 1999 sales growth of 2.1% in 1999 and 0.9% thereafter
[diamond] Joe's 1999 sales growth of 2.2% in 1999 and 1.0% thereafter
[diamond] American sales growth of 4.4% in 1999, 3.1% in 2000 and 1.2%
thereafter
[bullet] Margins remain constant for the existing stores
[bullet] New store openings:
[diamond] In 1999, the Rye Steakhouse and the East Coast Grill, both with
unit sales of approximately $3.0 million and 17.5% EBITDA margin
[diamond] Thereafter, one Joe's per year modeled after Joe's Fairfield
($1.75 million in unit sales, 18% EBITDA margin and 1.0% sales
growth)
[bullet] Capital cost for the new stores is expected to be $2.0 million per unit
12
<PAGE>
Base Case
Assumptions
Overview of Financials
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998E 1999E 2000E 2001E 2002E
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Units
Italian 14 14 14 14 14
American excl. Joe's 10 11 11 11 11
Joe's 10 11 12 13 14
------ ------ ------ ------ -------
Total 34 36 37 38 39
Average Unit Sales
Italian $2,426 $2,478 $2,500 $2,522 $2,545
American excl. Joe's 3,048 3,263 3,364 3,405 3,445
Joe's 3,998 3,699 3,533 3,485 3,446
------ ------ ------ ------ -------
Total $3,071 $3,091 $3,092 $3,107 $3,122
Average Unit Sales Growth
Italian 1.7% 2.1% 0.9% 0.9% 0.9%
American excl. Joe's 16.2% 7.1% 3.1% 1.2% 1.2%
Joe's 6.3% (7.5%) (4.5%) (1.4%) (1.1%)
------ ------ ------ ------ -------
Total 9.9% 0.6% 0.0% 0.5% 0.5%
- -----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Base Case
Assumptions
(continued)
Overview of Financials
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998E 1999E 2000E 2001E 2002E
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
Italian $33,965 $34,689 $34,998 $35,311 $35,626
American excl. Joe's 26,560 35,894 37,004 37,450 37,899
Joe's 38,676 40,686 42,393 45,303 48,243
------- ------- ------- ------- -------
Total $99,201 $111,269 $114,394 $118,064 $121,768
Restaurant EBITDA
Italian $5,455 $5,569 $5,615 $5,663 $5,711
American excl. Joe's 3,816 5,520 5,818 5,892 5,967
Joe's 8,150 8,807 9,118 9,666 10,153
Restaurant G&A (3,591) (4,028) (4,141) (4,274) (4,408)
------- ------- ------- ------- -------
Total $13,830 $15,868 $16,411 $16,947 $17,423
Restaurant EBITDA Margins
Italian 16.1% 16.1% 16.0% 16.0% 16.0%
American excl. Joe's 14.4% 15.4% 15.7% 15.7% 15.7%
Joe's 21.1% 21.6% 21.5% 21.3% 21.0%
------- ------- ------- ------- -------
Total 13.9% 14.3% 14.3% 14.4% 14.3%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Financial
Projections
Overview of Financials
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999E 2000E 2001E 2002E CAGR
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $111,269 $114,394 $118,064 $121,76 3.1%
EBITDA 10,564 11,001 11,428 11,7 3.7%
% Margin 9.5% 9.6% 9.7% 9.7%
EBIT 6,245 6,794 7,042 7,32 5.4%
% Margin 5.6% 5.9% 6.0% 6.0%
Capital (3,900) (3,900) (3,800) (4,040) 1.2%
Expenditures
Working Capital 904 231 315 315 (29.6%)
Requirements
- ----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Section III
Stock Price Performance
<PAGE>
Stock Price and
Volume
Stock Price Performance
- --------------------------------------------------------------------------------
March 13, 1992 to December 31, 1997
- --------------------------------------------------------------------------------
[Tabular representation of line chart]
<TABLE>
<CAPTION>
3/13/92 5/11/93 7/08/94 9/05/95 10/30/96 12/29/97
------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock Price
NUMBERS TO BE PROVIDED
Volume
</TABLE>
17
<PAGE>
Stock Price and
Volume
Stock Price Performance
- --------------------------------------------------------------------------------
January 2, 1998 to December 1, 1998
- --------------------------------------------------------------------------------
[Tabular representation of line chart]
<TABLE>
<CAPTION>
1/02/98 2/27/98 4/23/98 6/17/98 8/11/98 10/05/98 11/27/98
------- ------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Price
NUMBERS TO BE PROVIDED
Volume
</TABLE>
18
<PAGE>
Stock Price
Distribution
Stock Price Performance
- --------------------------------------------------------------------------------
Last Three Years
- --------------------------------------------------------------------------------
last three years
[Tabular representation of bar chart]
<TABLE>
<CAPTION>
Volume (000)
$2.50 - $6.00 $6.00 - $7.00 $7.00 - $8.00 $8.00 - $9.00 $9.00 - $9.50
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Stock Price Distribution 38.8% 21.1% 26.5% 13.1% 0.5%
</TABLE>
19
<PAGE>
Stock Price
Distribution
Stock Price Performance
- --------------------------------------------------------------------------------
Last One Year
- --------------------------------------------------------------------------------
last one year
[Tabular representation of bar chart]
<TABLE>
<CAPTION>
Volume (000)
$4.50 - $6.00 $6.00 - $7.00 $7.00 - $8.00 $8.00 - $9.00 $9.00 - $9.50
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Stock Price Distribution 9.9%% 21.2% 46.4% 21.4% 1.1%
</TABLE>
20
<PAGE>
Section IV
Valuation Analysis
<PAGE>
Overview
Valuation Analysis
[bullet] Schroders has prepared an independent valuation of Back Bay relying
primarily on three alternative approaches.
[diamond] Comparable Acquisition Analysis
[diamond] Comparable Company Analysis
[diamond] Discounted Cash Flow ("DCF") Analysis
[bullet] Schroders also performed a Leveraged Buyout ("LBO") Analysis.
22
<PAGE>
Qualitative
Valuation
Considerations
Valuation Analysis
As previously discussed with the Special Committee, Back Bay's valuation should
be at or below the low end of the valuation range implied by comparable
companies:
[bullet] Multiple concepts limit Company's value
[bullet] Poor operating statistics when compared to comparables
[bullet] Historical earnings extremely volatile
[bullet] Historical growth more from margin recovery than top line growth
[bullet] Micro capitalization limits liquidity
[bullet] Financial projections uncertain
23
<PAGE>
Valuation
Analysis
Summary
Valuation Analysis
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Equity Value per Best
Methodology Share Comparable Average
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Comparable M&A Transactions $7.44 to $14.44 $9.91 $11.77
Comparable Publicly Traded Companies $4.81 to $17.11 $6.10 $10.39
Comparable Publicly Traded Companies with 30% Premium $6.25 to $22.24 $7.93 $13.51
Discounted Cash Flow Analysis $9.91 to $13.56
- -------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Comparable
M&A
Transactions
Valuation Analysis
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Enterprise LTM EBITDA Implied Back Implied Share
Target / Acquirer Value Multiple Bay EV Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tony Roma's/Investor Group * $117.5 7.3 x 60.1 14.44
Pollo Tropical/Carrols Corp 88.3 6.8 x 56.0 13.41
Bertucci's/NE Restaurant Corp. 101.7 6.5 x 53.5 12.80
Perkins Family Rest./Restaurant Co. 215.0 6.3 x 51.9 12.38
Bugaboo Creek Steak/Longhorn Steaks 57.1 6.1 x 50.2 11.97
Charlie Brown's/Castle Harlan * 51.0 6.0 x 49.4 11.77
- -------------------------------------------------------------------------------------------------------------------
Houlihan's/Hampstead Group 123.4 5.1 x 42.0 9.91
- -------------------------------------------------------------------------------------------------------------------
Black-eyed Pea/DenAmerica * 66.8 3.9 x 32.1 7.44
- -------------------------------------------------------------------------------------------------------------------
Average 6.0 x 49.4 11.77
Range 3.9 x - 7.3 x $32.1 - $60.1 $7.44 - $14.44
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
* Schroders advised the seller
25
<PAGE>
Comparable
Company
Analysis
Valuation Analysis
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Company Enterprise 98E EBITDA Implied Back Implied Back Share Price
Value (EV) Multiple Bay EV Bay Share with 30%
Price Premium
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Il Fornaio $29.6 3.1 x $26.8 $6.10 $7.93
- -----------------------------------------------------------------------------------------------------
Landry's 230.3 3.1 x 26.8 6.10 7.93
Logan's 154.2 8.2 x 70.8 17.11 22.24
Roadhouse
Lone Star 194.6 2.5 x 21.6 4.81 6.25
Morton's 160.1 6.4 x 55.2 13.22 17.19
O' Charley's 254.5 7.2 x 62.1 14.95 19.43
Rainforest 156.9 4.1 x 35.4 8.26 10.74
Cafe
Rare 198.6 5.3 x 45.7 10.85 14.10
Hospitality
Taco Cabana 122.1 5.9 x 50.9 12.14 15.79
- -----------------------------------------------------------------------------------------------------
Average 5.1 x $43.9 $10.39 $13.51
Range 2.5 x - 8.2 x $21.6 - $70.8 $4.81 - $17.11 $6.25 - $22.24
- -----------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
P/E Premium
Analysis
Valuation Analysis
[bullet] The Transaction values Back Bay at a 1998E P/E of 16.3x which
represents the following premiums (discounts) to each of the
comparable companies.
------------------------------------------------
Premium /
Company 1998E P/E (Discount)
Il Fornaio 13.3 x 22.6%
------------------------------------------------
Landry's 7.5 x 117.3%
Logan's 16.6 x (1.8%)
Roadhouse
Lone Star 9.5 x 71.6%
Morton's 12.2 x 33.6%
O' Charley's 16.2 x 0.6%
Rainforest 10.6 x 53.8%
Cafe
Rare 14.4 x 13.2%
Hospitality
Taco Cabana 10.0 x 63.0%
------------------------------------------------
Average 12.3 x 33.0%
------------------------------------------------
27
<PAGE>
Discounted
Cash Flow
Analysis:
WACC
Valuation Analysis
[bullet] Equity risk premiums estimated at 13.5%
[diamond] Represents 500 bps spread over recent high yield spread of
850 bps over comparable treasuries
[diamond] Risk premium consistent with risk inherent in small
capitalization restaurant companies
[bullet] Assumed an optimal debt to equity ratio of roughly between 0.0x and
1.0x
[diamond] Small capitalization companies do not own much debt
[diamond] Public comparables have an average net debt to market
capitalization ratio of 6.5%
<TABLE>
<CAPTION>
Weighted Average Cost of Capital (WACC)
- ------------------------------------------------------------------------------------------------
Debt/ Unlevered Relevered Risk Free Risk Cost of After-tax
Equity Beta Beta Rate Premium Equity Cost of Debt WACC
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
0.00 1.04 1.04 5.6% 13.5% 19.6% 5.1% 19.6%
0.50 1.04 1.35 5.6% 13.5% 23.8% 5.1% 17.6%
1.00 1.04 1.66 5.6% 13.5% 28.0% 5.1% 16.5%
- ------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Discounted
Cash Flow
Analysis
Valuation Analysis
[bullet] Below is the range of equity values derived from the DCF analysis:
- -----------------------------------------------------------------
16.0% 17.0% 18.0%
- -----------------------------------------------------------------
5.0x $10.69 $10.29 $9.91
- -----------------------------------------------------------------
6.0x 12.12 11.67 11.23
- -----------------------------------------------------------------
7.0x 13.56 13.04 12.55
- -----------------------------------------------------------------
Note: The low enterprise value corresponds to an EBITDA multiple of 5.0x and a
discount rate of 18.0%.
The high enterprise value corresponds to an EBITDA multiple of 7.0x and a
discount rate of 16.0%.
29
<PAGE>
Leveraged
Buyout
Analysis
Valuation Analysis
[bullet] Without increase in rent payment, a third party could pay up to $10.25
per share and still receive a rate of return of approximately 35%.
[bullet] With a $500,000 per year increase in rent to market, we believe a third
party would only pay up to $9.60 per share, to ensure an IRR above 30%.
[bullet] Assumptions include:
[diamond] Management base case projections
[diamond] Traditional LBO structure with a leverage ratio (debt to EBITDA) of
4.0x
[diamond] 3.0x senior debt leverage and 1.0x mezzanine leverage
[diamond] Mezzanine debt with a current coupon of 12.5% and 7% warrants
[diamond] Management options for 10% of Back Bay
30
<PAGE>
Section V
Recommendation
<PAGE>
Recommendation
It is our opinion, as investment bankers, that, as of this date, the Transaction
Consideration is fair from a financial point of view to the independent
shareholders of the Company.
32
Confidential
PROJECT NEWCO
October 21, 1998
<PAGE>
Confidential
================================================================================
PROJECT NEWCO
================================================================================
Table of Contents
-----------------
<TABLE>
<S> <C>
Executive Summary...................................................Section I
Publicly Reported Results...........................................Section II
Relationship of Size of Total Capitalization and Valuation..........Section III
Selected Reference Company Analysis.................................Section IV
M&A Transaction Premium Analysis....................................Section V
Comparable M&A Transactions.........................................Section VI
Discounted Cash Flow Analysis.......................................Section VII
Newco Proposal......................................................Section VIII
</TABLE>
<PAGE>
Confidential
Project Newco - Executive Summary
- --------------------------------------------------------------------------------
-- HOYA has publicly announced ten consecutive quarters of improved financial
performance.
-- As a result, stock price has appreciated 51% from 52-week low price in
January 1998.
-- Stock price has substantially outperformed comparable restaurant issues by
69% and the Russell 2000 Index by 47% since January 1, 1998.
-- Valuation segmentation impacted as much by size of Total Capitalization as
by operating results.
-- Reference Companies indicate that Common Stock is in an appropriate
relative valuation range at current levels.
-- In Restaurant Acquisitions(2)-
Mean Premium of 40.6% was paid on Mean Transaction Value of $94
million
Median Premium of 35.5% was paid on Median Transaction Value of
$74 million
-- Premiums are consistent with relationship of Size and Valuation.
- ---------------------
(1) Total Capitalization equals market value of common stock plus debt less
cash.
(2) Based on four weeks prior to announcement data.
1
<PAGE>
Confidential
Project Newco - Publicly Reported Results
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Announcement Date Oct. 27, 1997 Feb. 19, 19 May 1, 1998 July 27, 199 Sept. 27, 1998
<S> <C> <C> <C> <C> <C>
Quarter QIII QIV QI QII QIII
Revenue $23,859 $25,027 $23,126 $24,586 $24,593
Net Income $ 376 $ 841 $ 356 $ 790 $ 546
E.P.S. current period $ 0.11 $ 0.24 $ 0.10 $ 0.22 $ 0.15
E.P.S. prior period $ 0.02 $ 0.16 $ (0.03) $ 0.18 $ 0.11
E.P.S. Growth vs. PP 450% 50.0% NM 22.2% 36.4%
</TABLE>
PP -- Prior Period
-- QIII of 1998 was tenth consecutive quarter of improved earnings versus
comparable prior year period.
-- Prospectively, it will be difficult for HOYA to show above average
period-over-period E.P.S. growth. Rather, earnings growth will moderate
and be driven by normal operating improvements.
2
<PAGE>
Confidential
Historical Weekly Stock Price Performance
Hoya Versus Peer Group Index #1, Peer Group Index #2 and the Russell 2000 Index.
January 2, 1998 - October 16, 1998
- --------------------------------------------------------------------------------
Hoya Peer Group #1 Peer Group #2 Russell 2000
2-Jan-98 100.00% 100.00% 100.00% 100.00%
9-Jan-98 100.00% 93.50% 93.10% 94.60%
16-Jan-98 101.10% 95.00% 97.80% 97.60%
23-Jan-98 89.90% 94.00% 97.10% 97.30%
30-Jan-98 94.40% 97.70% 99.00% 98.50%
6-Feb-98 86.50% 96.90% 100.20% 102.10%
13-Feb-98 98.90% 97.00% 103.60% 104.10%
20-Feb-98 110.10% 96.70% 104.90% 104.00%
27-Feb-98 112.40% 96.20% 105.50% 105.80%
6-Mar-98 119.10% 92.70% 108.50% 106.20%
13-Mar-98 116.90% 94.20% 112.60% 107.40%
20-Mar-98 121.30% 99.10% 112.20% 108.60%
27-Mar-98 139.30% 99.90% 106.70% 109.30%
3-Apr-98 146.10% 102.30% 110.70% 111.30%
10-Apr-98 141.60% 102.90% 111.00% 110.00%
17-Apr-98 155.10% 101.40% 112.60% 111.60%
24-Apr-98 141.60% 98.80% 117.10% 110.00%
1-May-98 143.80% 101.90% 123.80% 111.10%
8-May-98 141.60% 99.50% 126.60% 109.80%
15-May-98 143.80% 102.40% 123.00% 108.20%
22-May-98 143.80% 98.20% 121.10% 106.10%
29-May-98 140.40% 98.00% 117.40% 104.60%
5-Jun-98 139.30% 99.50% 114.50% 104.10%
12-Jun-98 137.10% 95.40% 113.10% 101.20%
19-Jun-98 132.60% 93.20% 110.20% 100.40%
26-Jun-98 157.30% 93.60% 113.70% 103.10%
3-Jul-98 143.80% 93.00% 115.90% 105.00%
10-Jul-98 137.10% 95.70% 116.20% 105.00%
17-Jul-98 139.30% 97.20% 117.10% 105.90%
24-Jul-98 137.10% 91.80% 112.20% 100.50%
31-Jul-98 142.70% 89.90% 110.90% 96.20%
7-Aug-98 137.10% 79.90% 106.10% 95.30%
14-Aug-98 130.30% 80.60% 105.40% 92.30%
21-Aug-98 131.50% 78.40% 106.80% 90.60%
28-Aug-98 121.30% 77.40% 98.30% 82.10%
4-Sep-98 123.60% 73.30% 90.80% 79.50%
11-Sep-98 123.60% 71.50% 89.40% 81.00%
18-Sep-98 125.80% 71.90% 90.40% 83.20%
25-Sep-98 123.60% 65.90% 93.40% 84.50%
2-Oct-98 130.30% 60.70% 91.80% 80.10%
9-Oct-98 121.30% 53.90% 84.30% 72.90%
16-Oct-98 125.80% 56.80% 87.30% 78.50%
Peer Group Index #1 includes: Shell Seafood Restaurants; Il Fornaio (America)
Corporation; Benihana Inc.; Ark Restaurants Corp. and Max & Erma's Restaurants
Peer Group Index #2 includes: Main Street & Main, Inc.; Roadhouse Grill, Inc.;
Chart House Enterprises, Inc., Rock Bottom Restaurants, Inc.; Uno Restaurant
Corp.; and Quality Dining, Inc.
-- HOYA has outperformed Index #1 by 69%; #2 by 39% and Russell 2000 by 47%.
-- Price appreciation of HOYA resulting from announcements of improved
financial performance has brought HOYA's valuation into an appropriate
relative valuation range.
3
<PAGE>
Confidential
PROJECT NEWCO
Relationship of Size of Totalization and Valuation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Capitalization
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17.6 19.4 45.5 36.9 49.3 58.3 58.8 61.7 74.8 27.8 42.662
SHLL 2.2
ILFO 2.29
BNHN 3.52
ARKR 3.48
MAXE 4.15
MAIN 7.48
GRLL 6.51
CHT 5.93
BREW 4.43
HOYA 3.34
OFFER 5.85
</TABLE>
Aggregate Mean 4.51x
Small Cap Mean 3.08x
- --------------------------------------------------------------------------------
-- HOYA's valuation is consistent with comparable companies and is in an
appropriate relative range.
4
<PAGE>
Confidential
PROJECT NEWCO
Relationship of Size of Totalization and Valuation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Capitalization
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17.6 19.4 45.5 36.9 49.3 58.3 58.8 61.7 74.8 27.8 42.662
SHLL 2.2
ILFO 2.29
BNHN 3.52
ARKR 3.48
MAXE 4.15
MAIN 7.48
GRLL 6.51
CHT 5.93
BREW 4.43
HOYA 3.34
OFFER 5.85
</TABLE>
Aggregate Mean 4.51x
Small Cap Mean 3.08x
- --------------------------------------------------------------------------------
-- HOYA's valuation is consistent with comparable companies and is in an
appropriate relative range.
5
<PAGE>
Confidential
Project Newco
SELECTED REFERENCE COMPANY ANALYSIS
(All Dollar Amounts in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shells Il Fornaio Benihana Ark Max & Erma's
Hoya Seafood Rest. America Corp. Inc. Restaurants Corp Restaurants Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ticker/Exchange XXXX/NASD SHLL/NASD ILFO/NASD BNHN/NASD ARKR/NASD MAXE/NASD
Latest Fiscal Year Ending 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97 10/31/97
Latest Fiscal Quarter Ending 06/30/98 06/30/98 06/30/98 06/30/98 6/30/98 07/31/98
Preliminary Earnings Reported 09/30/98 -- -- -- -- --
Current Market Information
Stock Price: 10/16/98 $7.00 $4.00 $5.88 $8.25 $8.50 $6.25
52-Week High $9.31 $14.13 $16.63 $15.75 $14.69 $8.13
52-Week Low $4.63 $3.25 $4.25 $6.13 $8.50 $5.88
% Within High/Low Range 50.7% 6.9% 13.1% 22.1% 0.0% 16.7%
Common Shares Outstanding (000s) 3,453 4,453 5,948 3,572 3,842 4,265
% Held by Institutions 25.5% 25.0% 42.3% 13.6% 20.0% 22.9%
Market Value of Common Equity (EMV) $24,171 $17,812 $34,945 $29,469 $32,657 $26,656
Plus: Total Funded Debt (TFD) (a) $4,000 $4,166 $0 $16,497 $4,555 $23,676
Less: Cash and Marketable Securities $326 $4,377 $15,512 $472 $313 $1,012
======= ======= ======= ======== ======== ========
Total Market Capitalization (b) $27,845 $17,600 $19,433 $45,494 $36,899 $49,321
======= ======= ======= ======== ======== ========
Last 12 Months' (LTM) Income Information
LTM Revenues $97,332 $75,134 $76,738 $106,986 $114,970 $96,630
LTM Gross Profit $70,460 $49,308 $58,683 $78,966 $84,578 $72,427
LTM EBITDA $8,331 $7,998 $8,678 $12,939 $10,594 $11,883
LTM EBIT $4,096 $3,912 $4,306 $9,501 $7,262 $5,997
LTM Net Income $2,534 $2,179 $3,132 $5,468 $4,353 $2,676
LTM EPS $0.67 $0.43 $0.50 $0.85 $1.19 $0.63
Margins:
LTM Gross Margin 72.4% 65.6% 76.5% 73.8% 73.6% 73.4%
LTM EBITDA Margin 8.6% 10.6% 11.3% 12.1% 9.2% 12.0%
LTM EBIT Margin 4.2% 5.2% 5.6% 8.9% 6.3% 6.1%
LTM Net Income Margin 2.6% 2.9% 4.1% 5.1% 3.8% 2.7%
Tax Rate 32.8% 36.0% 33.5% 32.5% 39.9% 30.2%
Capitalization (% Statement)
Short-Term Debt 0.0% 2.9% 0.0% 4.8% 2.5% 3.0%
------- ------- ------- -------- -------- --------
Long-Term Debt 12.2% 15.9% 0.0% 31.2% 11.1% 48.3%
Preferred Stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Book Equity 87.8% 81.1% 100.0% 64.0% 86.4% 48.6%
======= ======= ======= ======== ======== ========
Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ======== ========
TFD/(EMV+TFD) 14.2% 19.0% 0.0% 35.9% 12.2% 47.0%
Book Value $8.34 $4.02 $6.69 $8.22 $7.51 $5.25
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Main Street Roadhouse Chart Rock Bottom Uno Quality
& Main, Inc. Grill, Inc. House Ent. Restaurants, Inc. Restaurant Corp. Dining, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ticker/Exchange MAIN/NASD GRLL/NASD CHT/NYSE BREW/NASD UNO/NYSE QDIN/NASD
12/31/97 12/31/97 12/31/97 12/31/97 09/30/97 10/31/97
Latest Fiscal Year Ending 06/30/98 06/30/98 06/30/98 06/30/98 06/30/98 08/31/98
Latest Fiscal Quarter Ending 09/30/98 -- -- -- -- --
Preliminary Earnings Reported
Current Market Information
Stock Price: 10/16/98 $3.56 $3.69 $4.75 $5.13 $6.75 $2.75
52-Week High $4.31 $6.31 $9.19 $11.75 $7.69 $6.09
52-Week Low $2.59 $2.75 $4.56 $4.63 $5.75 $1.94
% Within High/Low Range 56.4% 26.3% 4.1% 7.0% 51.6% 19.5%
Common Shares Outstanding (000s) 9,971 9,309 11,748 8,056 10,758 12,599
% Held by Institutions 3.7% 2.2% 32.9% 35.7% 24.0% 12.1%
Market Value of Common Equity (EMV) $35,522 $34,327 $55,803 $41,287 $72,617 $34,647
Plus: Total Funded Debt (TFD) (a) $30,434 $27,101 $6,143 $34,025 $45,858 $116,010
Less: Cash and Marketable Securities $7,694 $2,628 $208 $490 $2,227 $1,938
======== ======= ======== ======== ======== ========
Total Market Capitalization (b) $58,262 $58,799 $61,738 $74,823 $116,248 $148,719
======== ======= ======== ======== ======== ========
Last 12 Months' (LTM) Income Information
LTM Revenues $108,769 $98,752 $149,185 $158,762 $188,361 $250,905
LTM Gross Profit $77,654 $65,849 $101,811 $118,663 $141,197 $176,722
LTM EBITDA $7,788 $9,039 $10,415 $16,879 $28,552 $23,738
LTM EBIT $2,940 $3,610 $2,557 $4,298 $16,158 $11,292
LTM Net Income $370 $1,867 $1,135 $1,319 $8,065 ($1,498)
LTM EPS $0.22 $0.22 $0.11 $0.18 $0.67 $0.50
Margins:
LTM Gross Margin 71.4% 66.7% 68.2% 74.7% 75.0% 70.4%
LTM EBITDA Margin 7.2% 9.2% 7.0% 10.6% 15.2% 9.5%
LTM EBIT Margin 2.7% 3.7% 1.7% 2.7% 8.6% 4.5%
LTM Net Income Margin 0.3% 1.9% 0.8% 0.8% 4.3% -0.6%
Tax Rate 40.0% 18.1% 39.2% 43.9% 35.5% NM
Capitalization (% Statement)
Short-Term Debt 2.2% 4.8% 1.2% 0.8% 3.4% 0.3%
======== ======= ======== ======== ======== ========
Long-Term Debt 53.2% 33.1% 8.1% 34.3% 35.1% 69.0%
Preferred Stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Book Equity 44.6% 62.1% 90.7% 64.9% 61.5% 30.7%
======== ======= ======== ======== ======== ========
Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======= ======== ======== ======== ========
TFD/(EMV+TFD) 46.1% 44.1% 9.9% 45.2% 38.7% 77.0%
Book Value $2.46 $4.77 $5.11 $7.81 $6.81 $4.07
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) Total Funded Debt equals Short-Term Debt plus Long-Term Debt plus Preferred
Equity.
(b) Total Market Capitalization equals Market Value of Common Equity plus Total
Funded Debt less Cash and Marketable Securities.
6
<PAGE>
Confidential
Project Newco
Analysis of Selected Reference Companies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------- Shells Il Fornaio Benihana Ark Max & Erma's
Market Multiples Hoya Seafood Rest. America Corp. Inc. Restaurants Corp. Restaurants
- ---------------------------------- ------- ------------- ------------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Market Capitalization $27,845 $17,600 $19,433 $45,494 $36,899 $49,321
Total Capitalization/LTM Revenues 0.29x 0.23x 0.25x 0.43x 0.32x 0.50x
Total Capitalization/LTM EBITDA 3.34x 2.20x 2.24x 3.52x 3.48x 4.15x
Total Capitalization/LTM EBIT 6.80x 4.50x 4.51x 4.79x 5.08x 8.22x
Price / LTM EPS 10.45x 9.30x 11.75x 9.71x 7.14x 9.92x
Market / Book Multiple 0.84x 0.99x 0.88x 1.00x 1.13x 1.19x
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------- Main Street Roadhouse Chart Rock Bottom Uno Quality
Market Multiples & Main, Inc. Grill, Inc. House Ent. Restaurants, Inc. Restaurant Corp. Dining, Inc.
- ---------------------------------- ------------ ----------- ---------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Market Capitalization $58,262 $58,799 $61,738 $74,823 $116,248 $148,719
Total Capitalization/LTM Revenues 0.54x 0.60x 0.41x 0.47x 0.62x 0.59x
Total Capitalization/LTM EBITDA 7.48x 6.51x 5.93x 4.43x 4.07x 6.27x
Total Capitalization/LTM EBIT 19.82x 16.29x 24.14x 17.41x 7.19x 13.17x
Price / LTM EPS 16.19x 16.76x 43.18x 28.47x 10.07x 5.50x
Market / Book Multiple 1.45x 0.77x 0.93x 0.66x 0.99x 0.68x
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Total Market Cap Total Market Cap Overall Universe
less than $50MM less than $50MM
----------------------- ------------------------- ------------------------
- -----------------------------
Summary Statistics (a) Hoya Mean High Low Mean High Low Mean High Low
- ----------------------------- -------- ------- ------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capitalization/LTM Revenues 0.29x 0.33x 0.50x 0.23x 0.55x 0.62x 0.41x 0.46x 0.62x 0.23x
Total Capitalization/LTM EBITDA 3.34x 3.08x 4.15x 2.20x 5.78x 7.48x 4.07x 4.51x 7.48x 2.20x
Total Capitalization/LTM EBIT 6.80x 4.79x 8.22x 4.50x 16.67x 24.14x 7.19x 10.72x 24.14x 4.50x
Price / LTM EPS 10.45x 9.64x 11.75x 7.14x 17.88x 43.18x 5.50x 13.26x 43.18x 5.50x
Market / Book Multiple 0.84x 1.04x 1.19x 0.88x 0.84x 1.45x 0.66x 0.95x 1.45x 0.66x
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes:
(a) Boldfaced multiples, if any, are excluded from Summary Statistics, as they
are deemed extraordinary
(b) Mean excludes high and low values.
7
<PAGE>
Confidential
Project Newco
SELECTED REFERENCE COMPANY ANALYSIS
(All Dollar Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Shells Il Fornaio Benihana Ark Max & Erma's
Hoya Mean Seafood Rest. America Corp. Inc. Restaurants Corp. Restaurants
-------- -------- ---------------- ------------- -------- ----------------- ------------
Revenues
<S> <C> <C> <C> <C> <C> <C> <C>
LTM $97,332 $75,134 $76,738 $106,986 $114,970 $98,630
Latest Fiscal Ye1996/97 $94,904 $65,312 $72,120 $99,757 $104,326 $91,626
Fiscal Year 1995/96 $87,753 $39,793 $60,752 $160,551 $76,796 $79,858
Fiscal Year 1994/95 $93,496 $28,621 $54,140 $179,155 $73,027 $64,198
------ ---- ------ ------ ------ ------ ------
3 Yr. Revenue CAGR 0.8% 36.0% 51.1% 15.4% -25.4% 19.5% 19.5%
Gross Margin
LTM 72.4% 65.6% 76.5% 73.8% 73.6% 73.4%
Latest Fiscal Ye1996/97 72.2% 64.8% 76.4% 74.0% 72.7% 73.0%
Fiscal Year 1995/96 71.8% 64.8% 75.7% 86.5% 72.8% 73.3%
Fiscal Year 1994/95 72.2% 60.8% 76.4% 88.2% 72.6% 74.0%
------ ---- ------ ------ ------ ------ ------
Avg. 3 Yr. Gross Margin 72.1% 72.3% 63.5% 76.2% 82.9% 72.7% 73.4%
EBITDA Margin
LTM 8.6% 10.6% 11.3% 12.1% 9.2% 12.0%
Latest Fiscal Ye1996/97 8.0% 9.6% 10.1% 13.0% 5.6% 12.9%
Fiscal Year 1995/96 6.2% 9.9% 10.0% 6.5% 3.7% 13.6%
Fiscal Year 1994/95 0.9% 3.9% 11.5% 5.3% 4.0% 13.4%
------ ---- ------ ------ ------ ------ ------
Avg. 3 Yr. EBITDA Margin 5.0% 9.0% 7.8% 10.6% 8.3% 4.4% 13.3%
EBIT Margin
LTM 4.2% 5.2% 5.6% 8.9% 6.3% 6.1%
Latest Fiscal Ye1996/97 3.5% 4.4% 4.7% 10.0% 2.7% 6.5%
Fiscal Year 1995/96 1.7% 6.7% 3.7% 5.0% 0.6% 6.7%
Fiscal Year 1994/95 -4.3% 0.5% 5.4% 3.9% 1.3% 6.9%
------ ---- ------ ------ ------ ------ ------
Avg. 3 Yr. EBIT Margin 0.3% 4.7% 3.9% 4.6% 6.3% 1.5% 6.7%
Net Income
LTM $2,534 $2,179 $3,132 $5,468 $4,353 $2,676
Latest Fiscal Ye1996/97 $1,731 $1,576 $2,301 $5,940 $1,738 $2,225
Fiscal Year 1995/96 $467 $1,327 $1,453 $4,947 $789 $2,161
Fiscal Year 1994/95 ($2,810) ($570) $2,631 $4,410 $1,121 $2,139
------ ---- ------ ------ ------ ------ ------
3 Yr. Net Income CAGR NM 14.2% NM -6.5% 16.1% 24.5% 2.0%
Net Income Margin
LTM 2.6% 2.9% 4.1% 5.1% 3.8% 2.7%
Latest Fiscal Ye1996/97 1.8% 2.4% 3.2% 6.0% 1.7% 2.4%
Fiscal Year 1995/96 0.5% 3.3% 2.4% 3.1% 1.0% 2.7%
Fiscal Year 1994/95 -3.0% -2.0% 4.9% 2.5% 1.5% 3.3%
------ ---- ------ ------ ------ ------ ------
Avg. 3 Yr. Net Income Margin -0.2% 2.6% 1.3% 3.5% 3.8% 1.4% 2.8%
<CAPTION>
-------------------------------------------------------------------------------------------------
Main Street Roadhouse Chart Rock Bottom Uno Quality
& Main, Inc. Grill, Inc. House Ent. Restaurants, Inc. Restaurant Corp. Dining, Inc.
------------ ----------- ---------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
LTM $108,769 $98,752 $149,185 $158,762 $188,361 $250,905
Latest Fiscal Ye1996/97 $107,997 $92,795 $151,202 $150,248 $178,020 $302,252
Fiscal Year 1995/96 $122,563 $62,433 $160,551 $109,230 $172,141 $237,630
Fiscal Year 1994/95 $119,508 $34,275 $179,155 $73,964 $158,706 $105,291
-------- ------- -------- ------- -------- --------
3 Yr. Revenue CAGR -4.9% 64.5% -8.1% 42.5% 5.9% 69.4%
Gross Margin
LTM 71.4% 66.7% 68.2% 74.7% 75.0% 70.4%
Latest Fiscal Ye1996/97 71.3% 66.6% 69.0% 74.9% 75.3% 70.7%
Fiscal Year 1995/96 71.4% 65.8% 69.4% 75.2% 74.4% 69.6%
Fiscal Year 1994/95 71.5% 64.7% 71.0% 75.0% 75.2% 70.4%
-------- ------- -------- ------- -------- --------
Avg. 3 Yr. Gross Margin 71.4% 65.7% 69.8% 75.0% 75.0% 70.2%
EBITDA Margin
LTM 7.2% 9.2% 7.0% 10.6% 15.2% 9.5%
Latest Fiscal Ye1996/97 8.7% 7.6% 8.6% 10.7% 13.2% 5.6%
Fiscal Year 1995/96 5.9% 4.9% 8.1% 12.0% 12.7% 12.8%
Fiscal Year 1994/95 7.6% -5.4% 11.7% 11.0% 15.3% 14.6%
-------- ------- -------- ------- -------- --------
Avg. 3 Yr. EBITDA Margin 7.4% 2.3% 9.5% 11.2% 13.7% 11.0%
EBIT Margin
LTM 2.7% 3.7% 1.7% 2.7% 8.6% 4.5%
Latest Fiscal Ye1996/97 4.5% 2.2% 2.7% 2.6% 6.1% 0.2%
Fiscal Year 1995/96 1.0% -0.1% 2.0% 4.9% 5.1% 8.7%
Fiscal Year 1994/95 2.8% -10.3% 5.7% 5.3% 8.4% 10.8%
-------- ------- -------- ------- -------- --------
Avg. 3 Yr. EBIT Margin 2.8% -2.7% 3.5% 4.3% 6.6% 6.6%
Net Income
LTM $370 $1,867 $1,135 $1,319 $8,065 ($1,498)
Latest Fiscal Ye1996/97 $1,448 $459 $1,570 $1,469 $5,073 ($9,270)
Fiscal Year 1995/96 ($1,958) ($890) ($590) $4,025 $4,048 $14,606
Fiscal Year 1994/95 ($1,034) ($3,490) $4,432 $3,270 $7,203 $6,095
-------- ------- -------- ------- -------- --------
3 Yr. Net Income CAGR NM NM -40.5% -33.0% -16.1% NM
Net Income Margin
LTM 0.3% 1.9% 0.8% 0.8% 4.3% -0.6%
Latest Fiscal Ye1996/97 1.3% 0.5% 1.0% 1.0% 2.8% -3.1%
Fiscal Year 1995/96 -1.6% -1.4% -0.4% 3.7% 2.4% 6.1%
Fiscal Year 1994/95 -0.9% -10.2% 2.5% 4.4% 4.5% 5.8%
-------- ------- -------- ------- -------- --------
Avg. 3 Yr. Net Income Margin -0.4% -3.7% 1.0% 3.0% 3.2% 3.0%
</TABLE>
8
<PAGE>
Project NEWCO
Restaurant Universe
$75-$15mm in Market Value of Common Stock
- --------------------------------------------------------------------------------
MARKET VALUE OF
COMPANY COMMON STOCK
- ------------------------------------------------------------------------------
Uno Restaurant Corporation 72.62M
- -------------------------------------------------------------------------------
Boston Chicken, Inc. 65.08M
Sizzler International, Inc. 59.45M
Koo Koo Roo, Inc. 57.89M
Frisch's Restaurants, Inc. 57.06M
Unique Casual Restaurants, Inc. 56.58M
- -------------------------------------------------------------------------------
Chart House Enterprises, Inc. 55.80M
- -------------------------------------------------------------------------------
Pizza Inn, Inc. 55.55M
Furr's/Bishop's Incorporated 48.68M
ELXSI Corporation 47.98M
Friendly Ice Cream Corporation 44.73M
Spaghetti Warehouse, Inc. (acquisition pending) 38.22M
- ------------------------------------------------------------------------------
Main Street & Main, Inc. 35.52M
Il Fornaio (America) Corporation 34.95M
Quality Dining, Inc. 34.65M
- ------------------------------------------------------------------------------
Checkers Drive-In Restaurants, Inc. 34.41M
- ------------------------------------------------------------------------------
Roadhouse Grill, Inc. 34.33M
Rock Bottom Restaurants, Inc. 34.03M
- ------------------------------------------------------------------------------
Einstein/Noah Bagel Corp. 33.27M
International Fast Food Corporation 32.69M
- ------------------------------------------------------------------------------
Ark Restaurants Corp. 32.66M
Benihana, Inc. 29.47M
- ------------------------------------------------------------------------------
Total Entertainment Restaurant Corp. 28.64M
- ------------------------------------------------------------------------------
Max & Erma's Restaurants, Inc. 26.66M
- ------------------------------------------------------------------------------
DenAmerica Corp. 26.06M
Santa Barbara Restaurant Group 25.89M
Famous Dave's of America, Inc. 23.72M
Rally's Hamburgers, Inc. 22.68M
Amarillo Mesquite Grill, Inc. 22.26M
Quizno's Corporation 21.67M
EasyRiders, Inc. 18.50M
Big Buck Brewery & Steakhouse 18.50M
- ------------------------------------------------------------------------------
Shells Seafood Restaurants, Inc. 17.81M
- ------------------------------------------------------------------------------
Nathan's Famous, Inc. 16.53M
Casa Ole' Restaurants, Inc. 16.19M
Grill Concepts, Inc. 16.02M
Star Buffet, Inc. 14.02M
9
<PAGE>
Confidential
PROJECT NEWCO
Business Description of Selected Reference Companies
in the Restaurant Industry
- --------------------------------------------------------------------------------
Ark Restaurants Corporation
- ---------------------------
Ark Restaurants Corporation, through its subsidiaries, owns and operates 23
restaurants and manages five restaurants owned by others. The Company's
restaurants are located in New York City and Rhinebeck, New York, Nevada,
Washington, D.C., Virginia, Massachusetts, and Florida. Ark Restaurants also
operates catering businesses, bakeries, a cafe, a studio store, and corporate
dining facilities.
Benihana, Inc.
- --------------
Benihana, Inc. owns and operates 50 Japanese teppanyaki-style restaurants and
franchises 13 restaurants in the United States. The Company's restaurants
feature steak, chicken, and seafood prepared in traditional Japanese style in a
casual upscale dining environment.
Chart House Enterprises, Inc.
- -----------------------------
Chart House Enterprises, Inc. operates 60 restaurants in 22 states, Puerto Rico,
and the US Virgin Islands. The Company's restaurants are full-service, casual
dinner houses with a menu featuring a variety of items, including fish, seafood,
steaks, chicken, prime rib, and more. Chart House also operates a wholesale
bakery under the name "Solana Beach Baking Co."
Il Fornaio (America) Corporation
- --------------------------------
Il Fornaio (America) Corporation owns and operates a restaurant chain. The
Company operates 15 restaurants in Colorado, California, Oregon, and Nevada. The
restaurants serve Italian cuisine based on authentic regional recipes. Il
Fornaio also operates wholesale bakeries and retail markers.
Main Street & Main, Inc.
- ------------------------
Main Street & Main, Inc. operates restaurants throughout the United States.
The Company operates 46 "T.G.I. Friday's" restaurants and one "Front Row Sports
Grill Restaurant." "T.G.I. Friday's restaurants offer full-service, casual
dining, with a wide selection of freshly prepared, popular foods and drinks.
Max & Erma's Restaurants, Inc.
- ------------------------------
Max & Erma's Restaurants, Inc. owns and operates 46 restaurants under the name
"Max & Erma's Neighborhood Gathering Place." The restaurants are located in
Ohio, Pennsylvania, Indiana, Michigan, Illinois, North Carolina, South Carolina,
Kentucky and Georgia and offer American food and alcoholic and non-alcoholic
beverages.
Quality Dining, Inc.
- --------------------
Quality Dining, Inc. owns and operates quick-service and casual dining
restaurants. The Company owns "Grady's American Grill," "Spageddies Italian
Kitchen," and "Papa Vino's Italian Kitchen." The Company also operates " Burger
King" restaurants and "Chili's Grill & Bar" restaurants as a franchisee.
10
<PAGE>
Confidential
PROJECT NEWCO
Business Description of Selected Reference Companies
in the Restaurant Industry
- --------------------------------------------------------------------------------
Roadhouse Grill, Inc.
- ---------------------
Roadhouse Grill, Inc. owns, operates, and franchises "Roadhouse Grill"
restaurants. The Company owns and operates 44 restaurants and franchises or
licenses three additional restaurants. Roadhouse's restaurants are located in
Florida, Georgia, South Carolina, Mississippi, Louisiana, Arkansas, Alabama, New
York, Ohio, Nevada, and Ampang and Baru, Malaysia.
Rock Bottom Restaurants, Inc.
- -----------------------------
Rock Bottom Restaurants, Inc. operates 42 "Old Chicago" restaurants and 27
brewery restaurants. The brewery restaurants operates under the names "Rock
Bottom Restaurant & Brewery," "ChopHouse & Brewery" and "Big River Grille &
Brewing Works." The restaurants offer casual dinning and microbrewed and
specialty beers.
Shells Seafood Restaurants, Inc.
- --------------------------------
Shells Seafood Restaurants, Inc. manages and operates 44 full service,
mid-priced casual dining seafood restaurants in Florida and the mid-western
United States under the name "Shells." The Company's restaurants feature a wide
variety of seafood items, pasta dishes, appetizers, salads, and desserts.
Uno Restaurant Corporation
- --------------------------
Uno Restaurant Corporation operates and franchises "Pizzeria Uno" and "Chicago
Bar & Grill" casual dining, full-service restaurants. The Company also operates
a consumer foods division, which supplies "American Airlines'" movie theaters,
hotels, and supermarkets with frozen and refrigerated "Pizzeria Uno" brand
products. In addition, Uno supplies certain private label products.
11
<PAGE>
Confidential
Project Newco
Premium Analysis of Select Completed and Pending Acquisitions
in the Restaurant Industry
Enterprise Value Greater than $20 Million
January 1, 1993 - Present
<TABLE>
<CAPTION>
Enterprise
Date Value (1)
Announced Target Name Acquirer Name ($mil)
- ---------------- ---------------------------------------- ----------------------- ----------------
<S> <C> <C> <C>
18-Sep-98 Spaghetti Warehouse Inc. Consolidated Restaurant Co. 60
4-Jun-98 Pollo Tropical Inc Carrols Corp 95
1-May-98 Denamerica Corp * Tech Electro Industries Inc 187
3-Apr-98 Bertucci's Inc NE Restaurant Co Inc 104
12-Dec-97 Timber Lodge Steakhouse Inc * GB Foods Corp 31
26-Sep-97 Sagebrush Inc WSMP Inc 41
26-Sep-97 Skyline Chili Inc Investor Group 27
23-Sep-97 El Chico Restaurants Inc Investor Group 59
5-Sep-97 DavCo Restaurants Inc * Investor Group 205
2-Sep-97 Ground Round Restaurants GRR Holdings LLC 73
4-Aug-97 Perkins Family Restaurant LP Restaurant Co 414
3-Jul-97 Krystal Co Port Royal Holdings Inc 146
28-May-97 DAKA International Inc Compass Group PLC 189
17-Jan-97 CEC Entertainment Inc * Hallwood Group Inc 474
14-Jun-96 Bugaboo Creek Steak House Inc Longhorn Steaks Inc 56
4-Jun-96 Hometown Buffet, Inc. Buffets, Inc. 218
2-May-96 Houlihans Restaurant Group Zapata Corp 80
22-Apr-96 Bayport Restaurant Group Landry's Seafood Restaurants 74
10-Oct-95 Champps Entertainment Inc. DAKA International Inc. 70
18-Sep-95 DelFrisco's Double Eagle Lonestar Steakhouse & Saloon 23
15-Aug-95 DF&R Restaurants Inc. Apple South 201
1-May-95 Marcus Corp-Applebee's Apple South 48
24-Oct-94 Grayling Corp Quality Dining Inc 20
14-Oct-94 Innovative Restaurant Concepts Applebee's International Inc 64
7-Sep-94 Pub Venture of New England Inc. Applebee's International Inc 58
1-Aug-94 Grill Concepts Inc. Magellan Restaurant Systems 53
5-Jul-94 Marco's Mexican Restaurants Billy Blues Food Corp. 25
24-Jan-94 On The Border Cafes Inc. Brinker International Inc. 33
20-May-93 Foodmaker Inc-Chi Chi's Rest Restaurant Enterprises Group 200
18-May-93 NRH Corp National Pizza Co 20
12-Jan-93 Two Pesos-Mexican Rest Chain Taco Cabana Inc 21
<CAPTION>
------------------------------------------------------------------
Premium Premium Premium Price as Price as
4 Weeks 1 Week 1 Day % %
Date Prior to Prior to Prior to 52-Wk 52-Wk
Announced Target Name Annc. Annc. Annc. Low High
- ---------------- ---------------------------------------- ---------- ---------- ---------- --------- ----------
<S> <C> <S> <C> <C> <C> <C>
18-Sep-98 Spaghetti Warehouse Inc. 13.3% 31.9% 39.1% 152.4% 93.4%
4-Jun-98 Pollo Tropical Inc 18.1% 7.3% 10.0% 523.8% 127.9%
1-May-98 Denamerica Corp *
3-Apr-98 Bertucci's Inc 35.5% 35.5% 35.5% 210.0% 147.9%
12-Dec-97 Timber Lodge Steakhouse Inc * 81.2% 74.1% 74.1% 261.9% 164.3%
26-Sep-97 Sagebrush Inc
26-Sep-97 Skyline Chili Inc
23-Sep-97 El Chico Restaurants Inc 104.0% 75.9% 64.5% 184.8% 134.2%
5-Sep-97 DavCo Restaurants Inc * 53.8% 49.5% 49.5% 235.3% 149.5%
2-Sep-97 Ground Round Restaurants
4-Aug-97 Perkins Family Restaurant LP
3-Jul-97 Krystal Co
28-May-97 DAKA International Inc
17-Jan-97 CEC Entertainment Inc *
14-Jun-96 Bugaboo Creek Steak House Inc 22.4% 28.1% 20.6% 164.0% 83.7%
4-Jun-96 Hometown Buffet, Inc. 2.6% 7.3% -3.3% 151.9% 96.7%
2-May-96 Houlihans Restaurant Group 60.0% 56.1% 56.1% 213.3% 96.0%
22-Apr-96 Bayport Restaurant Group 21.9% 28.5% 10.5% 141.4% 85.2%
10-Oct-95 Champps Entertainment Inc. 29.8% 17.1% 2.1% 252.6% 98.0%
18-Sep-95 DelFrisco's Double Eagle
15-Aug-95 DF&R Restaurants Inc. 39.8% 27.4% 25.0% 275.7% 111.2%
1-May-95 Marcus Corp-Applebee's
24-Oct-94 Grayling Corp
14-Oct-94 Innovative Restaurant Concepts
7-Sep-94 Pub Venture of New England Inc.
1-Aug-94 Grill Concepts Inc.
5-Jul-94 Marco's Mexican Restaurants
24-Jan-94 On The Border Cafes Inc. 70.6% 45.8% 29.6% 162.0% 94.1%
20-May-93 Foodmaker Inc-Chi Chi's Rest
18-May-93 NRH Corp
12-Jan-93 Two Pesos-Mexican Rest Chain
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Summary Table
-----------------------
<S> <C> <C> <C> <C> <C> <C>
Mean (2) $94 (3) 40.6% 36.5% 31.1% 205.8% 112.2%
Median $74 (3) 35.5% 31.9% 29.6% 210.0% 98.0%
Hoya Pricing Data:
Closing Price (10/16/98) $7.000 $9.84 -- -- $9.52 $10.45
52-Week High 9.310 $9.48 -- -- $9.71 $9.12
52-Week Low 4.625
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
* Transactions Pending
(1) Enterprise value is equal to the total value of consideration paid by the
acquirer, including liabilities if publicly disclosed, and excluding fees
and expenses.
(2) Mean excludes high and low values.
(3) For transactions with corresponding data only.
Source: Securities Data Company, Inc. (201) 622-3100
12
<PAGE>
Confidential
Project Newco
Comparable Merger & Acquisition Transactions in the Restaurant Industry
January, 1997 to October 16, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Date
Announced Target Name Target Business Description Acquiror Name
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
09/18/98 Spaghetti Warehouse Operate Italian restaurants Consolidated Restaurant Cos
08/03/98 Fuddruckers Inc (DAKA Intl Inc) Operate, franchise restaurants King Cannon Inc
06/04/98 Pollo Tropical Inc. Own and operate restaurants Carrols Corp
05/01/98 Houlihan's Restaurant Group Restaurant holding company Hampstead Ventures
04/27/98 Romacorp (NPC International) Own, operate restaurants Investor Group
04/03/98 Bertucci's Inc. Own and operate restaurants NE Restaurant Co Inc
10/17/97 Black-Eyed Pea Restaurants Own, operate restaurants DeanAmerica
09/02/97 Ground Round Restaurants Own and operate restaurants Boston Ventures
08/04/97 Perkins Family Restaurant LP Own, operate franchised restaurants Restaurant Co
06/24/97 Charlie Brown's Inc Own, op restaurants Castle Harlan Partners III
06/14/96 Bugaboo Creek Steak House Inc Own, op restaurants Longhorn Steaks Inc
<CAPTION>
----------------------------------------------------------
Ent. Ent.
Enterprise Value/ Value/
Value LTM LTM
($mil) Sales EBITDA
----------------------------------------------------------
<S> <C> <C> <C> <C>
09/18/98 Spaghetti Warehouse $54.3 0.8x 7.3x
08/03/98 Fuddruckers Inc (DAKA Intl Inc) $43.0 0.2x NA
06/04/98 Pollo Tropical Inc. $95.0 1.4x 7.8x
05/01/98 Houlihan's Restaurant Group $120.0 0.4x 4.9x
04/27/98 Romacorp (NPC International) $117.5 1.2x 7.3x
04/03/98 Bertucci's Inc. $104.2 0.8x 6.7x
10/17/97 Black-Eyed Pea Restaurants $66.8 0.4x 3.9x
09/02/97 Ground Round Restaurants $58.0 0.3x 7.9x
08/04/97 Perkins Family Restaurant LP $215.0 0.8x 6.3x
06/24/97 Charlie Brown's Inc $50.4 0.8x 6.0x
06/14/96 Bugaboo Creek Steak House Inc $57.1 1.2x 6.1x
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Ent. Ent.
Value/ Value/
LTM LTM
Sales EBITDA
----- ------
<S> <C> <C>
Mean 0.8x 6.4x
Median 0.8x 6.5x
Adjusted Mean (1) 0.7x 6.6x
High 1.4x 7.9x
Low 0.2x 3.9x
Count 11 10
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Source: Securities Data Company, Inc. (201) 622-3100
All bold italicized value excluded from multiples.
(1) Adjusted mean excludes high and low values.
13
<PAGE>
Confidential
Historical Weekly Stock Price Performance
S&P Restaurant Index and Announcement Dates of Selected Transactions
January 2, 1996 - October 16, 1998
- --------------------------------------------------------------------------------
S&P Restaurant Index
5-Jan-96 100.00%
12-Jan-96 95.80%
19-Jan-96 101.00%
26-Jan-96 105.40%
2-Feb-96 108.20%
9-Feb-96 114.40%
16-Feb-96 108.70%
23-Feb-96 110.50%
1-Mar-96 106.60%
8-Mar-96 111.90%
15-Mar-96 108.50%
22-Mar-96 109.80%
29-Mar-96 106.70%
5-Apr-96 106.10%
12-Apr-96 103.00%
19-Apr-96 103.00%
26-Apr-96 103.50%
3-May-96 107.00%
10-May-96 104.70%
17-May-96 103.60%
24-May-96 107.30%
31-May-96 105.10%
7-Jun-96 105.30%
14-Jun-96 104.50% BCS/LS: 6/14/96
21-Jun-96 100.50%
28-Jun-96 102.30%
5-Jul-96 101.50% BEP/DA: 7/9/96
12-Jul-96 97.10%
19-Jul-96 95.60%
26-Jul-96 97.00%
2-Aug-96 98.60%
9-Aug-96 102.60%
16-Aug-96 101.30%
23-Aug-96 100.80%
30-Aug-96 101.80%
6-Sep-96 99.00%
13-Sep-96 102.50%
20-Sep-96 102.60%
27-Sep-96 102.20%
4-Oct-96 101.50%
11-Oct-96 99.90%
18-Oct-96 99.20%
25-Oct-96 97.40%
1-Nov-96 96.50%
8-Nov-96 100.70%
15-Nov-96 101.20%
22-Nov-96 103.90%
29-Nov-96 99.60%
6-Dec-96 100.20%
13-Dec-96 100.30%
20-Dec-96 97.70%
27-Dec-96 99.50%
3-Jan-97 97.40%
10-Jan-97 95.00%
17-Jan-97 96.80%
24-Jan-97 97.80%
31-Jan-97 98.20%
7-Feb-97 98.00%
14-Feb-97 99.20%
21-Feb-97 99.40%
28-Feb-97 96.10%
7-Mar-97 96.20%
14-Mar-97 95.40%
21-Mar-97 101.40%
28-Mar-97 103.60%
4-Apr-97 101.70%
11-Apr-97 105.10%
18-Apr-97 106.50%
25-Apr-97 108.70%
2-May-97 113.00%
9-May-97 113.70%
16-May-97 111.40%
23-May-97 109.30%
30-May-97 108.70% CB/CH: 6/1/97
6-Jun-97 103.70%
13-Jun-97 108.40%
20-Jun-97 106.90%
27-Jun-97 105.40%
4-Jul-97 106.00%
11-Jul-97 105.30%
18-Jul-97 109.10%
25-Jul-97 112.40%
1-Aug-97 118.10% PFR/RC: 8/4/97
8-Aug-97 112.50%
15-Aug-97 108.70%
22-Aug-97 108.20%
29-Aug-97 104.70% GR/B: 9/2/97
5-Sep-97 102.20%
12-Sep-97 100.50%
19-Sep-97 102.00%
26-Sep-97 104.80%
3-Oct-97 104.90%
10-Oct-97 103.00%
17-Oct-97 101.30%
24-Oct-97 105.70%
31-Oct-97 99.50%
7-Nov-97 100.80%
14-Nov-97 101.30%
21-Nov-97 104.20%
28-Nov-97 105.50%
5-Dec-97 105.80%
12-Dec-97 103.50%
19-Dec-97 99.60%
26-Dec-97 99.70%
2-Jan-98 103.90%
9-Jan-98 101.70%
16-Jan-98 100.70%
23-Jan-98 102.40%
30-Jan-98 102.60%
6-Feb-98 104.70%
13-Feb-98 106.90%
20-Feb-98 110.30%
27-Feb-98 110.10%
6-Mar-98 114.00%
13-Mar-98 116.80%
20-Mar-98 111.50%
27-Mar-98 113.20% B/NERC: 4/3/98
3-Apr-98 128.60%
10-Apr-98 127.40%
17-Apr-98 130.10%
24-Apr-98 128.80% TR/IG: 4/27/98
1-May-98 125.20%
8-May-98 128.90%
15-May-98 132.10%
22-May-98 136.70%
29-May-98 135.40%
5-Jun-98 137.20% PT/CC: 6/4/98
12-Jun-98 137.10%
19-Jun-98 135.90%
26-Jun-98 140.40%
3-Jul-98 146.20%
10-Jul-98 149.20%
17-Jul-98 146.20% H/HI: 7/22/98
24-Jul-98 140.30%
31-Jul-98 139.00% F/KCI: 8/3/98
7-Aug-98 130.00%
14-Aug-98 137.30%
21-Aug-98 138.70%
28-Aug-98 136.50%
4-Sep-98 126.60%
11-Sep-98 132.10%
18-Sep-98 126.90% SW/CRG: 9/18/98
25-Sep-98 123.80%
2-Oct-98 128.40%
9-Oct-98 129.40%
16-Oct-98 135.30%
-- Downturn in Index during last three months is most severe since 1/1/96.
-- Only two transactions have been priced in this environment.
14
<PAGE>
Confidential
Project Newco
Historical Annual Restaurant Tax Collection Levels for the State
of Massachusetts
For Fiscal Years Ending June 30, 1980 - June 30, 1998
- -------------------------------------------------------------------
Total Annual
Restaurant
Tax Collections Percent Change
1980 136,000 0.0%
1981 155,506 13.0%
1982 164,232 5.6%
1983 186,425 13.5%
1984 206,266 10.6%
1985 228,977 11.0%
1986 258,108 12.7%
1987 265,750 3.0%
1988 287,780 8.3%
1989 296,874 3.2%
1990 295,948 -0.3%
1991 291,710 -1.4%
1992 296,335 1.6%
1993 303,193 2.3%
1994 323,365 6.7%
1995 344,329 6.5%
1996 358,010 4.0%
1997 381,364 6.5%
1998 389,975 2.3%
-- This chart shows the impact of volatility in the financial markets in
October 1987 and, to a lesser extent due to proximity, October 1997.
15
<PAGE>
Confidential
PROJECT NEWCO
Tax Restaurant Tax Collections for the State of Massachusetts
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year
Ending June 30 Total Collected Percent Change
- ----------------- --------------- --------------
<S> <C> <C>
Total for FY 1980 $137,598 --
Total for FY 1981 155,506 +13.0%
Total for FY 1982 164,232 +5.6
Total for FY 1983 186,425 +13.5
Total for FY 1984 206,266 +10.6
Total for FY 1985 228,977 +11.0
Total for FY 1986 258,108 +12.7
Total for FY 1987 267,750 +3.0
Total for FY 1988 287,780 +8.3
Total for FY 1989 296,874 +3.2
Total for FY 1990 295,948 -0.3
Total for FY 1991 291,710 -1.4
Total for FY 1992 296,335 +1.6
Total for FY 1993 303,193 +2.3
Total for FY 1994 323,365 +6.7
Total for FY 1995 344,329 +6.5
Total for FY 1996 358,010 +4.0
Total for FY 1997 381,364 +6.5
Total for FY 1998 389,975 +2.3
</TABLE>
16
<PAGE>
Confidential
PROJECT NEWCO
Comparable M&A Transactions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Enterprise Value ($MM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
43 54.3 58 95 117.5 104.2 215 57.1 50.4 120 66.8 42.662
FUDD
SWH 7.3
GR 7.9
PT 7.8
TR 7.3
BERT 6.7
PERK 6.3
BUG 6.1
CB 6
HOU 4.90
BEP 3.9
Newco 5.85
</TABLE>
- --------------------------------------------------------------------------------
(1) Pro Forma for rent adjustments of $939M
- -- Relationship between size and valuation is consistent with other analyses.
17
<PAGE>
Confidential
HOYA
Summary of Selected Financial Sensitivity Assumptions
ALL CASES - Impact of Potential Renegotiation of Selected Leases having Change
of Control Provisions
(dollars in thousands)
For Discussion and Illustration Purposes Only
The following valuation scenario is based on the range
of discount rates from 17.5% to 22.5% and the
range of terminal EBITDA multiples of 5.0x to 6.0x.
<TABLE>
<CAPTION>
Range of Present Value
Scenario per Share
- ----------------------------------------------------------------------------------- -------------------------------------
Low Mid-Point High
--------- ------------ ---------
<S> <C> <C> <C>
IDEAL CASE $9.21 - $11.02 - $12.83
- Ten new stores or conversions with average EBITDA substantially above chain
average
- Average unit sales growth exceeds 2.5%
- EBITDA margin approximately 10.3%
MODERATE CASE $7.29 - $8.73 - $10.17
- Ten new stores or conversions with average EBITDA approximately chain
average
- Average unit sales growth is less than 1.0%
- EBITDA margin approximately 9.8%
DOWNSIDE/RECESSION CASE $6.00 - $7.22 - $8.43
- Ten new stores or conversions with average EBITDA below chain average
- Average unit sales growth declines 2.0% in 2000 and 2001 and increases 2.0%
in 2002 and 2.5% in 2003
- Cost of sales and payroll costs each increase 0.25% from 2000 to 2003
- Occupancy costs for all restaurants increase 0.2% from 2000 to 2003
- EBITDA margin approximately 8.9%
</TABLE>
18
<PAGE>
Confidential
HOYA
Summary of Selected Financial Sensitivity Assumptions
ALL CASES
(dollars in thousands)
For Discussion and Illustration Purposes Only
The following valuation scenario is based on the range
of discount rates from 17.5% to 22.5% and the
range of terminal EBITDA multiples of 5.0x to 6.0x.
<TABLE>
<CAPTION>
Range of Present Value
Scenario per Share
- ---------------------------------------------------------------------------------- ----------------------------------
Low Mid-Point High
-------- ----------- -------
<S> <C> <C> <C>
IDEAL CASE $10.41 - $12.41 - $14.41
- Ten new stores or conversions with average EBITDA substantially above chain
average
- Average unit sales growth exceeds 2.5%
- EBITDA margin approximately 10.3%
MODERATE CASE $8.20 - $9.78 - $11.36
- Ten new stores or conversions with average EBITDA approximately chain
average
- Average unit sales growth is less than 1.0%
- EBITDA margin approximately 9.8%
DOWNSIDE/RECESSION CASE $6.87 - $8.22 - $9.56
- Ten new stores or conversions with average EBITDA below chain average
- Average unit sales growth declines 2.0% in 2000 and 2001 and increases 2.0%
in 2002 and 2.5% in 2003
- Cost of sales and payroll costs each increase 0.25% from 2000 to 2003
- Occupancy costs for all restaurants increase 0.2% from 2000 to 2003
- EBITDA margin approximately 8.9%
</TABLE>
19
<PAGE>
Confidential
Project Newco - Effect of Change in Control on
Occupancy Expense and EBITDA Multiple
<TABLE>
<CAPTION>
Adjustments Based on
Impact of Change
of Control on Pro Forma
LTM 1998 (1) Occupancy Expense LTM 1998 (1)
------------ --------------------- -----------
<S> <C> <C> <C>
Revenue $97,332 $97,332
Operating Expenses
including Occupancy Expense (62,226) (939) (63,165)
EBIT 4,096 3,157
EBITDA 8,235 7,296
EBITDA Multiple 5.38x 6.08x
Enterprise Value $44,343 (2) $44,343 (2)
Offer Price Per Share $10.25 $10.25
</TABLE>
(1) At September 30, 1998.
(2) Enterprise Value includes estimated expenses of $1,750,000.
<TABLE>
<CAPTION>
Current Annual Rent Estimated Market Rent
------------------- ---------------------
Sales (000) Base % Total Base % Total Change
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hillary's Wayland 1.8 84,156 5 90,000 180,000 6 180,000 90,000
Charley's Nashua 2.5 150,000 5 150,000 240,000 6 240,000 90,000
Hillary's Trumbull 2.1 170,000 5 170,000 180,000 6 180,000 10,000
Joe's Boston 6.3 50,000 4.5-4.75 291,750 250,000 10 630,000 338,250
Charley's Waterford 3.0 155,000 5 155,000 240,000 6 240,000 85,000
Charley's N. Attleboro 2.9 165,000 5 165,000 240,000 6 240,000 75,000
Hillary's Dedham 3.6 136,386 4.5-5.0 167,500 250,000 10 360,000 192,500
Papa Razzi Cambridge 2.2 231,316 5 231,316 240,000 6 240,000 8,684
Papa Razzi Chestnut Hill 2.4 190,000 0 190,000 240,000 6 240,000 50,000
Charley's Chestnut Hill 2.7 265,000 0 265,000 265,000 6 265,000 0
--------- --------- -------
1,875,466 2,815,000 939,434
========= ========
</TABLE>
20
<PAGE>
Confidential
Project Newco - Proposal
- --------------------------------------------------------------------------------
-- Purchase 2,726,000 shares of HOYA for $9.50 per share
-- Represents a 36% premium to current market and exceeds 52-week high
price.
-- Current share price consistent with comparable companies. Correlation
of data indicates reasonable efficiency.
-- Valuation represents 5.9x EBITDA reflecting likely impact of Change of
Control on certain leases
-- Comparable transactions have been priced in a dramatically different
market environment.
-- Impact of Financial Market turbulence is yet to be felt.
-- Transaction is fully financed.
-- Negotiate Definitive Purchase Agreement and option on shares held by Major
Holder.
-- Initiate Tender Offer as soon as possible.
21
SCHEDULE 14A
(RULE 14(a) 101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BACK BAY RESTAURANT GROUP, INC.
-------------------------------
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01 per share (2) Aggregate number of securities to which
transaction applies:
3,997,445 shares of Common Stock
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): $10.25
------
(4) Proposed maximum aggregate value of transaction: $40,973,811*
------------
(5) Total fee paid: $8,194.76**
-----------
/ / Fee paid previously with preliminary materials: $
- -----------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing party:
(4) Date filed:
* For purposes of calculation of the filing fee only. Assumes the acquisition
through a merger, at a purchase price of $10.25 per share of Common Stock of
3,997,445 shares of Common Stock of the Registrant, representing all of such
Common Stock to be purchased (assuming the exercise of options to acquire
536,636 shares of Common Stock).
** The amount of the filing fee equals 1/50(th) of 1% of the transaction value.
<PAGE>
BACK BAY RESTAURANT GROUP, INC.
284 Newbury Street
Boston, Massachusetts 02115
, 1999
DEAR FELLOW STOCKHOLDERS:
You are invited to attend a Special Meeting of stockholders of Back Bay
Restaurant Group, Inc., a Delaware corporation ("Back Bay"), to vote on the
proposed Merger (the "Merger") of Back Bay with SRC Holdings, Inc., a Delaware
corporation that has been organized by Charles F. Sarkis, Back Bay's Chairman,
President and Chief Executive Officer. Details of the Merger are discussed in
the enclosed Proxy Statement (the "Proxy Statement"), the forepart of which
includes a summary of the terms of the Merger and certain other information
relating to the proposed transaction.
At the Special Meeting, stockholders of Back Bay will be asked to approve
and adopt the Agreement and Plan of Merger, dated as of December 3, 1998 (the
"Merger Agreement"), and the transactions contemplated thereby, including,
without limitation, the Merger. A copy of the Merger Agreement is attached as
Annex I to the accompanying Proxy Statement.
At its meeting on December 2, 1998, Back Bay's Board of Directors,
including a special committee of independent directors (the "Special
Committee"), by unanimous vote of all of the disinterested directors determined
that the transactions contemplated by the Merger Agreement, including the
Merger, are fair to and in the best interests of Back Bay and its stockholders.
The Board of Directors recommends that holders of Back Bay common stock vote
FOR the approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger. In reaching its decision, the Board
of Directors considered, among other things, the oral opinion of Schroder &
Co., Inc. delivered to the Special Committee on December 2, 1998, subsequently
confirmed in writing as of the same date, to the effect that the cash
consideration to be received in the Merger by holders of Back Bay Common Stock
is fair to holders of Back Bay Common Stock (other than Affiliated Stockholders
(as defined in the Proxy Statement)) from a financial point of view.
Holders of Back Bay Common Stock will be entitled to appraisal rights
under applicable Delaware law in connection with the Merger as described in the
accompanying Proxy Statement.
The Special Meeting will be held at Papa.Razzi Restaurant, CambridgeSide
Galleria, Cambridge, Massachusetts 02141, on , 1999, beginning at 11:00
a.m., Eastern Time.
IT IS VERY IMPORTANT TO US THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING, WHETHER OR NOT YOU PLAN TO ATTEND PERSONALLY. THEREFORE, YOU SHOULD
COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS SOON AS POSSIBLE IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ENSURE THAT YOUR SHARES ARE
REPRESENTED AT THE SPECIAL MEETING.
VERY TRULY YOURS,
/s/ Irwin Chafetz
IRWIN CHAFETZ
Chairman of the Special Committee of
the Board of Directors
<PAGE>
BACK BAY RESTAURANT GROUP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A Special Meeting of the stockholders (the "Stockholders") of Back Bay
Restaurant Group, Inc. ("Back Bay") will be held at Papa.Razzi Restaurant,
CambridgeSide Galleria, Cambridge, Massachusetts 02141 on ------- , 1999 at
11:00 a.m. for the following purposes:
1. To consider and act upon a proposal to approve the Agreement and
Plan of Merger by and between SRC Holdings, Inc., a Delaware corporation ("SRC
Holdings"), and Back Bay, dated as of December 3, 1998 (the "Merger
Agreement"), and the transactions contemplated thereby, pursuant to which SRC
Holdings will be merged with and into Back Bay with Back Bay being the
surviving corporation (the "Merger"), on and subject to the terms and
conditions contained in the Merger Agreement. A copy of the Merger Agreement is
attached as Annex I to the accompanying Proxy Statement.
2. To transact such other and further business as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The affirmative vote of a majority of the outstanding shares of Back Bay
common stock ("Common Stock") is required to approve the Merger Agreement and
the transactions contemplated thereby, including the Merger. Unless waived by
the Board of Directors, the Merger is also conditioned upon the receipt of the
affirmative vote of a majority of shares of Common Stock held by Non-Affiliated
Stockholders (as defined in the Merger Agreement).
The Board of Directors has fixed the close of business on ----------- ,
1999 as the record date for determining the Stockholders entitled to notice of
and to vote at the Special Meeting and any adjournments or postponements
thereof. Only holders of record of shares of Back Bay Common Stock at the close
of business on the record date are entitled to notice of and to vote at the
Special Meeting.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF HOW MANY SHARES OF BACK BAY
COMMON STOCK YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY WITHOUT DELAY IN
THE ENCLOSED POSTAGE PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR
TO ITS EXERCISE. IF YOU ARE PRESENT AT THE SPECIAL MEETING OR ANY ADJOURNMENTS
OR POSTPONEMENTS THEREOF, YOU MAY REVOKE YOUR PROXY AND VOTE PERSONALLY ON THE
MATTERS PROPERLY BROUGHT BEFORE THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
FRANCIS P. BISSAILLON
Executive Vice President,
Chief Financial Officer and
Secretary
, 1999
NOTICE OF APPRAISAL RIGHTS
If the Merger Agreement is adopted by the Stockholders of Back Bay at the
Special Meeting and the Merger is consummated, any Stockholder (1) who files
with Back Bay before the taking of the vote on the adoption of the Merger
Agreement, a written demand stating that he or she intends to seek appraisal
for his or her shares of Common Stock if the Merger is consummated and (2)
whose shares are not voted in favor of the Merger, has or may have the right to
seek appraisal of his or her shares of Common Stock within 120 days of the date
a Certificate of Merger is filed with the Secretary of State of the State of
Delaware. Back Bay and any such Stockholder shall in such cases have the rights
and duties and shall follow the procedures set forth in Section 262 of the
General Corporation Law of Delaware, a copy of which is attached as Annex III
to the accompanying Proxy Statement. See "APPRAISAL RIGHTS" in the Proxy
Statement for more information.
<PAGE>
PROXY STATEMENT FOR SPECIAL
MEETING OF STOCKHOLDERS OF BACK BAY RESTAURANT GROUP, INC.
To be held on , 1999
11:00 a.m.
Back Bay Restaurant Group, Inc. ("Back Bay") and SRC Holdings, Inc. ("SRC
Holdings") have agreed to merge SRC Holdings with and into Back Bay with Back
Bay being the surviving corporation (the "Merger"). Stockholders of Back Bay
("Stockholders") will receive $10.25 per share, net to the seller in cash, in
exchange for shares of Back Bay common stock they own ("Company Common Stock"
or "Shares").
The Merger cannot be completed unless the Stockholders adopt the
Agreement and Plan of Merger, dated as of December 3, 1998, by and between Back
Bay and SRC Holdings (the "Merger Agreement") in accordance with Section 251 of
the Delaware General Corporation Law and pursuant to the terms and conditions
of the Merger Agreement. The Back Bay Board of Directors has scheduled a
special meeting of the Stockholders to vote on the Merger as follows:
Papa.Razzi Restaurant
CambridgeSide Galleria
Cambridge, MA 02141
, 1999
This document gives you detailed information about the proposed Merger
Agreement and the Merger. SRC Holdings has provided the information concerning
SRC Holdings, and Back Bay has provided the information concerning Back Bay.
Please see "Available Information" and "Incorporation of Documents by
Reference" on pages two and three for additional information about the Company
and Acquiror on file with the United States Securities and Exchange Commission.
This proxy statement and proxy are being mailed to Stockholders beginning about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
regulator has determined if this proxy statement is accurate or adequate. Any
representation to the contrary is a criminal offense.
<PAGE>
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Proxy Statement, in connection
with the Merger Agreement or the Merger, and, if given or made, such
information or representations may not be relied upon as having been authorized
by the Company or Acquiror. The delivery of this Proxy Statement shall not,
under any circumstances, create any implication that there has been no change
in the information set forth herein or in the affairs of the Company since the
date hereof.
The Company, the Acquiror and Mr. Charles F. Sarkis have filed with the
Securities and Exchange Commission (the "Commission") a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (including any amendments thereto, the "Schedule
13E-3") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), with respect to the Merger. This Proxy Statement does not contain all of
the information set forth in the Schedule 13E-3 and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. The Company is subject to the informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements
and other information with the Commission. The Schedule 13E-3 and the exhibits
thereto, as well as such reports, proxy statements and other information filed
by the Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or at its regional
offices located at 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 can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. Back Bay Common Stock
is listed on the Nasdaq National Market and certain reports, proxy statements
and other information concerning the Company may be inspected and copied at the
offices of The Nasdaq Stock Market, Inc., 1735 K Street, Washington, D.C.
20006.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference documents which are not
presented herein or delivered herewith. Copies of any such documents relating
to the Company, other than exhibits to such documents (unless such exhibits
specifically are incorporated by reference in such documents), are available
without charge, upon written or oral request, from Back Bay Restaurant Group,
Inc., 284 Newbury Street, Boston, Massachusetts 02115, Attention: Francis P.
Bissaillon, Executive Vice President and Chief Financial Officer, telephone:
(617) 536-2800. In order to ensure timely delivery of the documents requested,
any such request should be made by _______, 1999. Upon receipt of such
request, the Company will mail (via first class mail) the requested document
within one business day of receipt of such request.
The following documents previously filed by the Company (File No. 0-19810)
with the Commission are incorporated in this Proxy Statement by reference:
(1) The Company's Annual Report on Form 10-K and 10-K/A for the fiscal
year ended December 28, 1997.
(2) The Company's Quarterly Reports on Form 10-Q for the quarters ended
Marach 29, 1998, June 28, 1998 and September 27, 1998.
(3) The Company's Proxy Statement, dated May 1, 1997, which was mailed
to the Company's stockholders in connection with the Annual Meeting
of Stockholders held on June 3, 1997.
(4) The Company's Current Report on Form 8-K, dated December 11, 1998.
The Company's Annual Report on Form 10-K and 10-K/A for the fiscal year
ended December 28, 1997 and the Company's Quarterly Report on Form 10-Q for the
quarter ended September 27, 1998 are attached hereto as Annexes IV and V,
respectively. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Proxy Statement.
FORWARD-LOOKING STATEMENTS
Certain information contained in this Proxy Statement as to the future
financial or operating performance of the Company may constitute
"forward-looking statements." Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance,
and underlying assumptions and other statements which are other than statements
of historical facts. Forward-looking statements can be identified by, among
other things, the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "pro forma," "anticipates" or
"intends" or the negative of any thereof, or other variations thereon or
comparable terminology, or by discussions of strategy or intentions.
Forward-looking statements involve a number of risks and uncertainties. A
number of factors could cause actual results, performance, achievements of the
Company, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, but are not limited to, the
risks of the restaurant industry, including a highly competitive industry with
many well-established competitors with greater financial and other resources
than the Company, and the impact of changes in consumer tastes, local, regional
and national economic conditions, demographic trends, traffic patterns,
employee availability and cost increases. In addition, the Company's ability to
expand is dependant upon various factors, such as the availability of
attractive sites for new restaurants, the ability to negotiate suitable lease
terms, the ability to generate or borrow funds to develop new restaurants and
obtain various government permits and licenses and the recruitment and training
of skilled management and restaurant employees. Accordingly, such
forward-looking statements do not purport to be predictions of future events or
circumstances and may not be realized.
ii
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
AVAILABLE INFORMATION ........................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ................................. ii
FORWARD-LOOKING STATEMENTS ...................................................... ii
SUMMARY ......................................................................... v
INTRODUCTION .................................................................... 1
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ............................. 1
VOTING AT THE SPECIAL MEETING ............................................... 2
PROXIES ..................................................................... 2
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM ................................. 2
SOLICITATION OF PROXIES ..................................................... 3
SPECIAL FACTORS ................................................................. 4
RECOMMENDATION OF THE BOARD OF DIRECTORS .................................... 4
BACKGROUND OF THE MERGER .................................................... 4
FAIRNESS OF THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS. ........... 6
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST ........... 8
PURPOSE OF THE MERGER ....................................................... 11
CERTAIN EFFECTS OF THE MERGER ............................................... 11
PLANS FOR THE COMPANY AFTER THE MERGER ...................................... 12
RISK THAT THE MERGER WILL NOT BE CONSUMMATED ................................ 12
CERTAIN RISKS IN THE EVENT OF BANKRUPTCY .................................... 12
THE COMPANY ..................................................................... 13
GENERAL ..................................................................... 13
NORTHERN ITALIAN-STYLE MENU AND CONCEPT ..................................... 13
AMERICAN-STYLE MENUS, CONCEPTS AND TRADE NAMES .............................. 13
RESTAURANT LOCATIONS ........................................................ 15
GROWTH STRATEGY ............................................................. 16
SITE SELECTION, DESIGN AND CONSTRUCTION ..................................... 16
MANAGEMENT TRAINING AND RESTAURANT OPERATIONS ............................... 16
PURCHASING AND SUPPLIES ..................................................... 17
EMPLOYEES ................................................................... 17
MARKETING ................................................................... 17
COMPETITION ................................................................. 17
GOVERNMENTAL REGULATION ..................................................... 17
SERVICE MARKS ............................................................... 18
SEASONALITY ................................................................. 18
THE MERGER ...................................................................... 18
BACKGROUND OF THE MERGER .................................................... 18
MERGER CONSIDERATION ........................................................ 18
EFFECTIVE TIME .............................................................. 19
CONVERSION OF SRC HOLDINGS STOCK ............................................ 19
CONVERSION OF BACK BAY COMMON STOCK; PROCEDURES FOR EXCHANGE OF CERTIFICATES 19
CONDUCT OF BUSINESS PENDING THE MERGER ...................................... 19
CONDITIONS TO THE MERGER .................................................... 19
FEDERAL INCOME TAX CONSIDERATIONS ........................................... 20
</TABLE>
iii
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<TABLE>
<S> <C>
ANTICIPATED ACCOUNTING TREATMENT .................................... 20
CERTAIN REGULATORY MATTERS .......................................... 20
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS ................ 20
NASDAQ DELISTING .................................................... 21
MERGER FINANCING .................................................... 21
FEES AND EXPENSES ................................................... 22
BACK BAY CAPITAL STOCK .............................................. 23
BACK BAY COMMON STOCK ............................................... 23
REPORT FROM BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION ... 23
OPINION OF FINANCIAL ADVISOR ........................................ 23
COMPARABLE COMPANY ANALYSIS ......................................... 24
COMPARABLE TRANSACTIONS ANALYSIS .................................... 25
DISCOUNTED CASH FLOW ANALYSIS ....................................... 25
OTHER ANALYSES ...................................................... 25
THE MERGER AGREEMENT .................................................... 26
THE MERGER .......................................................... 26
REPRESENTATIONS AND WARRANTIES ...................................... 26
CONDITIONS TO THE MERGER ............................................ 27
NO SOLICITATION; ACQUISITION PROPOSALS .............................. 28
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES ............... 29
CONDUCT OF THE COMPANY'S BUSINESS UNTIL THE EFFECTIVE TIME .......... 29
AMENDMENTS; EXTENSIONS; WAIVERS ..................................... 30
OTHER MATTERS; GOING PRIVATE TRANSACTIONS ............................... 31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......... 31
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY ..................... 33
MARKET PRICES AND DIVIDENDS ON THE SHARES ............................... 34
CERTAIN TRANSACTIONS IN THE COMMON STOCK ................................ 34
APPRAISAL RIGHTS ........................................................ 34
INDEPENDENT PUBLIC ACCOUNTANTS .......................................... 36
OTHER INFORMATION AND STOCKHOLDER PROPOSALS ............................. 36
ANNEX I THE AGREEMENT AND PLAN OF MERGER, DATED AS OF DECEMBER 3, 1998, BY
AND BETWEEN BACK BAY RESTAURANT GROUP, INC. AND SRC HOLDINGS, INC.
ANNEX II FAIRNESS OPINION OF SCHRODER & CO., INC.
ANNEX III EXCERPTS FROM DELAWARE GENERAL CORPORATION LAW RELATING TO
DISSENTERS RIGHTS
ANNEX IV ANNUAL REPORT ON FORM 10-K AND 10-K/A FOR THE FISCAL YEAR ENDED
DECEMBER 28, 1997.
ANNEX V QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27,
1998.
</TABLE>
iv
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
Merger fully and for a more complete description of the legal terms of the
Merger, you should carefully read this entire document and the documents to
which we have referred you.
The Companies
Back Bay Restaurant Group, Inc.
284 Newbury Street
Boston, Massachusetts 02115
(617) 536-2800
Back Bay owns and operates thirty-four full service restaurants
throughout New England, New York, New Jersey and Washington, D.C. Fourteen
restaurants feature Northern Italian cuisine and are operated under the
Papa.Razzi trade name while twenty of the restaurants offer American-style
cuisine. Since it opened its first restaurant in 1964, Back Bay has followed an
operating philosophy of providing value to its customers by featuring generous
portions of high quality food, a level of service that is typical of higher
priced restaurants, and moderate prices.
SRC Holdings, Inc.
284 Newbury Street
Boston, Massachusetts 02115
(617) 536-2800
SRC Holdings, Inc. is a new corporation formed under the laws of
Delaware by Charles F. Sarkis, solely for the purpose of engaging in the
transactions proposed by the Merger Agreement. Charles F. Sarkis is the sole
director and President of SRC Holdings. The Affiliated Shareholders (as defined
below) will be the stockholders of the Acquiror immediately prior to the
Effective Time. SRC Holdings is expected to merge with and into Back Bay, with
Back Bay being the surviving corporation. Accordingly, after the Merger, SRC
Holdings will cease to be a going concern.
Reasons for the Merger
The Back Bay Board of Directors believes that the terms of the
Merger and the Merger Agreement are fair to, and in the best interests of, Back
Bay and its stockholders. In reaching its decision, the Back Bay Board of
Directors considered the following factors, among other things:
o The financial results and prospects of Back Bay, as well as the Special
Committee of the Board of Directors' knowledge of the restaurant
industry generally;
o The history of the negotiations with respect to the merger consideration
and the increase in the offer price to $10.25;
o The trading price of shares of Back Bay Common Stock since its initial
public offering, including recent trends;
o The opinion, dated December 2, 1998, of Schroder & Co., Inc., that the
cash consideration to be received by the holders of Common Stock
(other than the Affiliated Stockholders) is fair to such holders of
Common Stock from a financial point of view.
Recommendation to Back Bay's Stockholders
The Back Bay Board of Directors believes that the Merger is in the
best interest of Back Bay and its Stockholders and recommends that you vote FOR
the Merger.
The Merger
The Merger Agreement is attached as Annex I to this Proxy Statement.
We encourage you to read the Merger Agreement as it is the legal document that
governs the Merger.
What Stockholders Will Receive
As a result of the Merger, Stockholders other than Charles F.
Sarkis, The Westwood Group, Inc., Mark L. Hartzfeld, Francis P. Bissaillon, Ann
Marie Lagrotteria and Richard P. Dalton (collectively, the "Affiliated
Stockholders") will receive $10.25 in cash in exchange for each share of Back
Bay Common Stock that they own. The Affiliated Stockholders will exchange their
shares of Back Bay Common Stock for shares in SRC Holdings and will continue to
be stockholders in the surviving corporation. As of _______________ , 1999, the
Affiliated Stockholders beneficially owned shares, on a fully diluted
basis, which represents approximately % of the Company's fully diluted Common
Stock.
After the Merger, Stockholders, other than the Affiliated
Stockholders, will no longer retain any equity interest in Back Bay and
accordingly will no longer participate in any future earnings of Back Bay nor
be at risk for any future losses of Back Bay. (See "THE MERGER--Merger
Consideration" and "THE MERGER AGREEMENT--The Merger.")
Do not send in your stock certificates until instructed to do so
after the Merger is completed.
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<PAGE>
What Will Happen to Back Bay?
If the Merger is completed, SRC Holdings will be merged with and
into Back Bay with Back Bay being the surviving corporation. Back Bay will no
longer meet the requirements of a public company and its shares will no longer
be listed or traded in the public market.
Conditions to the Merger
The completion of the Merger depends upon meeting a number of
conditions, including a statutory requirement, which cannot be waived, that the
holders of a majority of the outstanding shares of Back Bay Common Stock adopt
the Merger Agreement and approve the Merger, and a requirement, which can be
waived by the Board of Directors, that a majority of the Shares held by persons
(the "Non-Affiliated Stockholders"), other than the Affiliated Stockholders and
William B. Finneran, adopt the Merger Agreement and approve the Merger. The
Merger is also conditioned upon the receipt by SRC Holdings of loan funds in an
amount sufficient to complete the purchase of shares contemplated by the Merger
Agreement. (See "THE MERGER AGREEMENT--Conditions to the Merger".)
Termination of the Merger Agreement
Back Bay and SRC Holdings can mutually agree to terminate the Merger
Agreement without completing the Merger.
Either Back Bay or SRC Holdings can unilaterally terminate the Merger
Agreement without completing the Merger, if any of the following occurs:
(a) The holders of a majority of the Shares of Back Bay Common Stock do not
approve the Merger as required by Delaware law;
(b) The Merger is not completed by June 30, 1999, provided that the failure
to complete the Merger is not due to the terminating party's failure to use its
commercially reasonable best efforts to fulfill its obligations under the
Merger Agreement; or
(c) Any law or regulation comes into effect that makes the Merger illegal or
the Merger is enjoined and such injunction is final and non-appealable.
Back Bay may terminate the Merger Agreement if, among other things,
any of the following occurs:
(a) A majority of the Shares held by the Non-Affiliated Stockholders do not
vote to adopt the Merger Agreement and the Merger; or
(b) The Back Bay Board of Directors receives a proposal from another party,
with respect to the purchase of Back Bay, that is of a higher price per share
and on more favorable terms than those set forth in the Merger Agreement and
the Back Bay Board of Directors determines that it is likely to have a
fiduciary duty to pursue such a superior proposal; or
(c) SRC Holdings breaches any of its representations, warranties or
obligations under the Merger Agreement and such breach would have a material
adverse effect on the proposed Merger.
SRC Holdings may terminate the Merger Agreement if, among other
things, the following occurs:
(a) Back Bay breaches any of its representations, warranties or obligations
under the Merger Agreement and such breach would have a material adverse effect
on the proposed Merger.
Termination Fees
The Merger Agreement requires Back Bay to pay to SRC Holdings a
termination fee of:
(a) $2,500,000 if, prior to the receipt of Stockholder approval, the Board
decides to terminate the Merger Agreement as a result of receiving a proposal
from another party with respect to the purchase of Back Bay for a higher price
per share and on more favorable terms than those set forth in the Merger
Agreement; or
(b) The expenses of SRC Holdings relating to this transaction in full, up to
$250,000, plus 50% of the expenses in excess of $500,000, but no more than a
total reimbursement of $1,000,000 if the Merger Agreement is terminated
because:
o the Stockholder vote required by Delaware law is not obtained;
o the Merger is not consummated by June 30, 1999;
o the Merger would be illegal or is enjoined;
o a majority of Non-Affiliated Stockholders do not vote to approve the
Merger Agreement and the Merger; or
o Back Bay breaches its representations, warranties and obligations under
the Merger Agreement and such breach would have a material adverse
effect on the Merger.
(See "THE MERGER AGREEMENT--Termination of the Merger Agreement;
Termination Fees.")
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<PAGE>
Vote Required
The Merger Agreement will need to be approved by a majority of the
outstanding Shares, as well as a majority of the Shares held by the
Non-Affiliated Stockholders.
Governmental and Regulatory Matters
The Company and the Acquiror do not believe that any governmental
filings are required with respect to the Merger other than filing a certificate
of merger with the Secretary of State of Delaware. The Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), prohibits
certain transactions from occurring until certain governmental approvals have
been obtained. We do not believe that the HSR Act applies to the Merger, and we
do not expect to have any delays because of this law. However, the Department
of Justice and the Federal Trade Commission continue to have the authority to
challenge the Merger on antitrust grounds before or after the Merger is
completed. (See "THE MERGER--Conditions to the Merger; --Certain Regulatory
Matters.")
Accounting Treatment
We expect that the Merger will be accounted for in accordance with
the principles of purchase accounting.
Opinion of Financial Advisor
In deciding to approve the Merger Agreement and the Merger, Back
Bay's Board of Directors, including the Special Committee, considered the
opinion of its financial advisor, Schroder & Co, Inc., that as of December 2,
1998 and subject to certain assumptions and other matters described therein,
the cash price of $10.25 offered in the Merger was fair, from a financial point
of view, to the Stockholders (other than the Affiliated Stockholders). This
opinion is attached as Annex II. We encourage you to read this opinion,
although it is limited to the fairness, from a financial point of view, of the
cash price offered to the Stockholders (other than the Affiliated Stockholders)
and does not constitute a recommendation as to how you should vote. SRC
Holdings received advice from its financial advisors, but did not request a
written opinion. (See "REPORT FROM BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF
THE TRANSACTION."
Important Federal Income Tax Consequences
The cash that will be received by each Stockholder in exchange for
his or her Shares will likely be treated as a sale of stock generating capital
gain equal to $10.25 minus the amount that the Stockholder paid for the shares.
Individual Stockholders should consult their tax advisor to determine the tax
treatment applicable to the sale of their particular shares. (See "THE
MERGER--Federal Income Tax Consequences.")
Rights of Dissenting Stockholders
Under Delaware law, Stockholders who do not vote in favor of the
Merger and who comply with certain notice requirements and other procedures
will have the right to be paid cash for the "fair value" of their Shares. "Fair
value" may be more or less than the $10.25 to be paid to other Stockholders
according to the Merger Agreement. Dissenting Stockholders must precisely
follow specific procedures to exercise this right, or the right may be lost.
These procedures are described in this Proxy Statement, and a copy of the
applicable portion of Delaware law that grants the right is attached as Annex
III. (See "APPRAISAL RIGHTS.")
Delisting of Back Bay Common Stock
The shares of Back Bay Common Stock will be delisted from the Nasdaq
Stock Market's National Market and there will no longer be a public market for
Back Bay's Shares after the Merger. (See "THE MERGER--Nasdaq Delisting.")
vii
<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to holders (the "Stockholders") of
Common Stock of Back Bay Restaurant Group, Inc. ("Back Bay" or the "Company")
in connection with the solicitation of proxies by the Board of Directors of the
Company (the "Board") for use at the Special Meeting of Stockholders to be held
at Papa.Razzi Restaurant, CambridgeSide Galleria, Cambridge, Massachusetts, on
________ , 1999, beginning at 11:00 a.m. Eastern Time, and at any adjournments
or postponements thereof. This Proxy Statement is accompanied by a form of
Proxy for use at the Special Meeting. At the Special Meeting, the Stockholders
will be asked to adopt the Merger Agreement, dated as of December 3, 1998 (the
"Merger Agreement"), by and between Back Bay and SRC Holdings, Inc., a Delaware
corporation ("SRC Holdings" or the "Acquiror"), pursuant to which SRC Holdings
will be merged (the "Merger") with and into the Company, with the Company being
the surviving corporation of the Merger (the "Surviving Corporation").
This Proxy Statement and the accompanying form of Proxy are being mailed
to Stockholders on or about , 1999.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Stockholders will be asked to consider and
vote upon a proposal to adopt the Merger Agreement. If the requisite votes in
favor of the proposal are obtained and certain other conditions are satisfied
or, where permissible, waived:
(i) Acquiror will be merged with and into the Company with the Company
being the Surviving Corporation and
(ii) except as set forth below, each share of common stock of Back Bay
("Company Common Stock" or "Share") issued and outstanding immediately prior to
the filing of a Certificate of Merger with the Secretary of State of the State
of Delaware (the "Effective Time") will be converted into the right to receive
$10.25 in cash, without interest.
Shares held at the Effective Time in the Company treasury or by Acquiror
will be canceled without payment. Shares in respect of which appraisal rights
have been perfected properly under Section 262 of the Delaware General
Corporation Law (the "DGCL") will be entitled to receive the consideration
provided for by DGCL. Shares held by Charles F. Sarkis, The Westwood Group,
Inc., Mark L. Hartzfeld, Francis P. Bissaillon, Ann Marie Lagrotteria and
Richard P. Dalton (collectively, the "Affiliated Stockholders") will be
contributed to the Acquiror, on or before the closing date of the Merger (the
"Closing Date") in exchange for shares in the Acquiror. As a result of the
Merger, the Affiliated Stockholders will become the stockholders of the
Surviving Corporation.
The affirmative vote of a majority of the outstanding Shares is required
by the DGCL and, unless waived by the Board, the affirmative vote of a majority
of the outstanding Shares held by persons (the "Non-Affiliated Stockholders"),
other than the Affiliated Stockholders and William B. Finneran, is required
pursuant to the terms of the Merger Agreement to effect the Merger.
It is currently anticipated that the Merger will occur as promptly as
practicable after adoption of the Merger Agreement by the Stockholders at the
Special Meeting and the satisfaction or, where permissible, waiver of the other
conditions to the consummation of the Merger. There can be no assurance that,
even if the requisite Stockholder approval is obtained, the other conditions to
the Merger will be satisfied or waived, or that the Merger will be consummated.
See "SPECIAL FACTORS--Risk that the Merger Will Not Be Consummated." A copy of
the Merger Agreement is attached to this Proxy Statement as Annex I. For
additional information concerning the terms and conditions of the Merger, see
"THE MERGER" and "THE MERGER AGREEMENT."
Acquiror is a newly incorporated entity organized by Charles F. Sarkis,
the Company's Chairman, President and Chief Executive Officer, for the purpose
of effecting the transactions described in this Proxy Statement. Upon
consummation of the Merger, the Company will be the Surviving Corporation, and
accordingly, SRC Holdings will cease to be a going concern. The principal
executive offices of SRC Holdings are located at 284 Newbury Street, Boston,
Massachusetts 02115, telephone number (617) 536-2800.
The disinterested members of the Board, including a special committee of
the Board (the "Special Committee"), have unanimously approved the Merger
Agreement and have determined that the Merger is fair to, and in the best
interests of, all of the Stockholders and recommended that the Stockholders
vote in favor of adoption of the Merger Agreement and approval of the Merger.
For a discussion of the factors considered by the Board in reaching its
conclusions, see "SPECIAL FACTORS--Fairness of the Merger; Recommendation of
the Board of Directors." For a description of certain interests of certain of
the Company's directors and officers that may have presented them with actual
or potential conflicts of interest in connection with the Merger, see "SPECIAL
FACTORS--Background of the Merger," "--Purpose of the Merger" and "--Interests
of Certain Persons in the Merger; Conflicts of Interest."
1
<PAGE>
VOTING AT THE SPECIAL MEETING
The Board has fixed the close of business on _________, 1999 as the
"Record Date" for determining the Stockholders entitled to notice of and to
vote at the Special Meeting. Accordingly, only holders of record of Shares as
of the Record Date will be entitled to notice of and to vote at the Special
Meeting. On the Record Date, there were ________ Shares, held by approximately
__ holders of record, outstanding and entitled to vote. Stockholders may cast
one vote per Share, either in person or by properly executed Proxy, on each
matter to be voted on at the Special Meeting.
Votes cast in person or by Proxy at the Special Meeting will be tabulated
by ____________ (the "Transfer Agent"). The Transfer Agent will treat
abstentions as Shares that are present and entitled to vote. In addition, if a
broker submits a Proxy indicating that it does not have discretionary authority
as to certain Shares to vote on a particular matter, those Shares will be
treated as present and entitled to vote.
THE MERGER CONSTITUTES A MATTER OF GREAT IMPORTANCE TO STOCKHOLDERS OF THE
COMPANY. IF THE MERGER AGREEMENT IS ADOPTED AND THE MERGER IS CONSUMMATED, THE
OWNERSHIP INTERESTS OF THE STOCKHOLDERS IN THE COMPANY (OTHER THAN THE ONGOING
INTEREST OF THE AFFILIATED STOCKHOLDERS) WILL CEASE IN EXCHANGE FOR THE RIGHT
TO RECEIVE A CASH PAYMENT OF $10.25 PER SHARE OR TO PURSUE APPRAISAL RIGHTS.
ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND CONSIDER CAREFULLY THE
INFORMATION PRESENTED IN THIS PROXY STATEMENT.
Because the vote on the Merger Agreement and the transactions contemplated
thereby, including the Merger, requires the approval of holders of a majority
in interest of the votes entitled to be cast by the holders of all outstanding
shares of the Company's Common Stock as well as the approval of holders of a
majority in interest of the votes entitled to be cast by the Non-Affiliated
Stockholders, abstentions and broker non-votes will have the same effect as a
vote against this proposal.
PROXIES
All Shares represented at the Special Meeting by properly executed Proxies
received prior to or at the Special Meeting, and not revoked before their use,
will be voted in accordance with the instructions thereon. If no instructions
are given, properly executed Proxies will be voted FOR the adoption of the
Merger Agreement. If any other matters are properly presented to the Special
Meeting or any adjournments or postponements thereof, the persons named in the
enclosed form of Proxy as acting thereunder will have discretion to vote on
such matters in accordance with their best judgment. The Company does not know
of any matters other than the adoption of the Merger Agreement that will be
presented at the Special Meeting.
A Stockholder who has given a Proxy may revoke it at any time before it is
voted at the Special Meeting, or any postponements or adjournments thereof, by
filing with the Secretary of the Company, at the address of the Company set
forth herein, a written revocation bearing a later date than the Proxy being
revoked, or by submission of a validly executed Proxy bearing a later date than
the Proxy being revoked, or by attending the Special Meeting, or any
postponements or adjournments thereof, and voting in person (although
attendance at the Special Meeting, or any postponements or adjournments
thereof, will not in and of itself constitute revocation of a Proxy). Proxies
are being solicited by and on behalf of the Board. The Company will bear the
cost of the Special Meeting and the cost of soliciting proxies therefor,
including the cost of printing and mailing the Proxy material.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of Company Common Stock at the close of business on ________
, 1999 will be entitled to receive notice of and to vote at the Special
Meeting. At the close of business on the Record Date, the Company had
outstanding and entitled to vote _________ Shares of Company Common Stock.
Shares of Company Common Stock represented by properly executed Proxies which
are marked "abstain" will be counted as Shares present for purposes of
determining the presence of a quorum on all matters. Proxies relating to
"street name" shares that are voted by brokers will be counted as Shares
present for purposes of determining the presence of a quorum on all matters,
but will not be treated as Shares having voted at the Special Meeting as to any
proposal as to which authority to vote is withheld by the broker.
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The presence, in person or by Proxy, at the Special Meeting of the holders
of at least _________ Shares of the Company's Common Stock, i.e., a majority in
interest of the Shares of the Company's Common Stock outstanding on the record
date, is necessary to constitute a quorum for the transaction of business.
SOLICITATION OF PROXIES
The Company will bear the cost of the solicitation of Proxies. In addition
to solicitation by mail, the directors, officers and employees of the Company
may solicit Proxies from Stockholders by telephone, facsimile or in person.
Such directors, officers and employees will not be additionally compensated for
any such solicitation but may be reimbursed for out-of-pocket expenses in
connection therewith. Arrangements will also be made with brokerage houses and
other custodians, nominees and fiduciaries for their forwarding of solicitation
material to the beneficial owners of Shares held of record by such persons and
Company will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
______________ will assist in the solicitation of Proxies by the Company
for a fee of $--- , plus reasonable out-of-pocket expenses and a reasonable fee
for each telephone solicitation.
HOLDERS OF COMPANY COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
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SPECIAL FACTORS
RECOMMENDATION OF THE BOARD OF DIRECTORS
At a special meeting held on December 2, 1998, the Board upon the
recommendation of a special committee of the Board (the "Special Committee")
comprised solely of independent, non-employee directors of the Company approved
the Merger Agreement and the transactions contemplated thereby and determined
that the Merger was fair to, and in the best interests of, the Company and its
Stockholders. The Board recommends that the Company's Stockholders vote FOR the
adoption of the Merger Agreement and the transactions contemplated thereby.
BACKGROUND OF THE MERGER
On April 22, 1997, the Company engaged Schroder & Co. Inc. ("Schroders")
to assist the Company in examining various strategic alternatives including (i)
the acquisition of other restaurant groups, (ii) a recapitalization, (iii) a
sale of the Company, and (iv) a management buyout. Schroders prepared a
presentation for the Company discussing each of the above alternatives. At that
time, the Company decided not to pursue any of the proposals set forth in
Schroders' presentation.
On April 7, 1998, Charles F. Sarkis informed Schroders of his desire to
explore the feasibility of a management buyout of the Company. Schroders
informed Mr. Sarkis that he should advise the Board of his intentions and seek
authority to proceed. Mr. Sarkis thereafter informed the Board of his desire to
explore a management buyout.
On June 2, 1998, the Board formed the Special Committee to consider
various alternatives to maximize shareholder value for the Company. The Special
Committee consists of Messrs. Irwin Chafetz, Richard K. Howe, Joseph M. Cassin
and Robert S. Parker. On that same date, the Special Committee engaged
Schroders to provide financial advisory and investment banking services to the
Board and the Special Committee in connection with the exploration and
evaluation of such alternatives.
On June 23, 1998, the Special Committee met in Boston with representatives
of Schroders and with legal counsel retained by the Special Committee. At that
meeting, representatives of Schroders discussed with the Special Committee
various alternatives available to the Company to maximize shareholder value.
Representatives of Schroders discussed with the Special Committee the factors
adversely affecting the Company's valuation in the public market, and
alternatives to continued public ownership of the Company, including a sale of
the Company to a third party or a management buyout of the Company. Schroders
discussed with the Special Committee that the Company was likely to be more
appealing to an entrepreneurial buyer, such as Mr. Sarkis, than to a large
restaurant chain. The Special Committee also received legal advice with respect
to its fiduciary duties to the Company and the Stockholders in connection with
its exploration of such alternatives. The Special Committee decided to offer to
the Company's management the opportunity to propose a management buyout, as
well as to continue to explore alternative strategies to maximize shareholder
value.
On August 5, 1998, the Special Committee met in Boston with
representatives of Schroders and with legal counsel to the Special Committee,
as well as with Mr. Sarkis and other members of the Company's management. At
that meeting, management described for the Special Committee the Company's
operating performance and prospects and its strategy for future growth. Mr.
Sarkis also informed the Special Committee that Acquiror was interested in
preparing and presenting a proposal to the Special Committee for a transaction
in which Acquiror would acquire all of the outstanding shares of the Company's
Common Stock. Mr. Sarkis informed the Special Committee that Acquiror had begun
discussions with potential lenders and investors with respect to such a
transaction. After Mr. Sarkis and members of the Company's management left the
meeting, the Special Committee discussed the Company's prospects with
Schroders.
On August 5, 1998, Acquiror agreed to treat as confidential certain
information provided to it by or on behalf of the Company. Acquiror and the
Company have entered into a Confidentiality Agreement which also provides that
until June 30, 1999, Acquiror will not, except at the written request of the
Board, engage in certain transactions or take certain actions involving the
Company's securities, or seek to control or influence the management, Board or
policies of the Company.
On September 29, 1998, Schroders received from Acquiror an informal
initial proposal to purchase all of the issued and outstanding shares of the
Company's Common Stock at a price of $9.50 per share. After consultation with
Schroders, the Special Committee informed Acquiror that the proposed price was
not sufficiently high, and suggested additional structural changes to the
proposal.
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On October 19, 1998, the Special Committee received from Acquiror a letter
outlining a proposal to purchase 100% of the outstanding shares of the
Company's Common Stock for $9.50 per share in cash, subject to certain terms
and conditions.
A meeting of the Special Committee was convened in Boston on October 21,
1998 to discuss the proposal made by Acquiror in the letter dated October 19,
1998. Mr. Sarkis and Acquiror's advisors made a formal presentation of the
proposed transaction to the Special Committee. After Mr. Sarkis and Acquiror's
advisors were excused from the meeting, representatives of Schroders described
for the Special Committee Schroders' analysis of the Company's prospects,
current market conditions and Acquiror's proposal. The Special Committee also
received advice from its legal counsel with respect to its fiduciary duties in
connection with such proposal. The Special Committee decided that the proposal
merited further consideration, and authorized its advisors to negotiate the
terms of the proposed transaction with Acquiror and Acquiror's advisors in
order, among other things, to obtain a higher price per share.
On October 23, 1998, legal counsel to the Special Committee and
representatives of Schroders met with legal counsel and the financial advisors
to Acquiror to negotiate the terms of the proposed transaction. On October 26,
1998, Acquiror delivered a modified proposal letter to the Special Committee
which increased its offer to $10.00 per share and included other concessions
with respect to the structure of the transaction, conditions to the closing of
the proposed transaction and the ability of the Special Committee to consider
alternative transactions in the exercise of its fiduciary duty.
During the next two days, legal counsel to the Special Committee and
representatives of Schroders continued to negotiate with legal counsel and the
financial advisors to Acquiror with respect to the terms of the proposed
transaction.
The Special Committee met via telephone conference call on October 28,
1998 with its legal counsel and with representatives of Schroders. During that
meeting, the Special Committee discussed the status of negotiations regarding
the modified proposal. The Special Committee also received legal advice from
its counsel. The Special Committee concluded that it was in the best interests
of the Stockholders to continue to negotiate the proposed transaction, and to
insist that Acquiror pay a higher price per share.
Negotiations between representatives of Acquiror and the Special Committee
continued during the next two days. On October 30, 1998, Acquiror agreed to
raise its proposal to $10.25 per share in cash. A number of other terms of the
transaction remained unsettled, including the structure of the transaction, the
terms of any break-up fees, and the availability of financing. As a result of
these negotiations, draft transaction documents were provided to the Special
Committee and its legal counsel and to Schroders on November 3, 1998.
During the period from November 2, 1998 through December 2, 1998, the
Acquiror and the Company continued to negotiate the terms of the proposed
transaction, and the Acquiror and its proposed lenders continued to negotiate
the terms of the financing for the proposed transaction. The Special Committee
met three times during this period.
During the period from November 2, 1998 through December 1, 1998,
representatives of the Acquiror negotiated with William B. Finneran with
respect to whether Mr. Finneran would enter into an agreement with Acquiror
pursuant to which Mr. Finneran would agree to support the proposed transaction
and agree not to solicit, initiate or engage in discussions or negotiations
relating to any proposal for any alternative transaction. The Special Committee
insisted that any such agreement not require Mr. Finneran to support the
proposed transaction if the Special Committee determined that its fiduciary
duty required it to pursue an alternative transaction. On December 1, 1998, Mr.
Finneran informed representatives of the Special Committee and Acquiror that he
would not enter any agreement with Acquiror, but intended to support the Merger
unless a superior transaction is proposed.
The Special Committee and the Board of Directors of the Company met via
telephone conference call on the afternoon of December 2, 1998. Directors
Sarkis, Bissaillon and Dalton waived notice of such meeting and were not
present. Representatives of Schroders verbally presented Schroders' opinion as
to the fairness of the consideration to be received by holders of Common Stock
(other than Affiliated Stockholders) from a financial point of view and, after
discussion, the Special Committee voted to recommend to the Board approval of
the transaction. After further discussion, the Board approved the transaction
on the terms presented at the meeting and authorized the Company, with the
assistance and advice of legal counsel to the Special Committee, to complete
the negotiation and execution of a definitive agreement. After the meeting,
documentation of the transaction was completed and a definitive Merger
Agreement was executed on December 3, 1998.
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FAIRNESS OF THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
In light of the Board's consideration of various strategic alternatives
and its review of the Company's competitive position and recent operating
results, the Board has determined that the Merger is fair to, and in the best
interests of, the Company and its Stockholders. In making this recommendation
and in approving the Merger Agreement and the transactions contemplated
thereby, the Board considered the recommendations of the Special Committee and
a number of factors considered by the Special Committee, including but not
limited to, the factors described below.
The members of the Board believe that the factors considered by the
Special Committee operate both individually and in combination to support their
determination that the Merger is fair to, and in the best interest of, the
holders of the Company's Common Stock. In determining to recommend to the Board
that it approve the Merger Agreement, and in determining the fairness of the
terms of the Merger, the Special Committee considered the factors set forth
below, each of which, in the Special Committee's view, supported the Special
Committee's determination to recommend the Merger:
(i) the Special Committee's knowledge of the business, financial
results and prospects of the Company, as well as the Special Committee's
knowledge of the restaurant industry generally; specifically, the Special
Committee considered the potential for growth through new store openings;
(ii) the history of the negotiations with respect to the Merger
Consideration that, among other things, led to an increase in Acquiror's
offer from $9.50 per share of the Company's Common Stock to $10.25 per
Share of the Company's Common Stock and the belief of the members of the
Special Committee that $10.25 per Share of the Company's Common Stock was
the highest price that Acquiror would agree to pay;
(iii) the views expressed by management of the Company regarding the
financial condition, results of operations, business and prospects of the
Company, including the prospects of the Company if the Company were to
remain publicly owned;
(iv) the trading price of the Shares over the past five years; the fact
that the $10.25 per Share to be paid in the Merger represents a premium of
approximately 12.3% over the $9.125 closing sale price for the Shares on
the Nasdaq National Market on December 2, 1998, the last trading day prior
to the execution of the Merger Agreement and its subsequent public
announcement, and a premium of approximately 46% over the average closing
trading price per share of $7.01 during the twelve months preceding the
initial merger discussions;
(v) the fact that during the past twelve months, including December 2,
1998, the price of the Company Common Stock ranged from $4.75 to $9.125
compared to the $10.25 per Share price to paid in the Merger;
(vi) presentations by Schroders regarding earnings projections and
Schroders' estimates of possible future trading prices of the shares in
light of those projections;
(vii) the absence of a significant public trading market for the Shares
since the initial public offering in March 1992;
(viii) the Special Committee's conclusion that it was not likely that
any party other than Acquiror would propose a transaction that was more
favorable than the Merger to the Company and its Stockholders, and the
fact that the terms of the Merger Agreement permit the Company to abandon
the Merger if a superior transaction is proposed;
(ix) the view expressed by Schroders that the Company was likely to be
more appealing to an entrepreneurial buyer, such as Acquiror, than to an
owner of a large restaurant chain;
(x) the opinion of Schroders that, as of the date of such opinion, the
$10.25 per Share consideration to be received by the Stockholders (other
than the Affiliated Stockholders) in the Merger is fair to such
Stockholders from a financial point of view. The full text of Schroders'
opinion, which sets forth the assumptions made, the matters considered and
limitations on the review undertaken by Schroders, is attached as Annex II
to this Proxy Statement, and is incorporated herein by reference.
Schroders' opinion is directed only to the fairness, from a financial
point of view, of the cash consideration to be received by the
Stockholders (other than the Affiliated Stockholders) in the Merger and is
not intended to constitute, and does not constitute, a recommendation as
to
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whether any Stockholder should vote to adopt the Merger Agreement or the
Merger. Holders of Company Common Stock are urged to read Schroders'
opinion in its entirety.
(xi) The terms and conditions of the Merger Agreement, including (A)
the amount and form of consideration, (B) the provision permitting the
Board under certain circumstances to furnish information to, and negotiate
with, a third party making an unsolicited bona fide Acquisition Proposal
(see "THE MERGER AGREEMENT--No Solicitation; Acquisition Proposals"), (C)
the provision permitting the Board under certain circumstances to
terminate the Merger Agreement in order to accept an Acquisition Proposal
from a third party on prior written notice to Acquiror and upon paying
Acquiror a fee of $2.5 million, which amount would not, in the Board's
view after consulting with Schroders, preclude the possibility of such an
Acquisition Proposal although it might deter some potential Acquisition
Proposals and/or reduce the price per Share of Common Stock payable by a
third party in an Acquisition Proposal (see "THE MERGER AGREEMENT--No
Solicitation; Acquisition Proposals," "--Termination of the Merger
Agreement; Termination Fees" and "--Fairness of the Merger; Recommendation
of the Board of Directors", and (D) the limited conditions to the Merger
(see "THE MERGER AGREEMENT--Conditions to the Merger").
(xii) the fact that certain of the leases of the Company have "change
of control" provisions which would be triggered if the Company was
purchased by a person other than Charles Sarkis or an affiliate of Mr.
Sarkis and might, therefore, adversely impact the Company's operating
income after such a transaction.
The foregoing discussion of the information and factors discussed by the
Special Committee and the Board is not meant to be exhaustive but includes all
material factors considered by the Special Committee and the Board. The Special
Committee and the Board did not assign relative weights to the above factors or
determine that any factor was of particular importance. Rather, the Special
Committee and the Board viewed their position and recommendations as being
based on the totality of the information presented to and considered by them,
except that particular consideration was placed on (i) the opinion of Schroders
that, as of the date of the opinion, the $10.25 per Share Merger Consideration
to be received by the Stockholders (other than the Affiliated Stockholders) in
the Merger was fair to such Stockholders from a financial point of view, (ii)
the active arm's length bargaining that had occurred between the Special
Committee, on the one hand, and Acquiror on the other hand, that resulted in
the $10.25 per Share Merger Consideration, which the members of the Special
Committee believed was the highest price that Acquiror would agree to pay and
(iii) the fact that the terms of the Merger Agreement permit the Company to
abandon the Merger if a superior transaction is proposed. While the Special
Committee and the Board noted that certain of the individual analyses contained
in the Schroders presentation and opinion were, in the judgment of the Special
Committee and the Board, more supportive of their decision to approve the
Merger than others, both the Special Committee and the Board considered the
totality of the presentation and the opinion in determining whether the Merger
was fair from a financial point of view.
The Special Committee and the Board recognized that, as a result of the
proposed Merger, Stockholders (other than the Affiliated Stockholders) would
cease to have an interest in an ongoing corporation with potential for future
growth, and the Special Committee and the Board therefore gave consideration to
the Company's results of operations and current forecasts of future revenues
and earnings in reaching its determination to approve the Merger Agreement. The
Board also recognized that the Affiliated Stockholders would have an
opportunity, subject to the risks of the Surviving Corporation's business, to
benefit from any increases in the value of the Surviving Corporation following
the Merger. The Special Committee and the Board recognized that this
represented a potential conflict between the interests of the Affiliated
Stockholders (most of whom are officers and employees of the Company) and the
Company's other Stockholders. However, the Special Committee and the Board
recognized that Acquiror was willing to enter into the Merger Agreement only if
satisfactory arrangements for the retention of, and equity reinvestment by,
management could be put in place. See "--Interests of Certain Persons in the
Merger; Conflicts of Interest."
In considering the fairness of the Merger, Stockholders should be aware
that the Affiliated Stockholders have a substantial equity ownership position
in the Company and will be offered an opportunity, not available to the
Company's other Stockholders, to indirectly participate in the equity of the
Surviving Corporation through the exchange of their Shares for shares in the
Acquiror, prior to the Effective Time. As of -------- , 1999, the Affiliated
Stockholders owned approximately % of the outstanding Shares of the
Company's Common Stock on a fully diluted basis. Assuming the transactions
contemplated by the Voting and Shares Exchange Agreements are consummated, on a
pro forma basis giving effect to the consummation of the Merger, the Affiliated
Stockholders will own approximately 99% of the Surviving Corporation.
The Special Committee believes that the Merger is procedurally fair
because: (i) the Special Committee consisted of disinterested directors (none
of whom will be directors of or investors in Acquiror or the Surviving
Corporation) appointed to represent the interest of the holders of Shares of
the Company's Common Stock (other than Shares of the Company's Common Stock
held by Acquiror, its affiliates or
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the Affiliated Stockholders), and to negotiate on an arm's length basis with
Acquiror on behalf of such holders; (ii) the Special Committee retained and was
advised by the law firm of Ropes & Gray; (iii) the Special Committee retained
and was advised by Schroders and (iv) Schroders rendered an opinion concerning
the fairness, from a financial point of view, of the consideration to be
received by the Stockholders (other than Affiliated Stockholders) in the
Merger. In addition, the Special Committee believes that the Merger is
procedurally fair because the $10.25 per share of the Company's Common Stock
and the other terms and conditions of the Merger Agreement resulted from active
and lengthy arm's length bargaining between the Special Committee, on the one
hand, and Acquiror on the other hand. In addition, the Special Committee and
the Board insisted that the Merger Agreement provide for the approval of the
Merger Agreement by the affirmative vote of at least a majority of the
Stockholders other than Mr. Sarkis, The Westwood Group, Inc., the other
Affiliated Stockholders and Mr. Finneran.
The rules of the Commission require each of Acquiror and Mr. Sarkis to
express its belief as to the fairness of the Merger to the Stockholders. While
each of Acquiror and Mr. Sarkis has undertaken no evaluation of the Merger from
the standpoint of fairness to the Stockholders, they have considered the
factors noted above which were taken into account by the Board and the Special
Committee, based however, only on the more limited facts and information
available to them. Although Acquiror and Mr. Sarkis did not find it practicable
to quantify or otherwise attach relative weights to the specific factors
considered by the Board or the Special Committee, each of Acquiror and Mr.
Sarkis did consider these specific factors in arriving at their proposed price
per Share. Each of Acquiror and Mr. Sarkis also considered the fact that it
required, as a condition to its execution and delivery of the Merger Agreement,
the Board and the Special Committee to have determined that the Merger
Agreement was fair to the Stockholders and to have obtained an opinion of
Schroders that the Merger Consideration to be received in the Merger by holders
of the Company's Common Stock pursuant to the Merger Agreement is fair to such
holders. On the basis of the foregoing considerations, each of Acquiror and Mr.
Sarkis believes that the Merger is fair from a financial point of view to the
Stockholders. In addition, Acquiror and Mr. Sarkis have considered the measures
taken by the Special Committee and the Board to ensure the procedural fairness
of the transaction, including the formation of the Special Committee, the
retention of legal and financial advisors by the Special Committee and the
arms-length nature of the negotiations. See "--Background of the Merger".
Other than the recommendations of the Special Committee and the Board that
the Stockholders vote in favor of adoption of the Merger Agreement and the
Merger, no other person filing the Schedule 13E-3 with the Commission has made
any recommendation with respect to the Merger or any other transaction
contemplated thereby. Acquiror and its affiliates and the Affiliated
Stockholders intend to vote their Shares in favor of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
In considering the recommendation of the Board of Directors with respect
to the Merger, Stockholders should be aware that certain members of the Board
and management have certain interests that present them with actual or
potential conflicts of interest in connection with the Merger. The Board of
Directors was aware of these conflicts and considered them among the other
matters described under "--Fairness of the Merger; Recommendation of the Board
of Directors," "THE MERGER--Effect on Stock Options and Employee Benefit
Matters," and "OTHER MATTERS--Security Ownership of Certain Beneficial Owners
and Management."
Mr. Sarkis, the Company's Chairman, President and Chief Executive Officer
and a member of the Board of Directors, may benefit from the Merger as
described under "--Purpose of the Merger." Mr. Dalton, an option holder and a
member of the Board of Directors, is the President and Chief Executive Officer
of The Westwood Group, Inc. which will own shares of the Surviving Corporation.
Mr. Bissaillon is also an option holder, a member of the Board of Directors and
an officer of the Company. Mr. Dalton and Mr. Bissaillon may benefit from the
Merger as describd under "--Purpose of the Merger." In addition, the other
officers of the Company beneficially own Shares and options to purchase Shares
for which they would receive the same cash payments as other Stockholders upon
the closing of the Merger (less the exercise price, in the case of options)
(see discussion of the Company's Stock Option Plan below).
Voting and Shares Exchange Agreement
It is anticipated that each Affiliated Stockholder will enter into a
Voting and Shares Exchange Agreement (each a "Voting Agreement") with Acquiror,
with respect to their Shares of the Company's Common Stock. The Affiliated
Stockholders each will agree, pursuant to their respective Voting Agreements
(i) to vote all of the Shares beneficially owned by him/her/it (the "Owned
Shares" (which term shall include any Shares acquired by each Affiliated
Stockholder after the date of the Merger Agreement)) in favor of the adoption
of the Merger Agreement and the approval of the Merger, (ii) to appoint
Acquiror as Stockholder's proxy to vote the Owned Shares at the Stockholders
meeting, (iii) with respect to other matters put to the Stockholders for a
vote, to vote the Owned Shares in each case, in accordance with the terms and
conditions of their Voting Agreement, and (iv) to exchange his/her/its Owned
Shares for shares of the Acquiror prior to the Closing Date. The
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Voting Agreements, and each Affiliated Stockholder's obligations thereunder,
will terminate upon the earlier of (i) the consummation of the Merger, or (ii)
the termination of the Merger Agreement in accordance with its terms.
Stock Option Plan
The executive officers, as well as other key employees, are eligible to
participate in the Company's Stock Option Plan (the "Company Stock Option
Plan"). The purpose of the Company Stock Option Plan is to provide increased
incentives to salaried employees, to encourage new employees to become
affiliated with the Company and to align the interests of such persons with
those of the Stockholders. The Stock Option Plan is administered by the
Compensation Committee of the Board of Directors (the "Compensation
Committee"). The Compensation Committee has the authority to determine the
individuals to whom the stock options are awarded, the terms upon which option
grants shall be made and the number of Shares subject to each option, all
subject to the terms and conditions of the Company Stock Option Plan. As a
result of the Merger, holders of options will be entitled to immediately
exercise their options for the aggregate number of Shares subject to such
options and be entitled to receive the Merger Consideration (less the exercise
price). See "THE MERGER--Effects on Stock Options and Employee Benefit
Matters."
Employment Agreement; Change of Control Severance Agreements
The Company entered into a three-year employment agreement with Mr. Sarkis
on January 16, 1992 (the "Employment Agreement") which provides that Mr. Sarkis
will be employed as President and Chief Executive Officer and that the term of
his employment under the Employment Agreement continues from year to year
thereafter unless either party terminates the Employment Agreement. Mr. Sarkis'
base compensation under the Employment Agreement is currently $375,000 per year
and may be readjusted from time to time by the Board of Directors or the
Compensation Committee. In addition, Mr. Sarkis may receive annual bonuses as
determined by the Board of Directors or the Compensation Committee. The Company
may terminate Mr. Sarkis' employment only for cause. The Employment Agreement
contains a non-competition covenant which prohibits Mr. Sarkis, until the later
of five years from the date of the Employment Agreement, the date of a change
of control, or such time that neither he nor The Westwood Group, Inc. owns more
than 3% of the outstanding Shares of Common Stock of the Company, from engaging
in any competing business, directly or indirectly. Mr. Sarkis' real estate
investments in two properties which currently are leased to the Company are not
subject to the non-competition covenant.
The Company has entered into Change of Control Severance Agreements
("Severance Agreements") with Charles F. Sarkis, Francis P. Bissaillon, Mark L.
Hartzfeld, Ann Marie Lagrotteria and Robert J. Ciampa. The Severance Agreements
provide that if there were a change of control (as defined in the Severance
Agreements) of the Company, and such officer's employment by the Company is
terminated during the next two years for any reason other than dismissal by the
Company for cause (as defined in the Severance Agreements), the officer would
be entitled to certain benefits. These benefits include receipt of a payment
equal to the sum of three times the amount of the officer's annual salary and
bonus, a pro rated amount of the officer's current year bonus, the amount of
salary and bonus deferred in prior years and not yet received by the officer,
and, in certain circumstances, a gross-up for certain taxes payable by the
officer in connection with the receipt of payments under the Severance
Agreements. The Severance Agreements also provide that upon a qualifying
termination of employment, the officer's stock options will become fully vested
and that the Company will continue the officer's life, medical and disability
insurance for two years after the termination of the officer's employment to
the extent that these benefits are not provided by another employer, and that
any non-competition agreements between the Company and the employee shall not
be effective.
The compensation levels and employee benefit plans and programs for
directors, officers and employees of the Company after the Merger are expected
to be substantially the same as those currently provided by the Company, except
that the existing Company Stock Option Plan will be terminated. It is not
anticipated that any director or officer of the Company will receive any
payment under any employment or severance agreement as a result of the Merger.
Transactions with Affiliates
Mr. Sarkis is the majority stockholder of The Westwood Group, Inc. The
Westwood Group, Inc. owns 673,451 Shares or 19.5% of the Common Stock of the
Company. The following is a summary of certain arrangements between the Company
and The Westwood Group, Inc., its subsidiaries, Mr. Sarkis and Mr. Sarkis'
affiliates. Certain of these arrangements were made while the Company was a
wholly-owned subsidiary of The Westwood Group, Inc. and accordingly, were
established by related parties and were not subject to arms length
negotiations.
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The Company's By-Laws provide that all future proposed agreements between the
Company and The Westwood Group, Inc., Mr. Sarkis or their respective affiliates
are subject to advance approval by a majority of the independent members of the
Company's Board of Directors.
Prior to 1994, the Company and The Westwood Group, Inc. were parties to
agreements pursuant to which the Company operated the concession business and
received certain other revenues in connection with the operation of Wonderland
Greyhound Park and Foxboro Park, two parimutuel race tracks owned by The
Westwood Group, Inc. In May 1994, the Company transferred its concession and
related operations to The Westwood Group, Inc. in return for a $770,000 term
note, to which $200,000 owed by The Westwood Group, Inc. to the Company was
added, to bring the total principal amount of the note to $970,000. This note
was subsequently amended to provide that principal and interest payments under
the note would not begin until April 1, 1999.
Lease Arrangements
In December 1991, Boraschi Cafe, Inc. ("Boraschi"), a wholly-owned
subsidiary of the Company, entered into a lease which formalized a prior
leasing arrangement for 14,427 square feet of restaurant space in Boston,
Massachusetts which Mr. Sarkis beneficially owns. The lease, which expires on
September 30, 2006, provides for annual rent of $300,000 and that the Company
is responsible for utilities, maintenance and taxes. The restaurants operated
at this location are Abe & Louie's and The Famous Atlantic Fish Company.
Indemnification
The Company is a Delaware corporation. Section 102(b)(7) of the DGCL
enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation of its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transactions from which a director derived an
improper personal benefit. The Certificate of Incorporation of the Company
contains provisions eliminating the liability of directors to the extent
permitted by Section 102(b)(7) of the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses actually and
reasonably incurred in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
The Restated Certificate of Incorporation of the Company provides for
indemnification of each of the Company's directors to the full extent permitted
by the DGCL. The By-Laws of the Company provide for indemnification of each of
the Company's directors and officer to the full extent permitted by the DGCL.
From and after the Effective Time, pursuant to the Merger Agreement,
Acquiror will cause the Surviving Corporation to indemnify and hold harmless
each person who is now, at any time has been or who becomes prior to the
Effective Time a director, officer or employee of the Company or any of its
Subsidiaries, and their heirs and personal representatives (the "Indemnified
Parties"), against all expenses, liabilities and losses (including without
limitation, attorneys' fees and related disbursements, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement incurred
in connection with any "Proceeding" (as defined in Article VI
10
<PAGE>
of the Company's By-laws) arising out of or pertaining to any action or
omission occurring prior to the Effective Time (including, without limitation,
any Proceeding which arises out of or relates to the transactions contemplated
by the Merger Agreement), to the full extent permitted under Delaware law and
the Company's Restated By-laws as in effect as of the Closing Date or under any
indemnification agreement in effect as of the date of the Merger Agreement.
Such indemnification is further subject to the terms and conditions set
forth in the Merger Agreement, including but not limited to the requirement
that for a period of not less than six years after the Effective Time, Acquiror
or the Surviving Corporation will maintain officers' and directors' liability
insurance ("D&O Insurance") covering each Indemnified Party who is presently
covered by the Company's officers' and directors' liability insurance or will
be so covered at the Effective Time with respect to actions or omissions
occurring prior to the Effective Time, on terms no less favorable than such
insurance maintained in effect by the Company as of the date of the Merger
Agreement in terms of coverage and amounts, provided that Acquiror and the
Surviving Corporation shall not be required to pay in the aggregate an annual
premium for D&O Insurance in excess of 200% of the last annual premium paid
prior to the date of the Merger Agreement, but in such case will purchase as
much coverage as may be obtained for 200% of the last annual premium paid prior
to the date of the Merger Agreement.
PURPOSE OF THE MERGER
The purpose of the Merger is for the stockholders of Acquiror to acquire
the entire equity interest in the Company. Acquiror was formed for the purpose
of effecting the Merger. In connection with the Merger, (i) Acquiror will be
merged with and into the Company, with the Company being the Surviving
Corporation of the Merger, (ii) the Affiliated Stockholders will exchange their
Shares in the Company for shares in the Acquiror and will be stockholders in
the Surviving Corporation and (iii) the Stockholders (other than Affiliated
Stockholders and Stockholders who perfect their appraisal rights) will receive
the Merger Consideration. Immediately after giving effect to the Merger, the
Company will be owned by the Affiliated Stockholders. See "--Interests of
Certain Persons in the Merger; Conflicts of Interest" and "THE MERGER
AGREEMENT--Other Agreements."
The acquisition of the Company was structured as a cash merger in which
Acquiror and the Surviving Corporation would incur indebtedness to acquire for
cash all Shares of the Company's Common Stock other than Shares exchanged by
the Affiliated Stockholders pursuant to the Voting and Shares Exchange
Agreements (discussed above). The Company's purpose in submitting the Merger to
the vote of its Stockholders with a favorable recommendation at this time is to
allow the Stockholders an opportunity to receive a cash payment at a fair price
in order to provide a prompt and orderly transfer of ownership of the Company
to the Stockholders of Acquiror and to provide the Stockholders (other than the
Affiliated Stockholders) with cash for all of their Shares of the Company's
Common Stock.
If the Merger is consummated, the Stockholders (other than the Affiliated
Stockholders) will no longer have any equity interest in the Company, and
therefore will not share in its future earnings and growth. Instead, each such
Stockholder (other than the Affiliated Stockholders and such Stockholders who
properly perfect appraisal rights in accordance with Section 262 of the DGCL)
will receive, upon surrender of the certificate or certificates evidencing the
appropriate number of Shares, the Merger Consideration in exchange for each
Share of Company Common Stock owned immediately prior to the Effective Time.
Except for the Merger, Acquiror does not have any present plans that
relate to or would result in an extraordinary corporate transaction such as a
Merger, reorganization or liquidation involving the Company or any of its
Subsidiaries or a sale or other transfer of a material amount of assets of the
Company or any of its Subsidiaries to any changes in the Company's corporate
structure or business. Acquiror, however, will continue to evaluate the
business and operations of the Company after the Merger and make such changes
as are deemed appropriate.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, each Stockholder (other than the
Affiliated Stockholders) will be entitled (i) to receive a payment in cash of
$10.25 per Share, without interest, or (ii) to exercise appraisal rights
pursuant to the DGCL if properly demanded prior to the vote on the Merger at
the Special Meeting. The Stockholders (other than the Affiliated Stockholders),
as of the Effective Time, will have no continuing ownership interest in the
Company and will no longer participate in the future earnings and potential
growth of the Company. The Affiliated Stockholders will exchange their Shares
for shares in the Acquiror prior to the Closing Date and will be the
stockholders of the Surviving Corporation.
11
<PAGE>
As a result of the Merger, the Company will become a privately held
corporation. From the Effective Time, the Shares will no longer be traded on
the Nasdaq National Market, and price quotations with respect to sales of
Shares in the public market will no longer be available. The registration of
the Shares under the Exchange Act will terminate and this termination will
eliminate the Company's obligation to file periodic financial and other
information with the Commission and will make certain of the provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) and the requirement, under the proxy rules of Regulation 14A, of
furnishing a proxy or information statement in connection with stockholders
meetings, no longer applicable to the Company.
Pursuant to the terms of the Merger Agreement, the Board of Directors of
Acquiror will become, upon consummation of the Merger, the Board of Directors
of the Surviving Corporation. Mr. Sarkis is the sole current director of
Acquiror and is expected to be the only director of the Surviving Corporation.
PLANS FOR THE COMPANY AFTER THE MERGER
It is expected that following the Merger the business and operations of
the Company will, except as set forth in this Proxy Statement, be conducted by
Surviving Corporation substantially as they are currently conducted.
Except as described in this Proxy Statement, neither Mr. Sarkis nor
Acquiror has any present plans or proposals that relate to or would result in
an extraordinary corporate transaction involving the Company's corporate
structure, business or management, such as a Merger, reorganization,
liquidation, relocation of any operations of the Company or sale or transfer of
a material amount of assets other than the transactions described in this Proxy
Statement. However, Mr. Sarkis and members of management will continue to
evaluate the business and operations of the Surviving Corporation following the
Merger and may propose or develop new plans and proposals which they consider
to be in the best interests of the Surviving Corporation and its stockholders.
Specifically, Mr. Sarkis currently intends to continue the Company's current
strategy of a growth rate of two to three new restaurants per year. See "THE
COMPANY-- Growth Strategy."
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to a number of conditions, including
without limitation, receipt of the required Stockholder approval, the absence
of an injunction or other order restraining consummation of the transactions
contemplated by the Merger Agreement, receipt by Acquiror of the required
financing to complete the Merger and to pay related fees and expenses. See "THE
MERGER AGREEMENT--Conditions to the Consummation of the Merger" and "APPRAISAL
RIGHTS." Although, as described in "THE MERGER--Merger Financing," Acquiror has
obtained commitments for the required financing, these commitments contain
numerous conditions. Therefore, even if the requisite Stockholder approval is
obtained, there can be no assurance that the Merger will be consummated.
It is expected that if the Merger Agreement is not adopted by the
Stockholders, or if the Merger is not consummated for any other reason, the
Company's current management, under the direction of the Board of Directors,
will continue to manage the Company as an on-going business. No other
transaction is currently being considered by the Company as an alternative to
the Merger.
CERTAIN RISKS IN THE EVENT OF BANKRUPTCY
If the Company is insolvent at the Effective Time or becomes insolvent as
a result of the Merger, the transfer of funds representing the $10.25 per Share
price payable to Stockholders upon consummation of the Merger may be deemed to
be a "fraudulent conveyance" under applicable law, and therefore may be subject
to claims of certain creditors of the Company. If such a claim is asserted by
the creditors of the Company after the Merger, there is a risk that persons who
were Stockholders at the Effective Time will be ordered by a court to turn over
to the Company's trustee in bankruptcy all or a portion of the $10.25 per Share
in cash they received upon the consummation of the Merger.
Based upon the projected capitalization of the Company at the time of the
Merger and projected results of operations and cash flow after the Merger,
management of the Company has no reason to believe that the Company and its
Subsidiaries ("Subsidiaries"), on a consolidated basis, will be insolvent
immediately after giving effect to the Merger.
12
<PAGE>
THE COMPANY
GENERAL
The Company owns and operates full service restaurants located in New
England, New York, New Jersey and Washington, D.C. As of , 1999, the
Company operated thirty-four restaurants, fourteen of which feature Northern
Italian cuisine and are operated under the Papa.Razzi trade name and twenty of
which offer American-style cuisine. Since it opened its first restaurant in
1964, the Company has generally followed an operating philosophy of providing
value to its customers by featuring generous portions of high quality food, a
level of service that is typical of higher priced restaurants, and moderate
prices.
The Company emphasizes freshness, quality, cleanliness, service and
distinctive decor in each of its restaurants. Menu items are prepared on the
restaurant premises from original recipes by skilled and experienced chefs. The
Company employs two executive chefs who are responsible for developing new menu
items, setting presentation standards and working with unit level chefs as
needed to improve performance and resolve problems. The Company's restaurants
use fresh ingredients almost exclusively and generally do not rely on frozen or
prepared foods as do some national chains. The Company employs quality control
consultants who conduct frequent unannounced inspections of its restaurants.
The Company believes that its adherence to the high-quality food standards has
promoted strong customer loyalty and has contributed to the longevity of its
restaurant concepts.
The Company recognizes that menus, and sometimes restaurant concepts, need
to be changed periodically to satisfy changing public tastes. The Company's
core restaurant concepts have proven adaptable to changing customer preferences
and the Company believes that its ability to modify and refresh its existing
restaurants by periodically revising their menus and concepts allows the
Company to maintain or increase its customer base within its market area.
The Company's restaurants provide specialty menus in addition to their
standard menus, such as weekend brunch menus. Both standard and specialty menus
are periodically updated by the executive chefs according to changing customer
preferences. The Company considers the extensive selection of items on its
menus to be an important factor in the appeal of its restaurants.
All of the Company's restaurants offer a full liquor selection and all
have a bar. The Company believes that, although such beverage service
contributes to the overall success of a restaurant, attention to the quality of
the food and service increases repeat customer business and minimizes volume
fluctuations associated with trends in bar popularity. All of the Company's
restaurants are open seven days a week and serve lunch and dinner.
NORTHERN ITALIAN-STYLE MENU AND CONCEPT
The Papa.Razzi concept creates a distinctive upscale, casual dining
atmosphere. Each of the Papa.Razzi restaurants features earth colors, marble or
granite and light wood decor to create the ambiance of a European trattoria.
The Papa.Razzi menu is tailored to this dining atmosphere and offers a selected
array of Northern Italian cuisine featuring several types of freshly prepared
pasta with sauces. The menu also includes a variety of pizzas with creative
toppings which are flash cooked in brick ovens under extreme heat to create a
thin, light crust and preserve the flavor and consistency of the toppings.
The "secondi" or entree portion of the Papa.Razzi menu offers a selection
of grilled and saut-ed veal, chicken, seafood and meat dishes.
The Papa.Razzi concept and menu allow the Company to take advantage of the
lower food costs and popularity of Italian food. The Papa.Razzi restaurants
have proven equally suitable for urban and shopping mall locations.
The average lunch and dinner checks per customer at Papa.Razzi are
approximately $12.50 and $19.00, respectively. Sales of alcoholic beverages
accounts for approximately 25.0% of Papa.Razzi revenue.
AMERICAN-STYLE MENUS, CONCEPTS AND TRADE NAMES
The Company's American-style restaurants offer substantially similar menus
which emphasize fresh, moderately-priced fare, including a variety of chicken
and seafood dishes, grilled steaks, gourmet hamburgers, Mexican dishes, pasta,
soups and salads.
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<PAGE>
While the Company's American-style restaurants are operated under several
trade names, each restaurant creates a warm, casual dining atmosphere
attracting a wide diversity of customers. The Company's strategy of using
different restaurant names enhances its ability to open a number of restaurants
in a strong restaurant market, such as the Back Bay section of Boston where the
Company operates four American-style restaurants. Although the menus of
American-style restaurants are substantially similar, menu items vary slightly
and different prices are charged, depending on the restaurant's location and
trade name.
In October of 1998 the Company opened a new restaurant concept called Abe
& Louie's. This concept has a specialized menu featuring a selection of prime
meats, seafood and classic dishes, with pricing, decor and service level
greater than the other American style restaurants owned by the Company.
The average lunch and dinner checks per customer at the Company's
American-style restaurants (exclusive of Abe & Louie's) are approximately
$11.00 and $16.00, respectively. Sales of alcoholic beverages accounts for
approximately 29.0% of the Company's American concept revenues.
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<PAGE>
RESTAURANT LOCATIONS
The following table presents certain information regarding the restaurants
operated by the Company as of , 1999.
<TABLE>
<CAPTION>
Approx. Restaurant
Date Seating Size (Approx. Lease (1)
Opened Location Name Capacity Sq. Ft.) Expiration
<S> <C> <C> <C> <C> <C>
Northern Italian Concept
- ------------------------------------
Nov. 1989 Boston, MA Papa.Razzi 220 6,700 2010
June 1991 Chestnut Hill, MA Papa.Razzi 160 4,050 2014
Oct. 1991 Cambridge, MA Papa.Razzi 219 6,170 2007
June 1992 Concord, MA Papa.Razzi 220 14,000 2019
Aug. 1992 West Hartford, CT Papa.Razzi 239 5,000 2014
Nov. 1992 White Plains, NY Papa.Razzi 280 6,750 2022
Dec. 1992 Burlington, MA Papa.Razzi 350 12,600 2017
Mar. 1993 Wellesley, MA Papa.Razzi 320 9,300 2018
June 1993 Cranston, RI Papa.Razzi 225 6,000 2018
Oct. 1993 Short Hills, NJ Papa.Razzi 202 5,450 2009
May 1994 Hanover, MA Papa.Razzi 230 7,200 2023
June 1994 Westbury, NY Papa.Razzi 280 10,200 2016
Sept. 1994 Paramus, NJ Papa.Razzi 220 5,800 2005
Feb. 1995 Georgetown, D.C. Papa.Razzi 243 8,400 2015
American Concept
- ------------------------------------
June 1973 Chestnut Hill, MA Charley's Eating & Drinking Saloon 170 5,000 2014
Sept. 1975 Dedham, MA J.C. Hillary's 270 7,920 2011
Oct. 1975 Boston, MA Abe & Louie's (2) (3) 411 9,870 2006
Oct. 1978 Boston, MA The Famous Atlantic Fish Company (3) 169 4,557 2006
Dec. 1984 Boston, MA Joe's American Bar & Grill 251 6,317 2010
Nov. 1985 Waterford, CT Charley's Eating & Drinking Saloon 190 7,108 2000
Aug. 1986 Wayland, MA Hillary's 188 6,100 2015
Feb. 1987 Nashua, NH Charley's Eating & Drinking Saloon 208 6,597 2002
July 1988 Worcester, MA Charley's Eating & Drinking Saloon 205 6,370 2003
Sept. 1988 West Hartford, CT Joe's American Bar & Grill 230 8,000 2014
Sept. 1989 Woburn, MA Joe's American Bar & Grill (4) 275 8,100 2023
Jan. 1990 North Attleboro, MA Charley's Eating & Drinking Saloon 239 6,633 2005
July 1990 Trumbull, CT J.C. Hillary's 250 7,090 2005
Nov. 1990 Boston, MA Charley's Eating & Drinking Saloon 270 7,888 2011
Dec. 1992 Peabody, MA Joe's American Bar & Grill 268 6,016 2008
Dec. 1993 Hanover, MA Joe's American Bar & Grill 260 7,400 2023
Oct. 1994 Paramus, NJ Joe's American Bar & Grill 240 6,100 2005
Dec. 1994 Short Hills, NJ Joe's American Bar & Grill 195 5,300 2009
Sept.1996 Braintree, MA Joe's American Bar & Grill 310 9,200 2016
May 1997 Boston, MA Joe's American Bar & Grill 344 7,500 2016
</TABLE>
(1) Assumes that the Company exercises all of its extension options.
(2) Operated as a J.C. Hillary's until February of 1998.
(3) Operated under a lease with an affiliate of Charles F. Sarkis, President
and Chief Executive Officer of the Company.
(4) Operated as J.C. Hillary's until November of 1997.
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<PAGE>
GROWTH STRATEGY
The Company's current growth strategy is to expand its operations on a
very select basis in markets along the Boston-Washington, D.C. corridor.
However, if a suitable opportunity arose, the Company would also consider
expansion into other metropolitan markets. The Company does not franchise and
currently has no plans to develop a domestic franchise program. The ability of
the Company to open new restaurants and achieve its expansion goals is
dependent upon, among other factors, locating satisfactory sites, obtaining or
generating adequate capital, negotiating favorable leases or purchasing land or
buildings on acceptable terms, securing appropriate government permits and
approvals, obtaining liquor licenses and recruiting and training additional
qualified restaurant management personnel.
SITE SELECTION, DESIGN AND CONSTRUCTION
The Company believes that location is a key factor in a restaurant's
ability to operate a profitable lunch and dinner business and considers several
demographic factors in selecting sites, including the size of the middle to
upper income residential population, the proximity of retail and office
facilities, traffic patterns and the visibility of the location. Senior
management inspects and approves each restaurant site. The Company generally
designs its restaurants utilizing outside architects under the supervision of
its in-house architect.
MANAGEMENT TRAINING AND RESTAURANT OPERATIONS
The Company invests a substantial amount of time in training and testing
its restaurant personnel. Management trainees must complete a ten-week on-site
training program during which they are familiarized with kitchen, bar and
dining room operations of the restaurant and are instructed in areas such as
food quality and preparation, customer service, alcoholic beverage service,
liquor liability avoidance and employee relations. Periodic seminars are
conducted by Company personnel and outside experts on a broad range of topics
to provide additional training for its managers. The training programs are
designed to ensure that uniform standards of quality and service are followed
in all of the restaurants and are further designed so that the managers can be
transferred from one American concept restaurant to another, or one Papa.Razzi
restaurant to another, with minimal disruption.
The Company believes that an important element of its success lies in
employee adherence to the Company's standard of quality. The Company encourages
the promotion of its qualified restaurant employees to managerial positions and
maintains employee morale by rewarding individual achievement through increased
salaries and bonuses. The Company has an incentive program under which general
managers, chefs and regional managers may receive bonuses and stock option
grants based on the contribution to the Company's earnings by the restaurants
for which they are responsible.
The Company employs regional managers who are each responsible for
supervising an average of seven restaurants. The day-to-day operations of each
restaurant, including personnel management, food procurement, inventory control
and guest relations, are the responsibility of a general manager who generally
reports to a regional manager. The management staff of a typical Company
restaurant consists of one general manager, two assistant managers, one chef
and one sous chef. Each restaurant also employs approximately 80 hourly
employees, many of whom work part-time.
Centralized financial and management controls, which are fundamental in
controlling restaurant operating margins, are maintained through the use of an
automated data processing system and prescribed reporting procedures. Each
restaurant has a point of sale system that captures restaurant operating
information. The restaurants forward daily sales reports, vendor invoices,
payroll information and other data to the Company's corporate headquarters.
Company management utilizes this data to monitor quality, cost and sales mix
and to prepare periodic financial and management reports. This system is also
used for budget analyses, planning, and determining menu composition.
Restaurant managers perform daily inventories on key products and weekly
inventories on all products. Cash is controlled through frequent deposits of
sales proceeds in local operating accounts, the balances of which are wire
transferred regularly to the Company's principal account.
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<PAGE>
PURCHASING AND SUPPLIES
The Company centrally controls the purchasing criteria for its
restaurants, including criteria related to acceptable suppliers and product
quality. Management develops product specifications and continually monitors
vendors to ensure that food suppliers comply with the Company's quality
standards. The Company's restaurants purchase certain perishable items,
beverages and other branded items directly from company-specified suppliers.
The Company is not dependent on any single supplier and believes that adequate
alternative suppliers are available.
EMPLOYEES
At December 11, 1998, the Company employed approximately 2,800 persons,
approximately 20 of whom were corporate personnel and approximately 220 of whom
were associated with the management or supervision of the restaurants. The
Company considers relations with its employees to be good.
MARKETING
Management believes that the Company's commitment to customer service and
value is the most effective approach to attracting customers. Accordingly, the
Company has historically focused its resources on providing its customers with
superior service and value, and has relied primarily on word of mouth to
attract new and repeat customers. Management believes that its strategy of
locating multiple restaurants under the same name within a defined geographic
area has enabled newer restaurants to benefit from the name recognition and
reputation for quality developed by existing restaurants. The Company employs
little print or direct mail advertising, and conducts some radio advertising
and local restaurant promotions. During 1998, the Company's expenditures for
advertising were less than one percent of its revenues.
In September 1994, the Company instituted its Preferred Guest Program.
Under the program, preferred guests receive a $20 dining certificate good at
any of the Company's restaurants each time $200 in food and beverage purchases
are reflected in the customer's account. The Company records the liability
associated with dining certificates as they vest. As of December 11, 1998, the
Company had approximately 20,000 members in its Preferred Guest Program.
COMPETITION
The restaurant business is highly competitive and is affected by, among
other things, changes in eating habits and preferences, local, regional and
national economic conditions, population trends and traffic patterns. The
Company competes within each market with locally-owned restaurants as well as
with national and regional restaurant chains, some of which operate more
restaurants and have greater financial resources and longer operating histories
than the Company. The principal bases of competition in the industry are the
quality and price of the food products served. Restaurant location, quality and
speed of service, name identification and attractiveness of facilities are also
important. The acquisition of sites is highly competitive as well, with the
Company often competing with other restaurant companies and retail businesses
for suitable sites for the development of new restaurants.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing by
governmental authorities and a variety of regulatory provisions relating to
zoning of restaurant sites, alcoholic beverage control, sanitation, health and
safety and the environment. Difficulties or failures in obtaining required
licenses or approvals may delay or prevent the Company from opening new
restaurants.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses 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,
and storage and dispensing of alcoholic beverages. The failure to receive or
retain, or a delay in obtaining, a liquor license in a particular location
could adversely affect the Company's ability to obtain such a license
elsewhere. The Company has not encountered any material problems relating to
alcoholic beverage licenses to date.
17
<PAGE>
Various federal and state labor laws govern the Company's relationship
with its employees, including such matters as minimum wage requirements,
overtime and other working conditions. Significant additional
government-imposed increases in minimum wages, paid leaves of absence, mandated
health benefits or increased tax payment requirements for employees who receive
gratuities could have a material adverse effect on the Company's results of
operations.
SERVICE MARKS
The Company regards its service marks as having significant value and as
being an important factor in the marketing of its services. The Company has
registered as service marks the words Papa.Razzi, Papa.Razzi's Cucina, Joe's
American Bar & Grill, J.C. Hillary's, Hillary's, Charley's Eating & Drinking
Saloon, Atlantic Fish Co., Rayz Riverside Caf-, and Abe & Louie's with the
United States Patent and Trademark Office. The Company's policy is to pursue
registration of its marks and to strenuously oppose infringement of its marks.
The Company is aware of similar names being used in some areas. To the
extent that these names were in use prior to the Company's registration of the
name as a service mark, the Company may be prevented from operating under the
name in the area of such prior use. The Company does not expect any such prior
use of similar names to have a material effect on its operations.
SEASONALITY
A large proportion of the Company's restaurants are located in mall
locations or other retail areas. Consequently, the Company's sales are
generally highest during the holiday shopping season in the fourth quarter of
each year and lowest during the first quarter of each year.
THE MERGER
BACKGROUND OF THE MERGER
As described above, the decision of the Board to approve, and recommend
adoption and approval by the Stockholders of, the Merger Agreement and the
transactions contemplated thereby, including the Merger, followed extensive
negotiations between the Special Committee and Acquiror regarding the terms of
the Merger Agreement. The Board's deliberations included a detailed review of
the Company's business, results of operations and prospects, including the
likelihood of effecting an alternative transaction and the ranges of values to
the Stockholders that might be achievable in an alternative transaction and the
financial and other terms of the proposed Merger. For a statement of the
material factors considered by the Board in connection with its approval and
recommendation, see "SPECIAL FACTORS--Purpose of the Merger"; "--Fairness of
the Merger" and "--Recommendation of the Board."
THE BOARD RECOMMENDS THAT BACK BAY STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT AND THE TRANSACTION CONTEMPLATED THEREBY, INCLUDING THE
MERGER.
The four members of the Board who voted to approve the Merger Agreement
and the transactions contemplated thereby, including the Merger, are not
officers or employees of the Company or its Subsidiaries. The other members of
the Board are Charles F. Sarkis, the Company's Chairman, President and Chief
Executive Officer, Francis P. Bissaillon, Executive Vice President and Chief
Financial Officer of the Company, and Richard P. Dalton, President and Chief
Executive Officer of The Westwood Group, Inc. Messrs. Sarkis, Bissaillon and
Dalton waived notice of the December 2, 1998 Board meeting and were absent when
the Board voted to approve the Merger Agreement and the transactions
contemplated thereby, including the Merger.
MERGER CONSIDERATION
Subject to certain provisions as described herein, except for Shares of
Company Common Stock owned by Acquiror and dissenting Shares, each issued and
outstanding Share of Company Common Stock will be entitled to receive in cash
from the Surviving Corporation following the Merger an amount equal to $10.25
(the "Merger Consideration").
Any Shares of Company Common Stock owned by the Company and Acquiror will
automatically be canceled at the Effective Time and will cease to exist. Shares
held by the Affiliated Stockholders will be exchanged for Shares of Acquiror
prior to the Closing Date and the Affiliated Stockholders will be the
stockholders of the Surviving Corporation.
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<PAGE>
EFFECTIVE TIME
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or upon such other
date as is specified in such Certificate of Merger in accordance with the DGCL
and as Acquiror and the Company shall agree (the "Effective Time"). Subject to
certain limitations, the Merger Agreement may be terminated by either party if,
among other reasons, the Merger has not been consummated on or before June 30,
1999. See "THE MERGER AGREEMENT--Conditions to the Merger" and "--Termination
of the Merger Agreement; Termination Fees."
CONVERSION OF SRC HOLDINGS STOCK
In the Merger, the shares of stock of Acquiror issued and outstanding
immediately prior to the Effective Time will become the shares of the Surviving
Corporation.
CONVERSION OF BACK BAY COMMON STOCK; PROCEDURES FOR EXCHANGE OF CERTIFICATES
At the Effective Time, shares of Company Common Stock (other than Shares
as to which appraisal rights are properly exercised, and Shares owned by
Acquiror) will be converted into the right to receive the Merger Consideration.
As soon as practicable following the Effective Time, the Exchange Agent
will send a letter of transmittal to each holder of Company Common Stock. The
letter of transmittal will contain instructions with respect to the surrender
of certificates representing shares of Company Common Stock or fractions
thereof in exchange for cash.
STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, each holder (other than
holders who perfect appraisal rights) of an outstanding certificate or
certificates at such time which prior thereto represented Shares of Company
Common Stock will, upon surrender to the Exchange Agent of such certificate or
certificates and acceptance thereof by the Exchange Agent, be entitled to
receive the Merger Consideration. The Exchange Agent will accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. After the Effective Time, there will be no
further transfer on the records of the Company or its transfer agent of
certificates representing Shares of Company Common Stock which have been
converted, in whole or in part, pursuant to the Merger Agreement into the right
to receive cash, and if such certificates are presented to the Company for
transfer, they will be canceled against delivery of cash. Until surrendered as
contemplated by the Merger Agreement, each certificate for Shares of Company
Common Stock will be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration. No
interest will be paid or will accrue on any cash payable to Stockholders as
consideration in the Merger.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed to carry on its
business and that of its Subsidiaries prior to the Effective Time in the usual,
regular and ordinary course of business consistent with past practice. See "THE
MERGER AGREEMENT--Conduct of the Company's Business Until the Effective Time."
CONDITIONS TO THE MERGER
The obligation of the Company and Acquiror to consummate the Merger are
subject to various conditions, including, without limitation, obtaining
requisite Stockholder approval in accordance with the DGCL, obtaining requisite
Non-Affiliated Stockholder approval pursuant to the Merger Agreement and the
absence of any injunction or other legal restraint or prohibition preventing
the consummation of the Merger. See "THE MERGER AGREEMENT--Conditions to the
Merger."
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FEDERAL INCOME TAX CONSIDERATIONS
Upon consummation of the Merger, each outstanding Share of Company Common
Stock (other than Shares held by the Acquiror and other than Shares as to which
appraisal rights are properly exercised) will be converted into the right to
receive the Merger Consideration.
The following discussion is a summary of the principal federal income tax
consequences of the Merger to Stockholders whose Shares are surrendered
pursuant to the Merger (including any cash amounts received by dissenting
Stockholders pursuant to the exercise of appraisal rights). The discussion
applies only to Stockholders in whose hands Shares of the Company's Common
Stock are capital assets, and may not apply to Shares of the Company's Common
Stock received pursuant to the exercise of employee stock options or otherwise
as compensation, or to Stockholders who are not citizens or residents of the
United States.
The federal income tax consequences set forth below are included for
general informational purposes only and are based upon present law. Because
individual circumstances may differ, each Stockholder is urged to consult such
Stockholder's own tax advisor to determine the applicability of the rules
discussed below to such Stockholder and the particular tax effects of the
Merger, including the application and effect of state, local and other tax
laws.
The receipt of cash pursuant to the Merger (including any cash amounts
received by dissenting Stockholders pursuant to the exercise of appraisal
rights) will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, (the "Code"), and also may be a
taxable transaction under applicable state, local and other income tax laws. In
general, for federal income tax purposes, a Stockholder will recognize gain or
loss equal to the difference between the cash received by the Stockholder
pursuant to the Merger and the Stockholder's adjusted tax basis in the Shares
of the Company's Common Stock surrendered pursuant to the Merger. Such gain or
loss will be capital gain or loss and will be long-term gain or loss if, on the
Effective Date of the Merger, the Shares of Company Common Stock were held for
more than one year. There are limitations on the deductibility of capital
losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely an advance payment, which may
be refunded to the extent it results in an overpayment of tax. Certain persons
generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include the reportable payments in income.
Stockholders should consult with their own tax advisors as to the
qualifications for exemption from withholding and procedures for obtaining such
exemption.
ANTICIPATED ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for in accordance with
the principles of purchase accounting.
CERTAIN REGULATORY MATTERS
The Company and the Acquiror do not believe that any governmental filings
are required with respect to the Merger other than the filing of the
Certificate of Merger. The Company and the Acquirer do not believe that they
are required to make a filing with the Department of Justice and the Federal
Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, although each agency has the authority to challenge the
Merger on antitrust grounds before or after the Merger is completed.
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS
Pursuant to the Merger Agreement, as of the Effective Time, each
outstanding, unexercised stock option to purchase Shares (a "Company Stock
Option") issued under the Company Stock Option Plan, except those Company Stock
Options which the Acquiror has agreed in writing to exchange for options
granted under the Acquiror's stock option plan immediately prior to the
Effective Time, will terminate and be canceled and each holder of a Company
Stock Option will be entitled to receive a cash payment from the Company equal
to the product of (a) the excess, if any, of (x) the Merger Consideration over
(y) the per Share exercise price of such Company Stock Option, times (b) the
aggregate number of Shares subject to such Company Stock Option. Such cash
payment will be net of any required withholding taxes. The Company's obligation
to make any such cash payment (1) will be subject to the obtaining of any
necessary consents of optionees to the cancellation of such Company Stock
Options, in form and substance satisfactory to Acquiror, and (2) will
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<PAGE>
not require any action which violates the Company Stock Option Plan. As of the
Effective Time, the Company Stock Option Plan will terminate and be of no
further force or effect, and the Company will take such action as will be
necessary to ensure, to Acquiror's reasonable satisfaction, that no holder of a
Company Stock Option will have any right to acquire any interest in the
Surviving Corporation under the Company Stock Option Plan.
There are currently 274,136 Company Stock Options outstanding (not
including options held by the Affiliated Stockholders). The aggregate cash
payment to be made on account of the cancellation of Company Stock Options as
set forth above is approximately $1.7 million.
The Stock Option Plan will terminate as of the Effective Time, and
following the Effective Time no holder of a Company Stock Option nor any
participant in the Company Stock Option Plan will have any right thereunder to
acquire equity securities of the Company following the Merger.
NASDAQ DELISTING
Following the consummation of the Merger, the Company will seek to have
the Company Common Stock, which is currently traded on the Nasdaq National
Market, delisted.
MERGER FINANCING
Pursuant to the Merger Agreement, Acquiror's obligation to consummate the
Merger is conditioned upon, among other things, sufficient financing being
obtained by Acquiror to consummate the transactions contemplated by the Merger
Agreement pursuant to the terms of the financing commitments (the "Financing
Commitments") described below or such other terms as Acquiror and the Company
may agree or as are not materially more onerous than as set forth in the
Financing Commitments. Pursuant to the Merger Agreement, Acquiror has agreed to
use commercially reasonable efforts to so obtain such financing.
The amount required to fund the purchase of Shares from selling
Stockholders pursuant to the Merger Agreement, consummate the Merger, and to
pay all related fees and expenses of the transaction, is estimated to be
approximately $38 million. Acquiror plans to obtain the necessary funds through
the Financing Commitments.
Acquiror has received a written commitment described below from (i) FINOVA
Capital Corporation ("FINOVA"), for the provision of a senior credit facility
(the "Senior Credit Facility") in the form of a senior term loan (the "Loan")
for the transactions contemplated by the Merger Agreement in the amount of $30
million; and (ii) DDJ Capital Management, LLC, on behalf of funds and accounts
managed and advised by it (collectively, "DDJ"), for the provision of
subordinated debt (the "Subordinated Debt") in the form of Senior Subordinated
Notes (the "Notes") in the amount of $8 million.
FINOVA issued to Mr. Sarkis a commitment letter, dated November 25, 1998
(the "FINOVA Commitment Letter"), pursuant to which FINOVA has committed,
subject to certain conditions discussed below, to provide Acquiror with the
Senior Credit Facility in the amount of $30 million in connection with the
Merger.
Borrowings pursuant to the Senior Credit Facility will be available (i) to
consummate the Merger, (ii) to refinance all existing indebtedness of the
Company and its Subsidiaries, (iii) to pay all transaction costs, and (iv) any
remainder, for working capital, including the construction and/or renovation of
new restaurant locations. The repayment of the Senior Credit Facility will be
unconditionally, jointly and severally guaranteed by all of the Surviving
Corporation's Subsidiaries.
The Loan will bear interest at a rate equal to the highest yield on seven
year Treasury Notes with a maturity date closest to the 27th quarter following
the quarter in which the closing occurs, as published in The Wall Street
Journal on the Friday before the Closing Date, plus 4.25% per annum. For any
period in which an event of default under the definitive loan agreement exists,
the Loan shall bear interest at the rate described above plus 3.0% per annum.
Accrued and unpaid interest on the Loan shall be payable monthly in arrears.
Voluntary prepayments are subject to premium charges, and there are certain
involuntary prepayments, not subject to any premium charges, that may occur,
subject to the terms set forth in the FINOVA Commitment Letter.
FINOVA will obtain valid and perfected first priority liens on all
property constituting security for the Loan, free and clear of any liens other
than liens permitted under the definitive loan agreement. Pursuant to such
collateral requirement, FINOVA will require
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<PAGE>
satisfactory evidence that the Surviving Corporation has good and marketable
title to all of its properties and that there is good and marketable title to
all of the issued and outstanding capital stock of the Surviving Corporation
and its Subsidiaries.
DDJ has issued to Acquiror a commitment letter, dated November 25, 1998
(the "DDJ Commitment Letter"), pursuant to which DDJ has committed, subject to
certain conditions discussed below, to provide Acquiror with Subordinated Debt
in the amount of $8 million in connection with the Merger.
The Subordinated Debt provided to Acquiror by DDJ will be in the form of
Senior Subordinated Notes (the "Notes"), which will mature seven years and
three months from the date of issuance (which shall be the date of the
contemplated buyout transaction). Interest on the Notes will accrue at a rate
of 12.50%, per annum, payable quarterly in arrears. DDJ shall also be entitled
to additional interest totaling 6.25% per annum, payable quarterly in arrears,
at Acquiror's option, in cash or additional Notes. As additional consideration
for purchasing the Notes, DDJ shall be entitled to receive 1% of the equity in
the Acquiror (on a fully diluted basis following the Merger). The Notes will be
redeemable prior to maturity at the option of the Acquiror in minimum principal
amounts of $1 million at the prices listed in the DDJ Commitment Letter. The
Notes will be senior subordinated obligations of the Acquiror subordinate in
right of payment only to permitted senior bank indebtedness of Acquiror. The
repayment of the Notes will be unconditionally, jointly and severally,
guaranteed by all of the Surviving Corporation's Subsidiaries.
It is anticipated that borrowings for the transactions contemplated by the
Merger Agreement described above will be repaid from funds generated internally
by Acquiror (including, after the Merger, funds generated by the Company), or
other sources, including the proceeds of the sale of debt or equity securities
or the sale of assets. No decisions have been made concerning the repayment of
such borrowings and decisions will be based on Acquiror's review from time to
time of the advisability of particular actions, as well as on prevailing
interest rates and financial and other economic conditions.
The definitive agreements for the financing to be provided under the
Commitment Letters have not been reached. Accordingly, not all of the terms of
the financing have been finalized, and the provisions described herein may
change materially as a result of the negotiation of definitive agreements. It
is a condition to the financing that definitive agreements be entered into. In
addition, it is anticipated that the obligation of the lenders to provide
financing will be subject to the satisfaction of certain other conditions,
including among others, the satisfaction of all conditions precedent to the
Merger.
The definitive agreements for the financing are also expected to contain
numerous restrictive covenants, including covenants related to capital
expenditures, mergers and asset sales or purchases, incurrence of debt
obligations, liens and contingent obligations, termination, name changes,
transactions with affiliates, distributions and dividends and use of proceeds.
The definitive agreements also are expected to contain standard event of
default provisions, including, among other things, payment defaults,
misrepresentations, covenant defaults, and other material contracts,
cross-defaults into other material indebtedness, failure to have perfected
liens of purported priority, bankruptcy events, adverse judgments, and changes
of control.
Other than as set forth above, no agreements, arrangements or commitments
relating to financing for the Merger have been executed or made. If and when
definitive agreements relating to the Notes or the Senior Credit Facility are
executed, copies thereof will be filed as exhibits in amendments to this Proxy
Statement and Acquiror will disseminate to Stockholders a description of such
agreements and/or commitments if and to the extent required by Rules 14d-4(c)
and 14d-6(d) under the Exchange Act or otherwise.
FEES AND EXPENSES
The aggregate fees and expenses paid and estimated to be paid by Acquiror
and the Company in connection with the merger, the financing and related
transactions are as follows:
<TABLE>
<S> <C>
Financing Fees $ 670,000.00
Investment Banking and Financial Advising $ 1,900,000.00
Legal and Accounting $ 500,000.00
Printing and Distribution $ 100,000.00
SEC Filings $ 8,194.76
Miscellaneous $ 21,805.24
--------------
TOTAL $ 3,200,000.00
==============
</TABLE>
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To the extent not paid prior to the Effective time by Acquiror or the
Company, all such fees and expenses will be paid by the Surviving Corporation
if the Merger is consummated. If the Merger is not consummated, each party will
bear its respective fees and expenses, except as otherwise provided under "THE
MERGER AGREEMENT--Termination of the Merger; Termination Fees."
BACK BAY CAPITAL STOCK
The Company is authorized by its Restated Certificate of Incorporation to
issue an aggregate of 20,000,000 shares of Common Stock, par value $.01 per
share. The following is a summary of certain of the rights and privileges
pertaining to the Company's capital stock. For a full description of the
Company's capital stock, reference is made to the Company's Restated
Certificate of Incorporation, a copy of which is on file with the Commission.
BACK BAY COMMON STOCK
The holders of Company Common Stock are entitled to one vote per Share on
all matters submitted for action by the Stockholders. Stockholders holding a
majority in interest of the Shares of Company Common Stock can, if they elect
to do so, approve a Merger. The terms and conditions of the Merger Agreement
also require the affirmative vote of a majority of the Shares held by the
Non-Affiliated Stockholders in order to adopt the Merger Agreement and approve
the Merger.
All Shares of Company Common Stock are entitled to share in such dividends
as the Board of Directors may from time to time declare from sources legally
available therefor.
Upon liquidation or dissolution of the Company, whether voluntary or
involuntary, all Shares of Company Common Stock are entitled to share equally
in the assets available for distribution to Stockholders after payment of all
prior obligations of the Company.
In connection with the transactions contemplated by the Merger Agreement,
the Company has amended the Shareholder Rights Agreement (the "Rights
Agreement"), dated December 20, 1994, by and between the Company and State
Street Bank & Trust Company. The Rights Agreement provides for the
administration of the dividend distribution of one right, representing the
right to purchase one Share of Common Stock, $0.01 par value, (a "Right"), for
each Share of Common Stock, $0.01 par value, of the Company, owned by the
holder of record on January 3, 1995. The amendment to the Rights Agreement,
dated as of December 3, 1998 (the "Amendment No. 1") excludes the Acquiror and
the Affiliated Stockholders from the definition of an Acquiring Person under
the Rights Agreement so long as the Merger Agreement has not been terminated in
accordance with its terms and consequently the transactions contemplated by the
Merger Agreement will not trigger any provisions within the Rights Agreement
and the Rights Agreement shall remain in full force and effect.
REPORT FROM BACK BAY'S FINANCIAL ADVISOR; FAIRNESS OF THE TRANSACTION
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated October 20, 1998 (the "Engagement
Letter"), the Special Committee engaged Schroders to act as its exclusive
financial advisor in connection with the consideration by the Company of
various strategic and financial alternatives available to it to maximize
stockholder value. Schroders is a nationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
valuation of businesses and their securities in connection with merger
transactions and other types of acquisitions, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The Special Committee selected
Schroders as its financial advisor on the basis of its experience and expertise
in transactions similar to the Merger and its reputation and experience in the
restaurant and investment communities and its historical investment banking
relationship with the Company.
In connection with the consideration by the Special Committee of the
merits of the Merger, Schroders was asked under the terms of the Engagement
Letter to perform various financial analyses and deliver to the Special
Committee its opinion based on such analyses. At the December 2, 1998 meeting
of the Special Committee, Schroders delivered its oral opinion, and
subsequently confirmed in writing as of such date, that the consideration to be
received by the Stockholders of the Company (other than the Affiliated
Stockholders) in the Merger is fair from a financial point of view (the
"Schroders Opinion").
THE FULL TEXT OF THE SCHRODERS OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS OF REVIEW BY SCHRODERS, IS ATTACHED
HERETO AS ANNEX II AND IS
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INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN ITS
ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. THE FOLLOWING SUMMARY OF THE
SCHRODERS OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE SCHRODERS OPINION. THE SCHRODERS OPINION IS ADDRESSED TO THE SPECIAL
COMMITTEE ONLY AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF
THE COMPANY AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In arriving at its opinion, Schroders, among other things: (i) reviewed a
draft, dated November 24, 1998, of the Merger Agreement; (ii) reviewed drafts
of the bank commitment letters received by Acquiror in connection with the
financing for the Transaction; (iii) reviewed the Company's Annual Reports on
Form 10-K and 10-K/A filed with the Securities and Exchange Commission for the
fiscal years ended December 31, 1993 through 1997, including the audited
consolidated financial statements of the Company included therein; (iv)
reviewed the Company's Quarterly Reports on Form 10-Q filed with the Securities
and Exchange Commission for the quarters ended March 29, 1998, June 30, 1998
and September 30, 1998, including the unaudited consolidated financial
statements of the Company included therein; (v) reviewed the proxy statement
for the Company's 1997 Shareholders' Meeting filed with the Securities and
Exchange Commission; (vi) reviewed historical financial results of the Company
by restaurant prepared by management; (vii) reviewed forecasts and projections
for the Company prepared and supplied by management of the Company for the
fiscal years ending December 1998 through December, 2003; (viii) held
discussions with the Company's management regarding the business, operations
and prospects of the Company and each of its restaurants; (ix) performed other
investigations, including restaurant visits and meetings with management; (x)
performed various valuation analyses, as Schroders deemed appropriate, of the
Company using generally accepted analytical methodologies, including (a) the
application to the financial results of the Company of the public trading
multiples of companies which Schroders deemed comparable to the Company; (b)
the application to the financial results of the Company of the multiples
reflected in recent mergers and acquisitions for businesses which Schroders
deemed comparable to the Company; (c) a discounted cash flow analysis of the
Company's operations; and (d) a leveraged buyout analysis; (xi) reviewed the
historical trading prices and volumes of the Company's Common Stock; and (xii)
performed such other financial studies, analyses, inquiries and investigations
as Schroders deemed appropriate.
In its review and analysis and in formulating the Schroders Opinion,
Schroders assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to it by the Company or
obtained by it from other sources, and upon the assurance of the Company's
management that they are not aware of any information or facts that would make
the information provided to Schroders incomplete or misleading. Schroders did
not independently verify such information. Schroders did not undertake an
independent appraisal of the assets or liabilities (contingent or otherwise) of
the Company, nor was it furnished with any such appraisals. With respect to
financial forecasts and projections of the Company referred to in clause (vii)
above, Schroders was advised by the Company, and Schroders assumed, without
independent investigation, that they were reasonably prepared and reflected the
best currently available estimates and judgments of management of the Company
as to the expected future financial performance of the Company.
Schroders noted that the Schroders Opinion was necessarily based upon
financial, economic, market and other conditions as they existed, and the
information made available to Schroders, as of December 2, 1998. Schroders
disclaimed any undertaking or obligation to advise any person of any change in
any fact or matter affecting the Schroders Opinion which may come or be brought
to its attention after the date of the Schroders Opinion.
Set forth below is a brief summary of selected analyses presented by
Schroders to the Special Committee on December 2, 1998 in connection with the
Schroders Opinion.
COMPARABLE COMPANY ANALYSIS
Schroders analyzed a group of nine comparable public restaurant companies
that included Il Fornaio Corp., Landry's Seafood Restaurants, Inc., Logan's
Roadhouse, Inc., Lone Star Steakhouse & Saloon, Inc., Morton's Restaurant
Group, Inc., O'Charley's Inc., Rainforest Cafe, Inc., Rare Hospitality
International, Inc. and Taco Cabana, Inc. As a multiple of adjusted market
value (i.e., equity market capitalization plus debt less cash) to expected 1998
earnings before interest, taxes, depreciation and amortization ("EBITDA"), the
restaurant comparable companies trade within a range of 2.5x to 8.2x with a
mean of 5.1x, indicating a valuation range for the Company's Common Stock of
between $4.81 and $17.11 per share and a mean valuation of $10.39 per share.
From this analysis, Schroders also determined that the Merger
Consideration of $10.25 per share, representing a 16.3x price to expected 1998
earnings ratio, compares favorably to the prevailing price to expected 1998
earnings ratios for the comparable restaurant companies, which trade within a
range of 7.5x to 16.6x, with a mean of 12.3x.
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Schroders noted that the comparable public restaurant companies varied
significantly in several areas, including, but not limited to, (i) size, (ii)
geographic diversity, (iii) underlying real-estate value, (iii) status as a
single or multi-concept restaurant operator and (iv) historical growth record.
No adjustments were made to the comparable company analysis to reflect any of
these factors.
No company used in the above analysis as a comparison is identical to the
Company. Accordingly, an analysis of the results of the foregoing involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading value of the companies to which the Company is being
compared. Mathematical analysis (such as determining average or a range) is
not, in itself, a meaningful method of using comparable company data.
COMPARABLE TRANSACTIONS ANALYSIS
Schroders developed a list of eight comparable merger and acquisition
transactions involving selected restaurant companies to determine comparable
transaction multiples of EBITDA. From this analysis, Schroders determined that
the $10.25 Merger Consideration represented a multiple of approximately 5.3x
EBITDA for the last twelve months ended September 30, 1998 ("LTM"), compared to
the multiples paid for the comparable transactions, which ranged from 3.9x to
7.3x, with a mean of 6.0x, indicating a valuation range for the Company's
Common Stock of between $7.44 and $14.44 per share and a mean valuation of
$11.77 per share.
Schroders noted that the comparable merger and acquisition transactions
varied significantly in several areas, including, but not limited to, (i) size,
(ii) geographic diversity, (iii) underlying real-estate value, (iii) status as
a single or multi-concept restaurant operator and (iv) historical growth
record. No adjustments were made to the comparable transactions analysis to
reflect any of these factors.
No company or transaction used in the above analysis as a comparison is
identical to the Company or the Merger. Accordingly, an analysis of the results
of the foregoing involves complex considerations and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the transaction multiples for the companies to
which the Company and the Merger are being compared. Mathematical analysis
(such as determining average or a range) is not, in itself, a meaningful method
of using comparable transaction data.
DISCOUNTED CASH FLOW ANALYSIS
Schroders applied a discounted cash flow analysis to the financial cash
flow forecasts for the Company for calendar years 1999 to 2003. Using this
information, Schroders calculated the net present value of free cash flows the
Company could generate through 2003 using discount rates of 16%, 17% and 18%.
Schroders' estimate of the appropriate discount rate was based on the weighted
average cost of capital of comparable restaurant companies. Schroders also
calculated the terminal value of the Company in the year 2003 based on exit
multiples of 2003 EBITDA ranging from 5.0x to 7.0x and discounted these
terminal values using discount rates of 16%, 17% and 18%. This analysis
indicated a valuation range of the Company's Common Stock of $9.91 to $13.56
per share.
Inherent in any discounted cash flow valuation are the use of a number of
assumptions, including the accuracy of projections, and the subjective
determination of an appropriate terminal value and discount rate to apply to
the projected cash flows of the entity under examination. Variations in any of
these assumptions or judgements could significantly alter the results of a
discounted cash flow analysis.
OTHER ANALYSES
In rendering its opinion, Schroders considered certain other factors and
conducted certain other analyses. These analyses did not directly focus on the
Merger Consideration, but were undertaken to provide contextual data and
comparative market data to assist in assessing the Merger and the market's
valuation of the Company. Schroders reviewed the historical trading prices and
volumes for the Company. Schroders also performed a Leveraged Buyout Analysis,
which evaluated the purchase price to be paid and hypothetical financing
arrangements for the proposed transaction from the perspective of an
unaffiliated financial buyer.
The summary set forth above does not purport to be a complete description
of the presentation by Schroders to the Special Committee or the analyses
performed by Schroders. The preparation of a fairness opinion necessarily is
not susceptible to partial analysis or summary description. Schroders believes
that such analyses and the summary set forth above must be considered as a
whole and that selecting portions of its analyses and of the factors
considered, without considering all such analyses and factors, would create an
incomplete view of the analyses set forth in its presentation to the Special
Committee. In addition, Schroders may have given various analyses more or less
weight than other analyses, and may have deemed various assumptions more or
less probable than other
25
<PAGE>
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Schroders' view of the
actual value of the Company.
In performing its analyses, Schroders made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. The
analyses performed by Schroders are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as part of
Schroders' analysis of the fairness, from a financial point of view, of the
consideration to be received in the Merger by the Company's stockholders (other
than the Affiliated Stockholders) and were provided to the Special Committee in
connection with the delivery of the Schroders Opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. Schroders used in its analyses various
projections of future performance prepared by the management of the Company.
The projections are based on numerous variables and assumptions which are
inherently unpredictable. Accordingly, actual results could vary significantly
from those set forth in such projections.
As described above, the Schroders Opinion and presentation to the Special
Committee were among the many factors taken into consideration by the Company's
Board of Directors in making its determination to approve, and to recommend
that its Stockholders approve, the Merger.
Pursuant to the Engagement Letter, the Company has agreed to pay Schroders
a fee of $250,000 following the delivery of the Schroders Opinion, half of
which will be credited against any fee payable to Schroders upon consummation
of the Merger. Upon consummation of the Merger, the Company will become
obligated to pay Schroders an additional fee of approximately $625,000. The
Company has also agreed to reimburse Schroders for its reasonable out-of-pocket
expenses. Pursuant to a separate letter agreement, the Company has agreed to
indemnify Schroders, its affiliates, and their respective partners, directors,
officers, agents, consultants, employees and controlling persons against
certain liabilities, including liabilities under the federal securities laws.
In the past, Schroders has provided financial advisory and investment
banking services to the Company and has received customary fees for the
rendering of such services. In the ordinary course of its business, Schroders
may actively trade securities of the Company for its own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement which is attached as Annex I to this Proxy Statement. The summary
does not purport to be complete and is qualified in its entirety by reference
to the complete text of the Merger Agreement, which is incorporated herein by
reference.
THE MERGER
The Merger Agreement provides that, following the satisfaction or waiver
of the conditions described below under "-- Conditions to the Merger," upon the
filing of a Certificate of Merger with the Delaware Secretary of State and in
accordance with Delaware law, at the Effective Time, the Acquiror shall be
merged with and into the Company with the Company being the Surviving
Corporation. Under Section 251 of the DGCL, the approval of the Board of
Directors of the Company and the affirmative vote of the holders of majority of
the outstanding Shares are required to adopt and approve the Merger Agreement
and the transactions contemplated thereby. Under the terms and conditions of
the Merger Agreement, the affirmative vote of a majority of the Shares held by
Non-Affiliated Stockholders is also required to adopt and approve the Merger
Agreement and the transactions contemplated thereby unless such requirement is
waived by the Company. As of the Effective Time, each outstanding Share (other
than Shares held by Stockholders who properly demand their appraisal rights
pursuant to Section 262 of the DGCL, Shares held in the Company's treasury and
Shares owned by Acquiror) shall be converted into the right to receive the
Merger Consideration. Shares owned by the Affiliated Stockholders will be
exchanged for shares in the Acquiror prior to the Effective Time and shares in
the Acquiror will be converted at the Effective Time into shares of the
Surviving Corporation. As a result, the Affiliated Stockholders will be the
stockholders of the Surviving Corporation.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the Company (which will not survive consummation of the Merger)
relating to, among other things: (i) the Company's due organization, corporate
power, good standing and
26
<PAGE>
similar corporate matters; (ii) the Company's capital structure; (iii)
authorization, execution, delivery and enforceability of the Merger Agreement
and the absence of any conflicts with the Company's charter or governmental
filing requirements; (iv) the Company's financial statements and documents
filed by the Company with the Commission and the accuracy of information
contained therein; (v) the absence of certain adverse changes or events since
September 28, 1998; (vi) the absence of undisclosed liabilities of the Company
or its Subsidiaries; (vii) fulfillment of disclosure obligations and accuracy
of disclosure documents filed with the Commission and sent to the Stockholders;
(ix) receipt by the Company of a fairness opinion from its financial advisor
regarding the transactions contemplated by the Merger Agreement; (x) brokers'
and financial advisors' fees; and (xi) the amendment to the Rights Agreement
discussed above.
The Merger Agreement contains various customary representations and
warranties of the Acquiror (which will not survive consummation of the Merger)
relating to, among other things: (i) Acquiror's due organization, corporate
power, good standing and similar corporate matters, (ii) Acquiror's capital
structure, (iii) authorization, execution, delivery and enforceability of the
Merger Agreement and the absence of any conflicts with the Acquiror's charter
or governmental filing requirements, (iv) the receipt by Acquiror of the
Commitment Letters, (v) the fulfillment of disclosure obligations and accuracy
of disclosure documents filed with the Commission and sent to Stockholders, and
(vi) the fact that the Voting and Shares Exchange Agreements to be entered into
between Acquiror and each Affiliated Stockholder are the only agreements with
respect to the Merger between Acquiror and any person who is, or will be on the
Effective Date, a stockholder of Acquiror on the one hand and Company
Stockholder on the other hand.
CONDITIONS TO THE MERGER
The Merger Agreement provides that the respective obligations of Acquiror
and the Company to effect the Merger are subject to the satisfaction or waiver
on or prior to the Closing Date of the following conditions: (i) the Merger
shall have been adopted and approved by the affirmative vote required under the
laws of the State of Delaware and (ii) the absence of any temporary restraining
order, judgment, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction, or other legal restraint or prohibition
preventing the consummation of the Merger.
The obligations of Acquiror to effect the Merger are subject to the
satisfaction, or waiver by Acquiror, on or prior to the Closing Date, of the
following conditions: (i) the receipt of cash proceeds of the Financing
Commitments or on such other terms as the Acquiror and the Company may agree or
are not materially more onerous than the terms of the Financing Commitments,
(ii) the absence of any change or event or circumstance in the business,
operations, assets or condition (financial or otherwise) of the Company or any
of its Subsidiaries, related to the period commencing on September 28, 1998,
that in the reasonable judgment of the Acquiror is likely to have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole, (iii)
there having not occurred (a) any general suspension of trading in, or
limitation on prices for, securities on the New York Stock Exchange, which
suspension or limitation shall continue for at least three consecutive trading
days, (b) any decline in either the Dow Jones Industrial Average or the
Standard and Poor's 500 Index by an amount in excess of 25%, measured from
August 31, 1998, (c) a declaration of a banking moratorium or any suspension or
payments in respect of banks in the United States, (d) a commencement of a war
or armed hostilities or other national or international calamity directly or
indirectly involving the United States which would reasonably be expected to
have a material adverse impact on the capital markets of the United States, or
(e) in the case of any of the foregoing existing on the date of the Merger
Agreement, a material acceleration, escalation or worsening thereof, (iv) the
representations and warranties of the Company in the Merger Agreement that are
qualified by materiality shall be true and correct and such representations and
warranties of the Company in the Merger Agreement that are not so qualified
shall be true and correct in all material respects, in each case as of the date
of the Merger Agreement and as of the Closing Date as though made on and as of
the Closing Date, except to the extent such representations and warranties
speak as of an earlier date and except for changes permitted or contemplated by
the Merger Agreement, and except, in the case of any such breach, where such
breach would not, individually or in the aggregate, materially and adversely
affect the Financing Commitments or the ability of the Company to consummate
the Merger, (v) the Company shall have performed in all material respects all
obligations and covenants required to be performed by it under the Merger
Agreement at or prior to the Closing Date, and (vi) the Merger Agreement shall
not have been terminated in accordance with its terms.
The obligation of the Company to effect the Merger is subject to the
satisfaction, or waiver by the Company, on or prior to the Closing Date, of the
following conditions: (i) a majority of the Shares held by the Non-Affiliated
Stockholders shall have voted to adopt the Merger Agreement and the Merger,
(ii) the representations and warranties of Acquiror set forth in the Merger
Agreement that are qualified by materiality shall be true and correct and such
representations and warranties of Acquiror set forth in the Merger Agreement
that are not so qualified shall be true and correct in all material respects,
in each case as of the date of the Merger Agreement and as of the Closing Date
as though made on and as of the Closing Date, except to the extent such
representations and warranties speak as of an earlier date and except for
changes permitted or contemplated by the Merger Agreement, and except, in the
case of any such
27
<PAGE>
breach, where such breach would not, individually or in the aggregate,
materially and adversely affect the Financing Commitments or the ability of
Acquiror to consummate the Merger, and (iii) Acquiror shall have performed in
all material respects all obligations and covenants required to be performed by
it under the Merger Agreement at or prior to the Closing Date.
NO SOLICITATION; ACQUISITION PROPOSALS
Pursuant to the Merger Agreement, the Company has agreed not to, nor to
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorneys, accountant or other
representative retained by it to, directly or indirectly, (i) solicit, initiate
or knowingly encourage (including by way of furnishing non-public information)
or take any other action to knowingly facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to any
Acquisition Proposal (as defined below), or (ii) participate in any discussions
or negotiations with any Third Party (as defined below) regarding an
Acquisition Proposal; provided, however, that if, at any time prior to the
Effective Time, the Board or the Special Committee determines in good faith,
(i) after consulting with outside counsel that it is likely to have a fiduciary
duty to do so under applicable law, and (ii) based on the advice of outside
counsel and Schroders, that the initiating Third Party is a credible potential
buyer reasonably likely to have the ability to consummate a Superior Proposal
(as defined below), the Company, in response to a written Acquisition Proposal
that was unsolicited from a Third Party or that did not otherwise result from a
breach of the Merger Agreement, and is reasonably likely to lead to a Superior
Proposal, may (x) furnish non-public information with respect to the Company to
the Third Party who made such Acquisition Proposal pursuant to a
confidentiality agreement in substantially the form executed by Acquiror, and
(y) participate in negotiations regarding such Acquisition Proposal.
Neither the Board nor the Special Committee will (i) withdraw or modify,
in a manner adverse to the Acquiror, its approval or recommendation of the
Merger Agreement and the Merger unless there is a Superior Proposal
outstanding, (ii) approve or recommend, an Acquisition Proposal unless it is a
Superior Proposal, or (iii) cause the Company to enter into any letter of
intent, agreement in principle, acquisition agreement or other agreement with
respect to an Acquisition Proposal unless it is a Superior Proposal, and,
unless the Board or the Special Committee will have (x) determined in good
faith, after consulting with outside counsel, that it is likely to have a
fiduciary duty to do so under applicable law, and (y) terminated the Merger
Agreement.
The Company will promptly (but in any event within one (1) day) advise the
Acquiror orally and in writing of any Acquisition Proposal or any inquiry
regarding the making of an Acquisition Proposal or any inquiry regarding the
making of an Acquisition Proposal from a Third Party including any request for
information, the material terms and conditions of such request, Acquisition
Proposal or inquiry and the identity of the person making such request,
Acquisition Proposal or inquiry. The Company will, to the extent reasonably
practicable, keep the Acquiror fully informed of the status and details
(including amendments or proposed amendments) of any such request, Acquisition
Proposal or inquiry.
Notwithstanding the foregoing, the Company will neither (i) amend the
Rights Agreement to permit a Third Party to consummate a Superior Proposal or
in any other manner whatsoever, nor (ii) take any steps to exempt the
transactions contemplated by a Superior Proposal from, or if necessary to
challenge the validity or applicability of, any applicable take-over law,
including without limitation, Section 203 of the DGCL, unless the Company has
complied in all respects with the foregoing paragraphs.
Under the Merger Agreement, (i) "Acquisition Proposal" means any bona fide
written proposal with respect to a merger, consolidation, share exchange,
tender offer or similar transaction involving the Company, or any purchase or
other acquisition of all or any significant portion of the assets of the
Company, or any equity interest in the Company, other than the transactions
contemplated by the Merger Agreement; (ii) "Third Party" means any corporation,
partnership, person or other entity or "group" (as defined in Section 13(d)(3)
of the Exchange Act), other than Acquiror or any affiliates of Acquiror and its
respective directors, officers, employees, representatives and agents; (iii)
"Superior Proposal" means an Acquisition Proposal that (A) would take the form
of either (i) a merger, consolidation, share exchange, recapitalization,
business combination, or other similar transaction; (ii) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 100% of the assets
of the Company and its Subsidiaries, taken as a whole, in a single transaction
or series of transactions; or (iii) a tender offer or exchange offer for 100%
of the outstanding shares of capital stock of the Company or the filing of a
registration statement under the Securities Act of 1933, as amended, in
connection therewith; (B) the Board or the Special Committee, in good faith,
based on the advice of its outside counsel and Schroders, determines to be of a
higher price per share and more favorable than the transaction contemplated
hereunder; and (C) is already fully financed and evidence of such financing, in
the form of an executed commitment letter, has been provided to the Company.
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<PAGE>
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES
The Merger Agreement may be terminated and abandoned at any time prior to
the Effective Time, whether before or after adoption of the Merger Agreement by
the Stockholders: (a) by mutual written consent of Acquiror and the Company or
(b) by either Acquiror or the Company if: (i) upon a vote at the Stockholders'
Meeting or any adjournment thereof, the adoption and approval of the Merger
Agreement and the Merger by the Stockholders, as required by Delaware law, the
Company's Restated Certificate of Incorporation or the terms of the Merger
Agreement is not obtained; (ii) if the Merger is not consummated on or before
June 30, 1999, provided that the failure to consummate the Merger is not
attributable to the failure of the terminating party to use its commercially
reasonable best efforts to fulfill its obligations pursuant to the Merger
Agreement; or (iii) if there is any law or regulation that makes consummation
of the Merger illegal or otherwise prohibited, or if any judgment, injunction,
order or decree enjoining or otherwise restraining Acquiror or the Company from
consummating the Merger is entered and such judgment, injunction, order or
decree becomes final and nonappealable; or (iv) by the Company, if a majority
of the Shares held by Non-Affiliated Stockholders do not vote to adopt the
Merger Agreement and the Merger; or (c) by the Company, immediately after
payment to Acquiror of the fee and expense reimbursement described below, if
prior to the Effective Time, either the Board or the Special Committee properly
elects, to terminate the Merger Agreement; or (d) by Acquiror, if, prior to the
Effective Time, the Company breaches in any material respect any of its
representations, warranties or obligations under the Merger Agreement
(including without limitation, the terms and conditions with respect to its
acceptance of a Superior Proposal) and such breach is not cured in all material
respects or waived and the Company has not provided reasonable assurance that
such breach will be cured in all material respects on or before the Closing
Date, but only if such breach, singly or together with all other such breaches,
would have a Material Adverse Effect; or (e) by the Company, if Acquiror
breaches in any material respect any of its representations, warranties or
obligations under the Merger Agreement and such breach has not been cured in
all material respects or waived, and Acquiror has not provided reasonable
assurance that such breach will be cured in all material respects on or before
the Closing Date, but only if such breach, singly or together with all other
such breaches, would have a Material Adverse Effect; provided, however, that
the party seeking termination pursuant to clause (d) or (e) above is not in
breach of any of its material representations, warranties, covenants or
agreements contained in the Merger Agreement.
If the Merger Agreement is terminated by the Company as described in
clause (c) above or, by the Acquiror as described in clause (d) above as a
result of a willful breach by the Company of any of the terms and conditions of
the Merger Agreement relating to Acquisition Proposals, then the Company will
promptly pay to Acquiror in cash a fee equal to $2,500,000 (the "Termination
Amount"), which amount will be payable in same day federal funds. The
Termination Amount (provided the same shall be promptly paid) will be the
exclusive remedy of Acquiror as a result of termination of the Merger Agreement
as a result of a Superior Proposal.
If the Merger Agreement is terminated as described in clause (b) above,
provided that Acquiror has used commercially reasonable best efforts to
consummate the transactions contemplated thereby, or (d) above, other than as a
result of a wilful breach by the Company of any of the terms and conditions of
the Merger Agreement relating to Acquisition Proposals, then the Company will
promptly pay to Acquiror in cash a portion of the aggregate out-of-pocket,
reasonable costs and expenses of Acquiror in connection with the Merger
Agreement and the transactions contemplated thereby, including, without
limitation, commitment, appraisal and other fees relating to the Financing
Commitments and the reasonable fees and disbursements of accountants, attorneys
and investment bankers, whether retained by Acquiror or by any other person,
(collectively, "Expenses") as follows: (i) 100% of Expenses up to $250,000;
(ii) no reimbursement of Expenses greater than $250,000 and up to $500,000; and
(iii) 50% of Expenses greater than $500,000; provided, however, that in no
event will the total reimbursement of aggregate Expenses exceed $1,000,000. In
such event, Acquiror will reimburse the Company for 50% of the filing fees
incurred by the Company in connection with the filing of the Preliminary Proxy
Statement and Schedule 13E-3 which amount shall be payable in cash.
CONDUCT OF THE COMPANY'S BUSINESS UNTIL THE EFFECTIVE TIME
Pursuant to and except as contemplated by the Merger Agreement, during the
period from the date of the Merger Agreement to the Effective Time, and except
with respect to actions taken by, at the direction of, or with the approval of,
the Acquiror, the Company will operate, and will cause each Subsidiary to
operate, its business in the ordinary course of business. Without limiting the
generality of the foregoing, during the period from the date of the Merger
Agreement to the Effective Time, except as expressly contemplated by the Merger
Agreement, the Company and the Subsidiaries will not, without the prior written
consent of Acquiror: (i) (x) declare, set aside or pay any dividends on, or
make any other distributions (whether in cash, stock or property) in respect
of, any of the Company's outstanding capital stock, (y) split, combine or
reclassify any of its outstanding capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its outstanding capital stock, or (z) purchase, redeem or
otherwise acquire any shares of outstanding capital stock or any rights,
warrants or options to acquire any such shares; (ii) issue, sell, grant, pledge
29
<PAGE>
or otherwise encumber any shares of its capital stock, any other voting
securities or any securities convertible into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible
securities, except for the issuance of Shares upon exercise of Company Stock
Options outstanding prior to the date of the Merger Agreement, or take any
action that would make the Company's representations and warranties not true
and correct in all material respects; (iii) amend its Restated Certificate of
Incorporation or By-laws or the comparable charter or organizational documents
of any of its Subsidiaries; (iv) acquire any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof (or any interest therein), or form any subsidiaries; (v) sell
or otherwise dispose of any of its substantial assets, except in the ordinary
course of business; (vi) make any capital expenditures, enter into leases or
agreements for new locations, or make other commitments with respect thereto,
except capital expenditures, leases, agreements or commitments (i) set forth on
the Disclosure Schedule to the Merger Agreement, or (ii) not exceeding $200,000
in the aggregate as the Company may, in its discretion, deem appropriate; (vii)
(x) incur any indebtedness for borrowed money or guaranty any such indebtedness
of another person, other than (A) borrowings in the ordinary course under
existing lines of credit (or under any refinancing of such existing lines), or
(B) indebtedness owing to, or guarantees of indebtedness owing to, the Company,
(y) make any loans or advances to any other person, other than routine advances
to employees; (viii) grant or agree to grant to any employee any increase in
wages or bonus, severance, profit sharing, retirement, deferred compensation,
insurance or other compensation or benefits, or establish any new compensation
or benefit plans or arrangements, or amend or agree to amend any existing
employee benefit plans, except as may be required under existing agreements or
in the ordinary course of business consistent with past practices; (ix) merge,
amalgamate or consolidate with any other person or entity in any transaction,
sell all or substantially all of its business or assets, or acquire all or
substantially all of the business or assets of any other person or entity; (x)
enter into or amend any employment, consulting, severance or similar agreement
with any person or amend the engagement letter with Schroders in any respect
that would result in a Material Adverse Effect; (xi) change its accounting
policies in any material respect, except as required by generally accepted
accounting principles; (xii) enter into any material contract, agreement or
commitment (other than purchase agreements for food and beverages and
restaurant supplies entered into in the ordinary course of business) not
otherwise permitted under Section 4.1 of the Merger Agreement, including,
without limitation, any contract, agreement or commitment involving
expenditures by the Company or any of its Subsidiaries in excess of $100,000 or
which is not terminable by the Company upon giving thirty (30) days or less
prior written notice; or (xiii) commit or agree to take any of the foregoing
actions.
The Company or Acquiror will not take any action that would, or that could
reasonably be expected to, result in (i) any of the representations and
warranties of such party set forth in the Merger Agreement that are qualified
as to materiality becoming untrue, (ii) any of such representations and
warranties that are not so qualified becoming untrue in any material respect,
or (iii) subject to the Company's right to take action under the Merger
Agreement with respect to any Acquisition Proposal, any of the conditions of
the Merger set forth in the Merger Agreement not being satisfied.
AMENDMENTS; EXTENSIONS; WAIVERS
The Merger Agreement may be amended by the parties at any time before or
after any required approval of matters presented in connection with the Merger
by the Stockholders; provided, however, that after any such approval, there
shall be made no amendment that by law requires further approval by such
Stockholders without the further approval of such Stockholders. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties.
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<PAGE>
OTHER MATTERS; GOING PRIVATE TRANSACTIONS
The Merger will have to comply with any applicable federal law operative
at the time of its consummation. The Commission has adopted Rule 13e-3 under
the Exchange Act which is applicable to certain "going private" transactions.
Acquiror recognizes that Rule l3e-3 will be applicable to the Merger. Rule
13e-3 requires, among other things, that certain financial information
concerning the Company and certain information relating to the fairness of the
Merger and the consideration offered to minority Stockholders in such
transaction be filed with the Commission and distributed to minority
Stockholders before the consummation of the Merger. Such information, required
by Rule 13e-3, will be disseminated to the Stockholders by the Acquiror in
accordance with the Commission Regulations.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership (as defined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934) as of , 1999, except as otherwise indicated
below, of the Company's Common Stock by each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, by each of the
Company's Directors and named executive officers and by all of the Company's
Directors and executive officers as a group.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned(1)
--------------------------------------
Directors, Executive Officers Number Percent of
and 5% Beneficial Owners(2) of Shares Common Stock
- -------------------------------------------------------------- ---------------------- -------------
<S> <C> <C>
Charles F. Sarkis 241,566(3)(4) 7.0%
Francis P. Bissaillon 34,333(5) 1.0%
Joseph M. Cassin 6,000(6) *
Irwin Chafetz 88,000(7) 2.5%
Richard P. Dalton 10,000(3)(8) *
Richard K. Howe 6,000(9) *
Robert S. Parker 5,000(8) *
Mark L. Hartzfeld 35,500(10) 1.0%
Robert J. Ciampa 7,750(8) *
All Directors and executive officers as a group (10 persons) 448,192(3) 13.0%
5% Beneficial Owners
William B. Finneran 782,486 22.6%
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, NY 10281
The Westwood Group, Inc. 673,451 19.5%
190 V.F.W. Parkway
Revere, MA 02151
Hathaway Associates 190,100 5.5%
119 Rowayton Avenue
Rowayton, CT 06853
Dimensional Fund Advisors Inc. 182,100(12) 5.3%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
</TABLE>
* Less than one percent
31
<PAGE>
(1) Except as otherwise noted, persons in the table have sole voting and
investment power with respect to all shares of Company Common Stock shown
as beneficially owned by them.
(2) Unless otherwise indicated, the address of each beneficial owner is 284
Newbury Street, Boston, Massachusetts 02115.
(3) Does not include 673,451 Shares owned by The Westwood Group, Inc. ("WGI").
Mr. Sarkis owns securities representing approximately 88.63% of the voting
power of WGI's outstanding Shares of Company Common Stock and
approximately 66.85% of the outstanding Shares and is Chairman of the
Board of WGI. Mr. Dalton is President and a Director of WGI.
(4) Includes 30,833 Shares Mr. Sarkis has the right to acquire within 60 days
under options granted to him pursuant to the Company's Stock Option Plan.
(5) Includes 28,333 Shares Mr. Bissaillon has the right to acquire within 60
days under options granted to him pursuant to the Company's Stock Option
Plan.
(6) Includes 5,000 Shares Mr. Cassin has the right to acquire within 60 days
under options granted to him pursuant to the Company's Stock Option Plan.
Excludes 2,000 Shares of Company Common Stock owned by Mr. Cassin's wife.
Mr. Cassin disclaims beneficial ownership of the Shares owned by his wife.
(7) Includes 5,000 Shares Mr. Chafetz has the right to acquire within 60 days
under options granted to him pursuant to the Company's Stock Option Plan
and 5,000 Shares Mr. Chafetz has the right to acquire within 60 days
pursuant to a stock option grant (not under the Company's Stock Option
Plan).
(8) Represents Shares such Director or officer has the right to acquire within
60 days under options granted to such Director or officer pursuant to the
Company's Stock Option Plan.
(9) Consists of 1,000 Shares Mr. Howe owns jointly with his wife and 5,000
Shares Mr. Howe has the right to acquire within 60 days under options
granted to him pursuant to the Company's Stock Option Plan.
(10) Includes 35,000 Shares Mr. Hartzfeld has the right to acquire within 60
days under options granted to him pursuant to the Company's Stock Option
Plan.
(11) Shareholdings information is based on Mr. Finneran's Schedule 13D dated
September 14, 1995. Shareholdings information is based on WGI's Schedule
13G dated June 1, 1994.
(12) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 182,100 Shares of
Company Common Stock as of December 31, 1997, all of which Shares are
held in portfolios of DFA Investment Dimensions Group, Inc., a registered
open-end investment company, or in a series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all
such Shares.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following table summarizes certain historical financial information
derived from the Consolidated Financial Statements of the Company. The Selected
Consolidated Financial Information (except for Restaurant Operating Data) for
the fiscal years ended December 26, 1993, December 25, 1994, December 31, 1995,
December 29, 1996, and December 28, 1997 is derived from the audited
Consolidated Financial Statements. This information should be read in
conjunction with and is qualified by reference to the Consolidated Financial
Statements of the Company and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included in the
1997 Annual Report on Form 10-K and 10-K/A enclosed herewith.
The Selected Consolidated Financial Information (except for Restaurant
Operating Data) for the nine month period ended September 27, 1998 is derived
from the unaudited Consolidated Financial Statements filed on Form 10-Q. This
information should be read in conjunction with and is qualified by reference to
the Consolidated Financial Statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in the Form 10-Q and the 1997 Form 10-K and 10-K/A
enclosed herewith.
<TABLE>
<CAPTION>
Year Ended
Dec. 26, Dec. 25, Dec. 31, Dec. 29, Dec. 28,
1993 1994 1995 1996 1997
----------- ------------- ------------ ------------ ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 74,172 $85,831 $93,496 $ 87,753 $ 94,904
Costs and expenses:
Cost of sales 20,286 23,230 25,980 24,785 26,401
Payroll and related costs 22,301 27,633 30,102 28,327 30,221
Operating expenses 14,567 18,948 21,440 20,398 22,121
Depreciation and amortization 3,876 4,541 4,891 3,880 4,197
-------- ------- ------- -------- --------
Total restaurant operating expenses 61,030 74,352 82,413 77,390 82,940
-------- ------- ------- -------- --------
Income from restaurant operations 13,142 11,479 11,083 10,363 11,964
General and administrative expenses 8,532 10,517 15,129 8,874 8,669
-------- ------- ------- -------- --------
Operating income/(loss) 4,610 962 (4,046) 1,489 3,295
Interest expense 104 118 795 748 548
Interest income (49) (4) - - -
Gain on sale of property (1,202) - - - -
-------- -------- ------- -------- --------
Income/(loss) from continuing
operations before income taxes 5,757 848 (4,841) 741 2,747
Income taxes 2,303 347 (2,031) 274 1,016
-------- -------- ------- -------- --------
Income/(loss) from continuing operations 3,454 501 (2,810) 467 1,731
Discontinued operations:
Income from operations of discontinued division (net
of income taxes) 83 - - - -
Estimated loss on disposal of discontinued division (net
of income taxes) (75) - - - -
-------- -------- ------- -------- --------
Net income/(loss) $ 3,462 $ 501 ($ 2,810) $ 467 $ 1,731
======== ======== ======= ======== ========
Income/(loss) from continuing operations per share
Basic/Diluted $ 0.95 $ 0.14 $ 0.82) $ 0.14 $ 0.50
======== ======== ======= ======== ========
Net income/(loss) per share Basic/Diluted $ 0.95 $ 0.14 $ 0.82) $ 0.14 $ 0.50
======== ======== ======= ======== ========
Average common shares and equivalents
Basic 3,637 3,600 3,430 3,434 3,432
Diluted 3,654 3,623 3,431 3,436 3,474
Book value per share
Basic 7.93 7.65 7.21 7.34 7.87
Diluted 7.89 7.60 7.21 7.33 7.78
<CAPTION>
Nine Months
Ended
Sept. 28
1998
------------
(Dollars in
thousands,
except per
share data)
<S> <C>
Statement of Operations Data:
Sales $ 72,305
Costs and expenses:
Cost of sales 19,976
Payroll and related costs 22,931
Operating expenses 17,120
Depreciation and amortization 3,024
----------
Total restaurant operating expenses 63,051
----------
Income from restaurant operations 9,254
General and administrative expenses 6,593
----------
Operating income/(loss) 2,661
Interest expense 223
Interest income -
Gain on sale of property -
----------
Income/(loss) from continuing
operations before income taxes 2,483
Income taxes 745
----------
Income/(loss) from continuing operations 1,693
Discontinued operations:
Income from operations of discontinued division (net
of income taxes) -
Estimated loss on disposal of discontinued division (net
of income taxes) -
----------
Net income/(loss) $ 1,693
==========
Income/(loss) from continuing operations per share
Basic/Diluted $ .49/.46
==========
Net income/(loss) per share Basic/Diluted $ .49/.46
==========
Average common shares and equivalents
Basic 3,449
Diluted 3,650
Book value per share
Basic 8.35
Diluted 7.89
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended
Dec. 26, Dec. 25, Dec. 31, Dec. 29, Dec. 28,
1993 1994 1995 1996 1997
----------- ------------ ------------ ------------ ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Restaurant operating data:
- --------------------------------------------------------
Average sales per restaurant open for full period (1) $ 2,674 $2,570 $2,595 $2,613 $ 2,744
Restaurants open for full period 25 30 33 33 32
Percentage change in comparable restaurant sales (1) 0.6% (3.5%) (2.2%) (0.8%) 0.04%
Total restaurants open at end of period 31 37 33 34 34
Balance Sheet Data (at Period End):
Total assets $38,884 $47,314 $46,100 $43,911 $43,072
Long term debt - 7,600 7,525 6,025 4,000
Current maturities of long term debt 683 542 2,500 1,500 -
Total stockholders' equity 28,831 27,537 24,727 25,202 27,012
<CAPTION>
Nine Months
Ended
Sept. 28
1998
------------
(Dollars in
thousands,
except per
share data)
<S> <C>
Restaurant operating data:
- --------------------------------------------------------
Average sales per restaurant open for full period (1) $ 2,223
Restaurants open for full period 32
Percentage change in comparable restaurant sales (1) 5.4%
Total restaurants open at end of period 34
Balance Sheet Data (at Period End):
Total assets $43,672
Long term debt 4,000
Current maturities of long term debt -
Total stockholders' equity 28,813
</TABLE>
(1) Does not include the 53rd week in the fiscal year ended December 31, 1995.
MARKET PRICES AND DIVIDENDS ON THE SHARES
Company Common Stock commenced trading on the Nasdaq National Market
(ticker symbol PAPA) in March, 1992. Prior to March, 1992, there was no market
for Company Common Stock. On December 2, 1998, the last trading day before the
public announcement of the proposal, the reported closing price per Share was
$9.125. On ________, 1999, the last full trading day prior to the date of this
Proxy Statement, the reported closing sale price per Share was $____.
As of December 11, 1998, there were approximately 58 holders of record of
the Company's Common Stock. The Company believes there are substantially more
beneficial owners of its Company Common Stock than there are holders of record.
The Company has not paid dividends since becoming a public company. The
Company presently intends to retain all earnings for use in the operation and
expansion of its business and has no present intention to pay cash dividends.
The quarterly range of high and low sales prices for the Company Common
Stock as reported on the Nasdaq National Market for fiscal years 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- -----------------------
High Low High Low High Low
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1st Fiscal Quarter $ 5.00 $ 3.50 $ 4.00 $ 2.63 $ 7.75 $ 4.63
2nd Fiscal Quarter 5.50 3.00 5.50 2.88 9.00 7.00
3rd Fiscal Quarter 4.75 3.25 8.00 4.25 9.31 6.38
4th Fiscal Quarter 4.13 2.63 8.50 5.50 -- --
</TABLE>
STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT PRICE QUOTATION
FOR THE COMMON STOCK.
CERTAIN TRANSACTIONS IN THE COMMON STOCK
There were no transactions in the Shares that were effected in the past 60
days by (i) the Company, (ii) any director or executive officer of the Company,
(iii) any persons controlling the Company, or (iv) any director or executive
officer ultimately in control of the Company or SRC Holdings.
APPRAISAL RIGHTS
If the Merger is consummated, Stockholders who make the demand described
below with respect to their Shares, who continuously are the record holders of
such Shares through the Effective Time, who otherwise comply with the statutory
requirements
34
<PAGE>
of Section 262 of DGCL ("Section 262") (a copy of which is attached as Annex
III) and who neither vote in favor of the Merger Agreement nor consent thereto
in writing will be entitled to an appraisal by the Delaware Court of Chancery
(the "Delaware Court") of the fair value of their Shares. Except as set forth
herein, Stockholders will not be entitled to appraisal rights in connection
with the Merger.
A Stockholder wishing to exercise rights of appraisal must, before the
taking of the vote on the Merger at the Special Meeting, deliver to the Company
a written demand for appraisal of such Stockholder's Shares. A demand for
appraisal will be sufficient if it reasonably informs the Company of the
identity of the Stockholders and that the Stockholder intends thereby to demand
the appraisal of his or her Shares.
Within 10 days after the Effective Time, the Surviving Corporation is
required to, and will, notify each Stockholder who has satisfied the foregoing
conditions on the Effective Date. Within 120 days after the Effective Time,
either the Surviving Corporation or any Stockholder who has complied with the
required conditions of Section 262 may file a petition in the Delaware Court,
with a copy served on the Surviving Corporation in the case of a petition filed
by a Stockholder, demanding a determination of the fair value of the Shares of
all dissenting Stockholders. There is no present intent on the part of the
Surviving Corporation to file an appraisal petition and Stockholders seeking to
exercise appraisal rights should not assume that the Surviving Corporation will
file such a petition or that the Surviving Corporation will initiate any
negotiations with respect to the fair value of such Shares. Accordingly,
Stockholders who desire to have their Shares appraised should initiate any
petitions necessary for the perfection of their appraisal rights within the
time periods and in the manner prescribed in Section 262. Within 120 days after
the Effective Time, any Stockholder who has theretofore complied with the
applicable provisions of Section 262 will be entitled, upon written request, to
receive from the Surviving Corporation a statement setting forth the aggregate
number of Shares of Company Common Stock not voting in favor of the Merger
Agreement and with respect to which demands for appraisal were received by the
Company and the number of holders of such Shares. Such statement must be mailed
within 10 days after the written request therefor has been received by the
Surviving Corporation.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which Stockholders have complied
with the provisions of Section 262 and are entitled to appraisal rights. The
Delaware Court may require the Stockholders who have demanded an appraisal for
their Shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any Stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
Stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the Shares of the Company Common Stock, determining the fair value of
such Shares exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining fair
value, the Delaware Court is to take into account all relevant factors. In
Weinberger v. UOP Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that in making this determination of fair value
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts which could be
ascertained as of the date of the merger which throw light on future prospects
of the merged corporation. In Weinberger, the Delaware Supreme Court stated
that "elements of future value, including the nature of the enterprise, which
are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." Section 262, however, provides that
fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their Shares determined under Section 262 could be more than, the same
as or less than the consideration they are entitled to receive pursuant to the
Merger Agreement if they do not seek appraisal of their Shares. The cost of the
appraisal proceeding may be determined by the Delaware Court and taxed against
the parties as the Delaware Court deems equitable in the circumstances. Upon
application of a dissenting Stockholder, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting Stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable attorney's fees and the fees and expenses of experts, be charged pro
rata against the value of all Shares of stock entitled to appraisal.
At any time within 60 days after the Effective Time, any Stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger; after this period, the Stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, Stockholders' rights to appraisal shall cease, and all
holders of Shares of Company Common Stock will be entitled to receive the
consideration offered pursuant to the Merger Agreement. Inasmuch as the Company
has no obligation to file such a petition, and
35
<PAGE>
the Surviving Corporation has no present intention to do so, any holder of
Shares of Company Common Stock who desires such a petition to be filed is
advised to file it on a timely basis. Any Stockholder may withdraw such
Stockholder's demand for appraisal by delivering to the Company a written
withdrawal of his or her demand for appraisal and acceptance of the Merger,
except (i) that any such attempt to withdraw made more than 60 days after the
Effective Time will require written approval of the Surviving Corporation, and
(ii) that no appraisal proceeding in the Delaware Court shall be dismissed as
to any Stockholder without the approval of the Delaware Court, and such
approval may be conditioned upon such terms as the Delaware Court deems just.
The foregoing is only a summary of Section 262, and is qualified in its
entirety by reference to the provisions thereof, the full text of which is set
forth as Annex III to this Proxy Statement. Each Stockholder is urged to read
carefully the full text of Section 262.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of PricewaterhouseCoopers, experts in accounting and
auditing matters, are expected to be present at the Special Meeting, where they
will have the opportunity to make a statement if they desire to do so and will
be available to respond to appropriate questions.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
Management of the Company knows of no other matters that may properly be,
or which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before such Special Meeting, the persons
named in the enclosed Proxy or their substitutes will vote the Proxies in
accordance with their judgment with respect to such matters.
By Order of the Board of Directors
Francis P. Bissaillon
Executive Vice President, Chief
Financial Officer and
Secretary
36
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 3, 1998
BY AND BETWEEN
BACK BAY RESTAURANT GROUP, INC.
AND
SRC HOLDINGS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
ARTICLE I
THE MERGER ................................................................ 1
SECTION 1.1. THE MERGER .............................................. 1
SECTION 1.2. COMPANY ACTION .......................................... 1
SECTION 1.3. CLOSING ................................................. 1
SECTION 1.4. EFFECTIVE TIME .......................................... 2
SECTION 1.5. EFFECTS OF THE MERGER ................................... 2
SECTION 1.6. CERTIFICATE OF INCORPORATION; BY-LAWS ................... 2
SECTION 1.7. DIRECTORS ............................................... 2
SECTION 1.8. OFFICERS ................................................ 2
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT CORPORATIONS .... 2
SECTION 2.1. EFFECT ON CAPITAL STOCK ................................. 2
SECTION 2.2. STOCK OPTIONS ........................................... 3
SECTION 2.3. EXCHANGE OF CERTIFICATES ................................ 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES ............................................ 5
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ........... 5
SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF PURCHASER ............. 7
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER ................. 9
SECTION 4.1. CONDUCT OF BUSINESS OF THE COMPANY ...................... 9
SECTION 4.2. OTHER ACTIONS ........................................... 10
ARTICLE V
ADDITIONAL AGREEMENTS ..................................................... 10
SECTION 5.1. PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETING .... 10
SECTION 5.2. ACCESS TO INFORMATION; CONFIDENTIALITY .................. 11
SECTION 5.3. COMMERCIALLY REASONABLE EFFORTS ......................... 11
SECTION 5.4. FINANCING ............................................... 12
SECTION 5.5. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE ..... 12
SECTION 5.6. PUBLIC ANNOUNCEMENTS .................................... 13
SECTION 5.7. NO SOLICITATION; ACQUISITION PROPOSALS .................. 13
SECTION 5.8. BOARD ACTION RELATING TO STOCK OPTION PLANS ............. 14
SECTION 5.9. CONSENTS AND APPROVALS .................................. 14
SECTION 5.10. STATE TAKEOVER LAWS .................................... 14
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI
CONDITIONS PRECEDENT ........................................................... 14
SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.... 14
SECTION 6.2. CONDITIONS TO OBLIGATION OF PURCHASER TO EFFECT THE
MERGER ..................................................... 15
SECTION 6.3. CONDITION TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER ..................................................... 16
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER .............................................. 16
SECTION 7.1. TERMINATION .................................................. 16
SECTION 7.2. EFFECT OF TERMINATION ........................................ 17
SECTION 7.3. AMENDMENT .................................................... 17
SECTION 7.4. EXTENSION; WAIVER ............................................ 17
SECTION 7.5. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR
WAIVER ..................................................... 18
ARTICLE VIII
GENERAL PROVISIONS ............................................................. 18
SECTION 8.1. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES ................ 18
SECTION 8.2. FEES AND EXPENSES ............................................ 18
SECTION 8.3. DEFINITIONS .................................................. 18
SECTION 8.4. NOTICES ...................................................... 18
SECTION 8.5. INTERPRETATION ............................................... 19
SECTION 8.6. COUNTERPARTS ................................................. 19
SECTION 8.7. ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES .................. 19
SECTION 8.8. GOVERNING LAW ................................................ 19
SECTION 8.9. ASSIGNMENT ................................................... 19
SECTION 8.10. ENFORCEMENT ................................................. 19
SECTION 8.11. SEVERABILITY ................................................ 20
SECTION 8.12. ATTORNEY'S FEES ............................................. 20
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 3, 1998
BY AND BETWEEN
BACK BAY RESTAURANT GROUP, INC.,
A Delaware Corporation (THE "COMPANY"),
AND
SRC HOLDINGS, INC., A Delaware Corporation ("PURCHASER")
WITNESSETH:
WHEREAS, the Board of Directors of the Company has determined that this
Agreement (this "Agreement") and the transactions contemplated hereby including
the Merger (as defined herein) are fair to and in the best interest of the
Company and its stockholders;
WHEREAS, the Board of Directors of Purchaser has determined that the
transactions contemplated by this Agreement (including the Merger) are in the
best interest of Purchaser and its stockholders; and
WHEREAS, the Boards of Directors of the Company and Purchaser have each
approved and adopted this Agreement and approved the Merger and the other
transactions contemplated hereby and recommended, in the case of the Company,
acceptance of the Merger by its stockholders.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Section 251 of the Delaware
General Corporate Law (the "DGCL"), at the Effective Time (as hereinafter
defined), Purchaser shall be merged with and into the Company (the "Merger")
with the Company being the Surviving Corporation (the "Surviving Corporation").
SECTION 1.2. COMPANY ACTION.
(a) The Company hereby consents to the Merger and represents that each of
the Company's Board of Directors (the "Board of Directors") and the Special
Committee of the Board of Directors (the "Special Committee"), at a meeting duly
called and held, has (i) unanimously determined that this Agreement and the
transactions contemplated hereby, including the Merger (as defined in Section
1.1), are fair to and in the best interest of the Company and its stockholders,
(ii) unanimously approved this Agreement and the transactions contemplated
hereby, including the Merger, which approvals are sufficient to render entirely
inapplicable to the Merger or Purchaser the provisions of Section 203 of the
Delaware General Corporate Law (the "DGCL") and (iii) resolved to recommend
approval and adoption of this Agreement and the Merger by its stockholders.
Schroder & Co. Inc. (the "Financial Advisor") has delivered to the Board of
Directors its opinion, subject to the qualifications and limitations stated
therein, to the effect that the consideration to be received by the holders of
the Shares pursuant to the Merger is fair to the holders of Shares from a
financial point of view. The Company has been authorized by the Financial
Advisor to permit, subject to prior review and consent by the Financial Advisor
(such consent not to be unreasonably withheld), the inclusion of the fairness
opinion (or a reference thereto) in the Preliminary Proxy Statement and the
Company Proxy Statement (as defined in paragraph (b) of Section 5.1).
SECTION 1.3. CLOSING. Unless this Agreement shall have been terminated
and the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
at 10:00 a.m., Boston time, not later than the fifth business day following the
date on which the last to be fulfilled or waived of the conditions
1
<PAGE>
set forth in Article VI shall be fulfilled or waived in accordance with this
Agreement (the "Closing Date"), at the offices of Hutchins, Wheeler & Dittmar,
A Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110,
unless another date, time or place is agreed to in writing by the parties
hereto.
SECTION 1.4. EFFECTIVE TIME. The parties hereto will file with the
Secretary of State of the State of Delaware (the "Delaware Secretary of State")
on the Closing Date (or on such other date as Purchaser and the Company may
agree) a certificate of merger or other appropriate documents, executed in
accordance with the relevant provisions of the DGCL, and make all other filings
or recordings required under the DGCL in connection with the Merger. The Merger
shall become effective upon the filing of the certificate of merger with the
Delaware Secretary of State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.5. EFFECTS OF THE MERGER. The Merger shall have the effect set
forth in Section 251 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Purchaser shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Purchaser shall become the debts, liabilities and duties of the
Surviving Corporation.
SECTION 1.6. CERTIFICATE OF INCORPORATION; BY-LAWS.
(a) The Company's Restated Certificate of Incorporation, as in effect at
the Effective Time, shall be, from and after the Effective Time, the Certificate
of Incorporation of the Surviving Corporation until thereafter changed or
amended as provided therein or by applicable law.
(b) The Company's By-laws, as in effect at the Effective Time, shall be,
from and after the Effective Time, the By-laws of the Surviving Corporation
until thereafter changed or amended as provided therein or by applicable law.
SECTION 1.7. DIRECTORS. The directors of Purchaser at the Effective Time
shall become, from and after the Effective Time, the directors of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
SECTION 1.8. OFFICERS. The officers of Purchaser at the Effective Time
shall become, from and after the Effective Time, the officers of the Surviving
Corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE
CONSTITUENT CORPORATIONS
SECTION 2.1. EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of any holder:
(a) COMMON STOCK OF PURCHASER. Each share of the capital stock of Purchaser
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable share
of common stock, par value $.01 per share, of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND PURCHASER-OWNED STOCK. Each Share
issued or outstanding immediately prior to the Effective Time that is owned by
the Company or by Purchaser shall be canceled automatically and shall cease to
exist, and no cash or other consideration shall be delivered or deliverable in
exchange therefor.
(c) CONVERSION OF COMPANY SHARES. At the Effective Time, each issued and
outstanding share of common stock, par value $.01 per share, of the Company (the
"Shares" or "Common Stock") other than (i) Shares
2
<PAGE>
to be canceled pursuant to Section 2.1(b) and (ii) Dissenting Shares (as
hereinafter defined) shall be converted into and become the right to receive,
upon surrender of the certificate representing such Shares in accordance with
Section 2.3, a cash payment of $10.25 per Share, net to the stockholder in cash
(the "Merger Consideration").
(d) DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, Shares issued and outstanding immediately prior to the Effective Time
and held by a holder (a "Dissenting Stockholder"), if any, who has the right to
demand, and who properly demands, an appraisal of such shares in accordance with
Section 262 of the DGCL or any successor provision ("Dissenting Shares") shall
not be converted into a right to receive the Merger Consideration unless such
Dissenting Stockholder fails to perfect or otherwise loses or withdraws such
Dissenting Stockholder's right to such appraisal, if any. Provided the holder of
any Dissenting Shares complies with the provisions of the DGCL, such holder
shall have with respect thereto solely the appraisal rights provided under
Section 262 of the DGCL. If, after the Effective Time, such Dissenting
Stockholder fails to perfect or otherwise loses or withdraws any such right to
appraisal, each such share of such Dissenting Stockholder shall be treated as a
share that had been converted as of the Effective Time into the right to receive
the Merger Consideration in accordance with this Section 2.1(d). The Company
shall give prompt notice to Purchaser of any demands received by the Company for
appraisal of any Dissenting Shares, and Purchaser shall have the right to
participate in and direct all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior written consent of
Purchaser, which consent shall not be unreasonably withheld, make any payment
with respect to, or settle or offer to settle, any such demands.
(e) CANCELLATION AND RETIREMENT OF COMMON STOCK. As of the Effective Time
all certificates representing Shares, other than certificates representing
Shares to be canceled in accordance with Section 2.1(b) or Dissenting Shares,
issued and outstanding immediately prior to the Effective Time, shall no longer
be outstanding and shall automatically be canceled and shall cease to exist, and
each holder of a certificate representing any such Shares shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration upon surrender of such certificate in accordance with Section 2.3.
SECTION 2.2. STOCK OPTIONS. As of the Effective Time, each outstanding,
unexercised stock option to purchase Shares (a "Company Stock Option") issued
under the Company's Amended and Restated Stock Option Plan (the "Company Stock
Option Plan"), except those Company Stock Options which the Purchaser has
agreed in writing to exchange for options granted under the Purchaser's stock
option plan immediately prior to the Effective Time, shall terminate and be
canceled and each holder of a Company Stock Option shall be entitled to
receive, in consideration therefor, a cash payment from the Company (which
payment shall be made as soon as practicable after the Effective Time) equal to
the product of (a) the excess, if any, of (x) the Merger Consideration over (y)
the per Share exercise price of such Company Stock Option, times (b) the number
of Eligible Shares (as defined below) subject to such Company Stock Option.
Such cash payment shall be net of any required withholding taxes. The term
"Eligible Shares" shall mean the aggregate number of Shares that shall then be
subject to such option. The Company's obligation to make any such cash payment
(1) shall be subject to the obtaining of any necessary consents of optionees to
the cancellation of such Company Stock Options, in form and substance
satisfactory to Purchaser, and (2) shall not require any action which violates
the Company Stock Option Plan. As of the Effective Time, the Company Stock
Option Plan shall terminate and be of no further force or effect, and the
Company shall take such action as shall be necessary to ensure, to Purchaser's
reasonable satisfaction, that no holder of a Company Stock Option will have any
right to acquire any interest in the Surviving Corporation under the Company
Stock Option Plans.
SECTION 2.3. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, Purchaser (or the Company, as
the Surviving Corporation) shall deposit, or shall cause to be deposited, with
or for the account of a bank, trust company or other agent designated by
Purchaser, which shall be reasonably satisfactory to the Company (the "Exchange
Agent"), for the benefit of the holders of Shares, cash in an aggregate amount
equal to the product of (x) the number of Shares outstanding immediately prior
to the Effective Time (other than Shares to be canceled pursuant to Section
2.1(b) and Dissenting Shares), times (y) the Merger Consideration (such amount
being hereinafter referred to as the "Payment Fund"). The Exchange Agent shall
invest the Payment Fund as directed by the Surviving Corporation.
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(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
each holder of an outstanding certificate or certificates which prior thereto
represented outstanding Shares shall, upon surrender to the Exchange Agent of
such certificate or certificates and acceptance thereof by the Exchange Agent,
be entitled to the amount of cash which the aggregate number of Shares
previously represented by such certificate or certificates surrendered shall
have been converted into the right to receive pursuant to Section 2.1(c). The
Exchange Agent shall accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. If the
consideration to be paid in the Merger (or any portion thereof) is to be
delivered to any person other than the person in whose name the certificate
representing Shares surrendered in exchange therefor is registered, it shall be
a condition to such exchange that the certificate so surrendered shall be
properly endorsed with the signature guaranteed or otherwise be in proper form
for transfer and that the person requesting such exchange shall pay to the
Exchange Agent any transfer or other tax required by reason of the payment of
such consideration to a person other than the registered holder of the
certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. After the Effective
Time, there shall be no further transfer on the records of the Company or its
transfer agent of certificates representing Shares, and if such certificates are
presented to the Company for transfer, they shall be canceled against delivery
of the Merger Consideration as hereinabove provided. Until surrendered as
contemplated by this Section 2.3(b), each certificate representing Shares shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration, without any interest
thereon, as contemplated by Section 2.l(c). No interest will be paid or will
accrue on any cash payable as Merger Consideration to any holder of Shares.
(c) LETTER OF TRANSMITTAL. Promptly after the Effective Time (but in no
event more than five business days thereafter), the Surviving Corporation shall
require the Exchange Agent to mail to each record holder of certificates that
immediately prior to the Effective Time represented Shares which have been
converted pursuant to Section 2.1, a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving the
consideration to which such holder shall be entitled therefor pursuant to
Section 2.1.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMMON STOCK. The Merger Consideration
paid upon the surrender for exchange of certificates representing Shares in
accordance with the terms of this Article II shall be deemed to have been issued
and paid in full satisfaction of all rights pertaining to the Shares theretofore
represented by such certificates, and no holder of Shares shall thereby have any
equity interest in the Surviving Corporation.
(e) TERMINATION OF PAYMENT FUND. Any portion of the Payment Fund which
remains undistributed to the holders of the certificates representing Shares for
one year after the Effective Time (including, without limitation, all interest
and other income received by the Exchange Agent in respect to all funds made
available to it) shall be delivered to the Surviving Corporation, upon demand,
and any such holders of Shares who have not theretofore complied with this
Article II shall thereafter look only to the Surviving Corporation (subject to
abandoned property, escheat and other similar laws) and only as general
creditors thereof for payment of their claim for the Merger Consideration.
(f) NO LIABILITY. None of Purchaser, the Surviving Corporation or the
Exchange Agent shall be liable to any person in respect of any cash, shares,
dividends or distributions payable from the Payment Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any certificates representing Company Shares shall not have been surrendered
prior to five (5) years after the Effective Time (or immediately prior to such
earlier date on which the Merger Consideration in respect of such certificate
would otherwise escheat to or become the property of any Governmental Entity (as
defined in Section 3.1(d)), any such cash, shares, dividends or distributions
payable in respect of such certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and clear
of all claims or interest of any person previously entitled thereto.
(g) WITHHOLDING RIGHTS. The Surviving Corporation or Purchaser shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Shares such amounts as the Surviving
Corporation or Purchaser is required to deduct and withhold with respect to the
making of such payment under the Code, or any provision of state, local or
foreign tax law, including, without limitation, withholdings required in
connection with payments with respect to Company Stock Options. To the extent
that amounts are so
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withheld by the Surviving Corporation or Purchaser such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
in respect of which such deduction and withholding was made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to Purchaser as follows; provided, however, that the
Company does not represent or warrant to Purchaser in this Section 3.1 with
respect to any matter set forth herein to the extent such information was
furnished to the Company by Purchaser or any Affiliate or Associate of
Purchaser:
(a) ORGANIZATION, STANDING AND CORPORATE POWER. The Company is a
corporation duly organized, validly existing and in corporate good standing
under the laws of the State of Delaware and has the requisite corporate power
and authority and any necessary governmental authority to carry on its business
as now being conducted and to own, operate and lease its properties. The Company
is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse effect upon
(i) the business, assets, properties, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries taken as a whole, or
(ii) the transactions contemplated hereby or the legality or validity of this
Agreement (each a "Material Adverse Effect").
(b) INTENTIONALLY OMITTED.
(c) CAPITALIZATION. As of the date hereof, the authorized capital stock of
the Company consists of 20,000,000 shares of Common Stock, $.01 par value per
share. As of the date hereof, 3,460,409 shares are issued and outstanding,
727,923 shares of Common Stock are reserved for issuance pursuant to outstanding
Company Stock Options, and 208 shares of Common Stock are held by the Company in
its treasury. Except as set forth above and in the Shareholder Rights Agreement,
dated as of December 20, 1994, by and between the Company and State Street Bank
& Trust Company, as amended (the "Rights Agreement"), no shares of capital stock
or other equity securities of the Company are issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are, and all
shares which may be issued pursuant to the Company Stock Option Plan will be,
when issued, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights.
(d) AUTHORITY; ENFORCEABILITY; NONCONTRAVENTION. The Company has the
requisite corporate power and authority to enter into this Agreement and to
consummate the Merger and the other transactions contemplated by this Agreement.
The execution and delivery of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company. This Agreement has
been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except that the enforceability hereof may be subject to
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated by this
Agreement and compliance with the provisions hereof will not, (i) violate any of
the provisions of the Restated Certificate of Incorporation or By-Laws of the
Company, or (ii) subject to the governmental filings and other matters referred
to in the following sentence, contravene any law, rule or regulation of any
state or of the United States or any political subdivision thereof or therein,
including any licensing board or agency, or any order, writ, judgment,
injunction, decree, determination or award currently in effect, which singly or
in the aggregate, would have a Material Adverse Effect. No consent, approval or
authorization of, or declaration or filing with, or notice to, any governmental
agency, board or regulatory authority, domestic or foreign (a "Governmental
Entity"), which has not been received or made, is required by or with respect to
the Company or any Subsidiary in connection with the execution and delivery of
this Agreement by the Company or the consummation
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by the Company of the transactions contemplated hereby, except for (i)
compliance with any applicable requirements of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act") and the rules and regulations
promulgated thereunder, (ii) state securities or blue sky laws and state
takeover, antitrust and compensation law filings and approvals, (iii)
compliance with any applicable requirements of The Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended (the "HSR Act"), (iv) the filing of a
certificate of merger with the Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business, (v) the consent of any licensing board or agency
governing the sale of alcoholic beverage) and (vi) any required consents of
landlords.
(e) FINANCIAL STATEMENTS; SEC REPORTS. The Company has previously furnished
Purchaser with true and complete copies of (i) its Annual Reports on Form 10-K
and Form 10-K/A for the fiscal year ended December 28, 1997 (the "Annual
Report") filed by the Company with the Securities and Exchange Commission (the
"SEC"), (ii) its Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 28, 1998 and September 27, 1998 (collectively, the "Quarterly
Reports" and, together with the Annual Report, the "Reports") filed by the
Company with the SEC, (iii) the unaudited consolidated balance sheet and the
unaudited consolidated statement of operations of the Company and its
Subsidiaries as of September 27, 1998 and for the nine (9) months ended
September 27, 1998, respectively (the "Financial Statements"), (iv) proxy
statements relating to all of the Company's meetings of stockholders (whether
annual or special) held or scheduled to be held since December 28, 1997 and (v)
each other registration statement, proxy or information statement or current
report on Form 8-K filed since December 28, 1997 by the Company with the SEC.
Since December 28, 1997 the Company has complied in all material respects with
its SEC filing obligations under the Exchange Act and the Securities Act of
1933, as amended (the "Securities Act"). The Financial Statements and related
schedules and notes thereto of the Company contained in the Reports (or
incorporated therein by reference) and the Financial Statements were prepared in
accordance with generally accepted accounting principles (except, in the case of
interim unaudited financial statements, as permitted by Form 10-Q) applied on a
consistent basis except as noted therein, and fairly present in all material
respects the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended, subject (in the case of
interim unaudited financial statements) to normal year-end audit adjustments,
and such financial statements complied as to form as of their respective dates
in all material respects with applicable rules and regulations of the SEC. Each
such registration statement, proxy statement and Report was prepared in
accordance with the requirements of the Securities Act or the Exchange Act and
did not, on the date of effectiveness in the case of such registration
statements, on the date of mailing in the case of such proxy statements and on
the date of filing in the case of such Reports, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as may be disclosed in the
Reports, since September 28, 1998 there has not been (i) any declaration,
setting aside or payment of any dividend or other distribution in respect of the
capital stock of the Company or any redemption or other acquisition by the
Company of any of its capital stock; (ii) any issuance by the Company, or
agreement or commitment of the Company to issue, any shares of its Common Stock
or securities convertible into or exchangeable for shares of its Common Stock,
except for stock options and stock purchase rights; (iii) any change by the
Company in accounting methods, principles or practices except as required by
generally accepted accounting principles; or (iv) any agreement or commitment,
whether in writing or otherwise, to take any action described in this subsection
3.1(f). Since September 28, 1998, the Company and its Subsidiaries have
conducted their respective businesses in all material respects only in the
ordinary course, consistent with past custom and practice, except as
contemplated by this Agreement.
(g) NO UNDISCLOSED LIABILITIES. Except as set forth in the Reports, neither
the Company nor any of its Subsidiaries has any liabilities (absolute, accrued,
contingent or otherwise), except liabilities (i) in the aggregate adequately
provided for in the Financial Statements, (ii) incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, (iii) incurred since September 28,
1998 in the ordinary course of business consistent with past practice, (iv)
incurred in connection with this Agreement, or (v) which could not reasonably be
expected to have a Material Adverse Effect.
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(h) DISCLOSURE DOCUMENTS.
(i) Each document required to be filed by the Company with the SEC in
connection with the transactions contemplated by this Agreement (the "Company
Disclosure Documents") and any amendments or supplements thereto, will, when
filed, comply as to form in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations thereunder.
(ii) At the time any Company Disclosure Document or any amendment or
supplement thereto is first mailed to stockholders of the Company, it will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. At the time of the
filing of any Company Disclosure Document or any amendment or supplement
thereto, and from the time of any distribution thereof through the Effective
Time each such Company Disclosure Document will not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties contained in
paragraphs (i) and (ii) of this Section 3.1(h) will not apply to statements or
omissions included in the Company Disclosure Documents, if any, based upon
information furnished to the Company in writing by Purchaser or its Affiliates
or Associates specifically for use therein.
(iii) The information with respect to the Company or any Company
Subsidiary that the Company furnishes to Purchaser in writing specifically for
use in the Schedule 13E-3 (as defined herein), the Preliminary Proxy Statement
and the Company Proxy Statement will not, at the time of the filing thereof, and
from the time of any distribution thereof through the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this paragraph (iii)
will not apply to statements or omissions included in the Schedule 13E-3, the
Preliminary Proxy Statement and Company Proxy Statement, if any, based upon
information furnished by Purchaser, its Affiliates or Associates specifically
for use therein.
(i) FAIRNESS OPINION. The Board of Directors of the Company has received
from the Financial Advisor an oral opinion on December 2, 1998, to be followed
with a written opinion to be dated the date hereof, in connection with this
Agreement to the effect that the Merger Consideration to be received by the
stockholders of the Company pursuant to this Agreement and the Merger is fair to
such stockholders from a financial point of view.
(j) BROKERS. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by the Company, is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement,
other than pursuant to an engagement letter with the Financial Advisor, a copy
of which has been previously furnished to Purchaser, which fees and expenses
shall remain the sole responsibility of the Company.
(k) AMENDMENT TO RIGHTS AGREEMENT. Contemporaneously with the execution of
this Agreement, the Company has amended the Rights Agreement in the form of
Exhibit A attached hereto.
SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants to the Company as follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER. Purchaser is a corporation
duly organized, validly existing and in corporate good standing under the laws
of the State of Delaware. Purchaser has the requisite corporate power and
authority to carry on its business as now being conducted. Purchaser is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a Material Adverse Effect.
(b) CAPITALIZATION. As of the date of this Agreement, the authorized
capital stock of Purchaser consists of 2,000,000 shares of common stock, par
value $.01 per share, no shares of which are presently issued and
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outstanding. All of the issued and outstanding shares of capital stock of
Purchaser are validly issued, fully paid and nonassessable.
(c) AUTHORITY; ENFORCEABILITY; NONCONTRAVENTION. Purchaser has all
requisite corporate power and authority to enter into this Agreement and to
consummate the Merger and the other transactions contemplated by this Agreement.
The execution and delivery of this Agreement by Purchaser and the consummation
by Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of Purchaser. This
Agreement has been duly executed and delivered by and constitutes a valid and
binding obligation of Purchaser, enforceable against it in accordance with its
terms, except that the enforceability hereof may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated by this Agreement
and compliance with the provisions of this Agreement will not (i) violate any of
the provisions of the charter documents or By-laws of Purchaser, (ii) subject to
the governmental filings and other matters referred to in the following
sentence, contravene any law, rule or regulation of any state or of the United
States or any political subdivision thereof or therein, or any order, writ,
judgment, injunction, decree, determination or award currently in effect, or
(iii) violate, conflict with or constitute a breach under any contract,
agreement, indenture, mortgage, deed of trust, lease or other instrument to
which Purchaser is a party or by which any of their assets is bound or subject,
which, in the case of clauses (ii) and (iii) above, singly or in the aggregate,
would have a material adverse effect on the business, financial condition or
results of operations of Purchaser or prevent consummation of the transactions
contemplated hereby. No consent, approval or authorization of, or declaration or
filing with, or notice to, any Governmental Entity which has not been received
or made is required by or with respect to Purchaser in connection with the
execution and delivery of this Agreement by Purchaser or the consummation by
Purchaser, as the case may be, of any of the transactions contemplated by this
Agreement, except for (i) compliance with any applicable requirements of the
Exchange Act and the rules and regulations promulgated thereunder, (ii) state
securities or blue sky laws and state takeover, antitrust and competition law
filings and approvals, (iii) compliance with any applicable requirements of the
HSR Act, and (iv) the filing of the certificate of merger with the Delaware
Secretary of State and appropriate documents with the relevant authorities of
other states in which the Company is qualified to do business.
(d) FINANCING. Purchaser has received (i) a written commitment from FINOVA
Capital Corporation (the "Bank") for the provision of a senior credit facility
(the "Senior Credit Facility") for the transactions contemplated hereby, on or
prior to the Closing Date, in the amount of $30,000,000 and (ii) a written
commitment from DDJ Capital Management, LLC ("DDJ," and, together with the Bank,
the "Banks") for the provision of subordinated debt in the amount of $8,000,000.
The aggregate of $38,000,000 of financing (the "Financing") contemplated by the
commitments from the Banks (collectively, the "Commitments") will be sufficient
to consummate the transactions contemplated by the Merger Agreement, including
the Merger. Purchaser has no reason to believe that, as of the date hereof, the
conditions precedent to the consummation of the transactions contemplated by
each of the Commitments would not be satisfied on or before the Closing Date.
True and correct copies of the Commitments have been provided to the Company on
or prior to the date hereof.
(e) DISCLOSURE DOCUMENTS.
(i) The information with respect to Purchaser that Purchaser furnishes
to the Company in writing specifically for use in any Company Disclosure
Documents will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading; provided that no representation is made by
Purchaser with respect to statements or omissions in the Company Disclosure
Documents based upon information furnished to Purchaser by the Company
specifically for use therein.
(ii) The Schedule 13E-3, the Preliminary Proxy Statement and Company
Proxy Statement will comply in all material respects with the applicable
requirements of the Exchange Act and will not, at the time of the filing
thereof, or from the time of any distribution thereof through the Effective Time
contain any untrue statement
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of material fact or omit to state any material fact required to be stated
therein or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading; provided, that no
representation is made by Purchaser with respect to statements or omissions in
the Schedule 13E-3, the Preliminary Proxy Statement or the Company Proxy
Statement based upon information furnished to Purchaser in writing by the
Company specifically for use therein.
(f) BROKERS. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by Purchaser, is entitled to
any broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement, except for
fees payable to Tucker Anthony Incorporated and Alouette Capital, Inc., which
fees and expenses shall remain the sole responsibility of Purchaser.
(g) STOCKHOLDER AGREEMENTS. The Voting and Shares Exchange Agreements to be
entered into by and between Purchaser and each of Charles F. Sarkis, The
Westwood Group, Inc. and the members of management of the Company set forth on
Schedule 3.2(g) attached hereto or added thereto by notice to the Company
(collectively, "Management") are the only agreements between Purchaser or any
person who is, or on the Effective Date will be, a stockholder of Purchaser and
any Company stockholder with respect to the transactions contemplated hereunder.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
PRIOR TO MERGER
SECTION 4.1. CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated
by this Agreement, during the period from the date of this Agreement to the
Effective Time, and except with respect to actions taken by, at the direction
of, or with the approval of, the Purchaser or any of its Affiliates or
Associates, the Company shall operate, and shall cause each Subsidiary to
operate, its business in the ordinary course of business. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, except as expressly contemplated by this Agreement, the
Company and the Subsidiaries shall not, without the prior written consent of
Purchaser:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of the
Company's outstanding capital stock, (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
outstanding capital stock, or (z) purchase, redeem or otherwise acquire any
shares of outstanding capital stock or any rights, warrants or options to
acquire any such shares;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities, except for the issuance of Shares upon
exercise of Company Stock Options outstanding prior to the date of this
Agreement and disclosed in Section 3.1(c), or take any action that would make
the Company's representations and warranties set forth in Section 3.l(c) not
true and correct in all material respects;
(iii) amend its Restated Certificate of Incorporation or By-laws or
the comparable charter or organizational documents of any of its Subsidiaries;
(iv) acquire any business or any corporation, partnership, joint
venture, association or other business organization or division thereof (or any
interest therein), or form any subsidiaries;
(v) sell or otherwise dispose of any of its substantial assets, except
in the ordinary course of business;
(vi) make any capital expenditures, enter into leases or agreements
for new locations, or make other commitments with respect thereto, except
capital expenditures, leases, agreements or commitments (i) set forth on Section
4.1(vi) of the disclosure schedule attached hereto, or (ii) not exceeding
$200,000 in the aggregate as the Company may, in its discretion, deem
appropriate;
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(vii) (x) incur any indebtedness for borrowed money or guaranty any
such indebtedness of another person, other than (A) borrowings in the ordinary
course under existing lines of credit (or under any refinancing of such existing
lines), or (B) indebtedness owing to, or guaranties of indebtedness owing to,
the Company, (y) make any loans or advances to any other person, other than
routine advances to employees;
(viii) grant or agree to grant to any employee any increase in wages
or bonus, severance, profit sharing, retirement, deferred compensation,
insurance or other compensation or benefits, or establish any new compensation
or benefit plans or arrangements, or amend or agree to amend any existing
Company Plans, except as may be required under existing agreements or in the
ordinary course of business consistent with past practices;
(ix) merge, amalgamate or consolidate with any other person or entity
in any transaction, sell all or substantially all of its business or assets, or
acquire all or substantially all of the business or assets of any other person
or entity;
(x) enter into or amend any employment, consulting, severance or
similar agreement with any person or amend the engagement letter with the
Financial Advisor referred to in Section 3.1(j) hereof in any respect that would
result in a Material Adverse Effect;
(xi) change its accounting policies in any material respect, except as
required by generally accepted accounting principles;
(xii) enter into any material contract, agreement or commitment (other
than purchase agreements for food and beverages and restaurant supplies entered
into in the ordinary course of business) not otherwise permitted under this
Section 4.1, including, without limitation, any contract, agreement or
commitment involving expenditures by the Company or any of its Subsidiaries in
excess of $100,000 or which is not terminable by the Company upon giving thirty
(30) days or less prior written notice; or
(xiii) commit or agree to take any of the foregoing actions.
SECTION 4.2. OTHER ACTIONS. The Company or Purchaser shall not take any
action that would, or that could reasonably be expected to, result in (i) any
of the representations and warranties of such party set forth in this Agreement
that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect, or (iii) subject to the Company's right to take action under
Section 5.7, any of the conditions of the Merger set forth in Article VI not
being satisfied.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETING;
SCHEDULE 13E-3.
(a) The Company will, as promptly as practicable following the date of this
Agreement and in consultation with Purchaser, duly call, give notice of, convene
and hold a meeting of its stockholders (the "Stockholders' Meeting") for the
purpose of approving this Agreement, the Merger and the transactions
contemplated by this Agreement. Subject to Section 5.7, the Company will,
through the Board of Directors and the Special Committee, recommend to its
stockholders approval of the foregoing matters and seek to obtain all votes and
approvals thereof by the stockholders.
(b) In connection with the Stockholders' Meeting contemplated hereby, the
Company will promptly prepare and file, and Purchaser will cooperate with the
Company in the preparation and filing of, a preliminary proxy statement (the
"Preliminary Proxy Statement") with the SEC and will use its commercially
reasonable best efforts to respond to the comments of the SEC concerning the
Preliminary Proxy Statement and to cause a final proxy statement (the "Company
Proxy Statement") to be mailed to the Company's stockholders, in each case as
soon as reasonably
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practicable. Purchaser shall be given a reasonable opportunity to review and
comment on all filings with the SEC and all mailings to the Company's
stockholders in connection with the Merger prior to the filing or mailing
thereof, and the Company shall use its commercially reasonable best efforts to
reflect all such comments. The Company shall pay the filing fees for the
Schedule 13E-3 and the Preliminary Proxy Statement. The Company will cooperate
with Purchaser in the preparation and filing of the Rule 13E-3 Transaction
Statement on Schedule 13E-3 (the "Schedule 13E-3") with the SEC and will use
its commercially reasonable best efforts to respond to comments by the SEC
concerning the Schedule 13E-3. Each party to this Agreement will notify the
other parties promptly of the receipt of the comments of the SEC, if any,
notification of SEC approval of the Company Proxy Statement and of any request
by the SEC for amendments or supplements to the Schedule 13E-3, the Preliminary
Proxy Statement or the Company Proxy Statement or for additional information,
and will promptly supply the other parties with copies of all correspondence
between such party or its representatives, on the one hand, and the SEC or
members of its staff, on the other hand, with respect to the Schedule 13E-3,
the Preliminary Proxy Statement, the Company Proxy Statement or the Merger.
(c) If at any time prior to the Stockholders' Meeting, any event should
occur relating to the Company or any of the Subsidiaries which should be set
forth in an amendment of, or a supplement to, the Schedule 13E-3 or the Company
Proxy Statement, the Company will promptly inform Purchaser. If at any time
prior to the Stockholders' Meeting, any event should occur relating to Purchaser
or any of its respective Associates or Affiliates, or relating to the plans of
any such persons for the Surviving Corporation after the Effective Time of the
Merger, or relating to the Financing, that should be set forth in an amendment
of, or a supplement to, the Schedule 13E-3 or the Company Proxy Statement, the
Company, with the cooperation of Purchaser, will, upon learning of such event,
promptly prepare, file and, if required, mail such amendment or supplement to
the Company's stockholders; provided that, prior to such filing or mailing, the
Company shall consult with Purchaser with respect to such amendment or
supplement and shall afford Purchaser reasonable opportunity to comment thereon.
(d) Purchaser shall furnish to the Company the information relating to
Purchaser, its Associates and Affiliates and the plans of such persons for the
Surviving Corporation after the Effective Time of the Merger, and relating to
the Financing, which is required to be set forth in the Preliminary Proxy
Statement or the Company Proxy Statement under the Exchange Act and the rules
and regulations of the SEC thereunder. The Company shall cause to be included
(i) as an exhibit to the Preliminary Proxy Statement and the Company Proxy
Statement, the written fairness opinion of the Financial Advisor referred to in
Section 3.1(i), and (ii) as an exhibit to the Schedule 13E-3 any materials
delivered to the Company's Board of Directors by the Financial Advisor in
connection with the delivery of the Fairness Opinion which are required under
Schedule 13E-3 to be filed as exhibits.
(e) The Company will cause its transfer agent to make stock transfer
records relating to the Company available to the extent reasonably necessary to
effectuate the intent of this Agreement.
(f) At the Stockholders Meeting, Purchaser covenants to vote all Shares it
will own or have a right to vote in favor of the Merger.
SECTION 5.2. ACCESS TO INFORMATION; CONFIDENTIALITY. From and after the
date hereof, the Company will provide to Purchaser reasonable access, upon
notice and during normal business hours, to the Company's facilities, books and
records and shall cause the directors, employees, accountants, attorneys,
financial advisors, lenders and other agents and representatives (collectively,
"Representatives") of the Company to continue to cooperate fully with Purchaser
and Purchaser's Representatives in order to enhance such persons' knowledge of
the Company's assets, contracts, liabilities, operations, records and other
aspects of its business (including any environmental investigation of the
Company's facilities) and the efforts of Purchaser to secure the Financing as
described in Section 3.2(d). Except as the Company may otherwise expressly
agree in writing, unless and until the Merger is consummated, Purchaser shall
be bound by the terms of the Confidentiality Agreement, a copy of which is
attached hereto as Exhibit B.
SECTION 5.3. COMMERCIALLY REASONABLE EFFORTS. Upon the terms and subject
to the conditions and other agreements set forth in this Agreement, each of the
parties agrees to use commercially reasonable best efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious
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manner practicable, the Merger and the other transactions contemplated by this
Agreement, including the procurement of the Financing and the satisfaction of
the respective conditions set forth in Article VI.
SECTION 5.4. FINANCING. Purchaser shall use commercially reasonable best
efforts (i) to close the Financing on terms consistent with the Commitments or
such other terms as shall be mutually satisfactory to Purchaser and the
Company, provided, however, that with respect to the Company's consent, such
consent shall only be required for any such term that would be likely to
adversely effect the parties' ability to close the transactions contemplated
hereunder in any material respect and shall not be unreasonably withheld or
delayed, and (ii) to execute and deliver definitive agreements with respect to
the Financing (the "Definitive Financing Agreements") on or before the Closing
Date. Purchaser shall use commercially reasonable best efforts to satisfy on or
before the Closing Date all requirements of the Definitive Financing Agreements
which are conditions to closing the transactions constituting the Financing and
to drawing the cash proceeds thereunder. The Company shall use its commercially
reasonable best efforts to assist and cooperate with Purchaser, its Affiliates
and Associates to satisfy on or before the Closing Date all of the conditions
to close the transactions constituting the Financing, provided that the Company
shall not be obligated to incur any material out-of-pocket expenses in order to
comply with this obligation. The obligations contained herein are not intended,
nor shall they be construed, to benefit or confer any rights upon any person,
firm or entity other than the parties hereto.
SECTION 5.5. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) From and after the Effective Time, Purchaser shall cause the Surviving
Corporation to indemnify and hold harmless each person who is now, at any time
has been or who becomes prior to the Effective Time a director or officer of the
Company or any of its Subsidiaries, and their respective heirs and personal
representatives (the "Indemnified Parties"), against all expenses, liabilities
and losses (including, without limitation, attorneys' fees and related
disbursements, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) incurred in connection with any "Proceeding"
(as defined in Article VI of the Company's By-laws) arising out of or pertaining
to any action or omission occurring prior to the Effective Time (including,
without limitation, any Proceeding which arises out of or relates to the
transactions contemplated by this Agreement), to the full extent permitted under
Delaware law and the Company's By-laws as in effect as of the date of this
Agreement or under any indemnification agreement in effect as of the date of
this Agreement.
(b) The Surviving Corporation shall control the defense of any such
Proceeding with counsel selected by the Surviving Corporation, which counsel
shall be reasonably acceptable to the Indemnified Party, provided that the
Indemnified Party shall be permitted to participate in the defense of such
Proceeding at its own expense; except that the Surviving Corporation shall pay
as incurred the reasonable fees and expenses of counsel retained by an
Indemnified Party in the event that (i) the Surviving Corporation and the
Indemnified Party shall have mutually agreed on the retention of such counsel,
or (ii) the named parties to any Proceeding include both the Surviving
Corporation and the Indemnified Party and representation of both parties by the
same counsel would be inappropriate, in the reasonable opinion of counsel to the
Indemnified Party, due to actual or potential differing interests between them;
and provided, further, that if any D&O Insurance (as defined in paragraph (c) of
this Section 5.5) in effect at the time shall require the insurance company to
control such defense in order to obtain the full benefits of such insurance and
such provision is consistent with the provisions of the Company's D&O Insurance
existing as of the date of this Agreement, then the provisions of such policy
shall govern. Neither Purchaser nor the Surviving Corporation shall in any event
be liable for any settlement effected without its written consent, which consent
shall not be withheld unreasonably.
(c) For a period of not less than six (6) years after the Effective Time,
Purchaser or the Surviving Corporation shall maintain officers' and directors'
liability insurance ("D&O Insurance") covering each Indemnified Party who is
presently covered by the Company's officers' and directors' liability insurance
or will be so covered at the Effective Time with respect to actions or omissions
occurring prior to the Effective Time, on terms no less favorable than such
insurance maintained in effect by the Company as of the date hereof in terms of
coverage and amounts, provided that Purchaser and the Surviving Corporation
shall not be required to pay in the aggregate an annual premium for D&O
Insurance in excess of 200% of the last annual premium paid prior to the date
hereof, but in such case shall purchase as much coverage as may be obtained for
200% of the last annual premium paid prior to the date hereof.
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(d) The Certificate of Incorporation and By-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation set forth in the Certificate of Incorporation and By-laws of the
Company as of the date of this Agreement, which provisions shall not be amended,
repealed or otherwise modified after the Effective Time in any manner that would
adversely affect the rights thereunder of the Indemnified Parties in respect of
actions or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), unless
such modification is required by law. Purchaser and the Company agree that all
rights existing in favor of any Indemnified Party under any indemnification
agreement in effect as of the date hereof shall survive the Merger and shall
continue in full force and effect, without any amendment thereto.
(e) The provisions of this Section 5.5 are intended to be for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Purchaser, the Company and the Surviving Corporation.
SECTION 5.6. PUBLIC ANNOUNCEMENTS. Purchaser, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press
release or other public statements with respect to the existence of and
transactions contemplated by this Agreement, and shall not issue any such press
release or make any such public statement without the consent of the other
party following such consultation, except as may be required by applicable law,
regulation or judicial process, and in such case only after reasonable notice
to the other party.
SECTION 5.7. NO SOLICITATION; ACQUISITION PROPOSALS.
(a) The Company shall not, and shall not authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorneys, accountant or other representative retained by it to, directly or
indirectly, (i) solicit, initiate or knowingly encourage (including by way of
furnishing non-public information), or take any other action to knowingly
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, an Acquisition Proposal (as such term is
defined herein) or (ii) participate in any discussions or negotiations with a
Third Party (as such term is defined herein) regarding an Acquisition Proposal;
provided, however, that if, at any time prior to the Effective Time, the Board
of Directors of the Company or the Special Committee of the Board of Directors
of the Company determines in good faith, (i) after consulting with outside
counsel, that it is likely to have a fiduciary duty to do so under applicable
law, and (ii) based on the advice of outside counsel and the Financial Advisor,
that the initiating Third Party is a credible potential buyer reasonably likely
to have the ability to consummate a Superior Proposal (as such term is defined
herein), the Company, in response to a written Acquisition Proposal that was
unsolicited from a Third Party or that did not otherwise result from a breach of
this Section 5.7, and is reasonably likely to lead to a Superior Proposal, may
(x) furnish non-public information with respect to the Company to the Third
Party who made such Acquisition Proposal pursuant to a confidentiality agreement
in substantially the form of Exhibit B attached hereto, and (y) participate in
negotiations regarding such Acquisition Proposal. Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
the preceding sentence by any director or officer of the Company or any of its
Subsidiaries, other than Affiliates or Associates of the Purchaser, or any
investment banker, financial advisor, attorney, accountant or other
representative of the Company or any of its Subsidiaries, whether or not acting
on behalf of the Company or any of its Subsidiaries, shall be deemed to be a
breach of this Section 5.7 by the Company.
(b) Neither, the Board of Directors of the Company nor the Special
Committee shall (i) withdraw or modify in a manner adverse to the Purchaser, its
approval or recommendation of this Agreement, and the Merger unless there is a
Superior Proposal outstanding, (ii) approve or recommend an Acquisition Proposal
unless it is a Superior Proposal, or (iii) cause the Company to enter into any
letter of intent, agreement in principle, acquisition agreement or other
agreement with respect to an Acquisition Proposal unless it is a Superior
Proposal, and, in addition, in the case of either (i), (ii) or (iii), unless the
Board of Directors of the Company or the Special Committee of the Board of
Directors of the Company shall have (x) determined in good faith, after
consulting with outside counsel, that it is likely to have a fiduciary duty to
do so under applicable law, and (y) terminated this Agreement pursuant to
Section 7.1(c) hereto.
(c) The Company shall promptly (but in any event within one (1) day) advise
the Purchaser orally and in writing of any Acquisition Proposal or any inquiry
regarding the making of an Acquisition Proposal or any inquiry
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regarding the making of an Acquisition Proposal from a Third Party including
any request for information, the material terms and conditions of such request,
Acquisition Proposal or inquiry and the identity of the person making such
request, Acquisition Proposal or inquiry. The Company will, to the extent
reasonably practicable, keep the Purchaser fully informed of the status and
details (including amendments or proposed amendments) of any such request,
Acquisition Proposal or inquiry.
(d) Notwithstanding the foregoing, the Company shall neither (i) amend the
Rights Agreement to permit a Third Party to consummate a Superior Proposal or in
any other manner whatsoever nor (ii) take any steps to exempt the transactions
contemplated by a Superior Proposal from, or if necessary to challenge the
validity or applicability of, any applicable take-over law, including without
limitation, Section 203 of the DGCL, unless the Company has complied in all
respects with paragraphs (a) through (c) above.
(e) For purposes of this Agreement, (i) "Acquisition Proposal" means any
bona fide written proposal with respect to a merger, consolidation, share
exchange, tender offer or similar transaction involving the Company, or any
purchase or other acquisition of all or any significant portion of the assets of
the Company, or any equity interest in the Company, other than the transactions
contemplated hereby; (ii) "Third Party" means any corporation, partnership,
person or other entity or "group" (as defined in Section 13(d)(3) of the
Exchange Act), other than Purchaser or any Affiliates of Purchaser and its
respective directors, officers, employees, representatives and agents; (iii)
"Superior Proposal" means an Acquisition Proposal that (A) would take the form
of either (i) a merger, consolidation, share exchange, recapitalization,
business combination, or other similar transaction; (ii) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 100% of the assets
of the Company and its Subsidiaries, taken as a whole, in a single transaction
or series of transactions; or (iii) a tender offer or exchange offer for 100% of
the outstanding shares of capital stock of the Company or the filing of a
registration statement under the Securities Act of 1933, as amended, in
connection therewith; (B) the Board of Directors of the Company or the Special
Committee of the Board of Directors of the Company, in good faith, based on the
advice of its outside counsel and of the Financial Advisor, determines to be of
a higher price per share and more favorable than the transaction contemplated
hereunder; and (C) is already fully financed and evidence of such financing, in
the form of an executed commitment letter, has been provided to the Company.
SECTION 5.8. BOARD ACTION RELATING TO STOCK OPTION PLANS. As soon as
practicable following the date of this Agreement, the Board of Directors of the
Company (or, if appropriate, any committee administering a Company Stock Option
Plan) shall adopt such resolutions or take such actions as may be required to
adjust the terms of all outstanding Company Stock Options in accordance with
Section 2.2 and shall make such other changes to the Company Stock Option Plan
as Purchaser deems appropriate to give effect to the Merger, and to terminate
such plans as of the Effective Time.
SECTION 5.9. CONSENTS AND APPROVALS. As soon as practicable following the
date of this Agreement, the Company and Purchaser shall make all filings
required to be made with and seek all consents, approvals, permits and
authorizations required to be obtained from, any third parties or Governmental
Entities in connection with this Agreement and the transactions contemplated
hereby, including, without limitation, the filing of any required notification
under the HSR Act. The Purchaser shall pay any required filing fees or other
expense in connection therewith.
SECTION 5.10. STATE TAKEOVER LAWS. The Company shall take all steps
necessary to exempt the transactions contemplated by this Agreement from, or if
necessary to challenge the validity or applicability of, any applicable
takeover law, including, without limitation, Section 203 of the DGCL.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligation of each party to effect Merger is subject to the
satisfaction or waiver on or prior to the Closing Date (as applicable) of the
following conditions:
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(a) STOCKHOLDER APPROVAL OF MERGER. The Merger shall have been adopted and
approved by the affirmative vote required under the laws of the State of
Delaware.
(b) INTENTIONALLY OMITTED.
(c) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, judgment,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
parties invoking this condition shall use their commercially reasonable best
efforts to have any such order or injunction vacated.
SECTION 6.2. CONDITIONS TO OBLIGATION OF PURCHASER TO EFFECT THE MERGER. In
addition to the conditions set forth in Section 6.1, the obligation of Purchaser
to effect the Merger is further subject to the satisfaction, or waiver by the
Purchaser, on or prior to the Closing Date, of the following conditions:
(a) FINANCING CONDITION. The receipt of cash proceeds of the Financing in
an amount sufficient to consummate the transactions contemplated hereby pursuant
to the terms of the Commitments or such other terms as Purchaser and the Company
shall agree or as are not materially more onerous than as set forth in the
Commitments (the "Financing Condition") shall have been satisfied.
(b) MATERIAL ADVERSE EFFECT. There shall not have occurred any change,
event, occurrence or circumstance in the business, operations, assets or
condition (financial or otherwise) of the Company or any of its Subsidiaries,
related to the period commencing on September 28, 1998, that in the reasonable
judgment of Purchaser, is likely to have a Material Adverse Effect on the
Company and its Subsidiaries, taken as a whole.
(c) FORCE MAJEURE. There shall not have occurred (i) any general suspension
of trading in, or limitation on prices for, securities on the New York Stock
Exchange, which suspension or limitation shall continue for at least three
consecutive trading days, (ii) any decline in either the Dow Jones Industrial
Average or the Standard and Poor's 500 Index by an amount in excess of 25%,
measured from August 31, 1998, (iii) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States, (iv) a
commencement of a war or armed hostilities or other national or international
calamity directly or indirectly involving the United States which would
reasonably be expected to have a material adverse impact on the capital markets
of the United States, or (v) in the case of any of the foregoing existing on the
date of this Agreement, a material acceleration, escalation or worsening
thereof.
(d) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in Section 3.1 that are qualified by materiality shall be
true and correct and such representations and warranties of the Company set
forth in Section 3.1 that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except to the extent
such representations and warranties speak as of an earlier date and except for
changes permitted or contemplated by this Agreement, and except, in the case of
any such breach, where such breach would not, individually or in the aggregate,
materially and adversely affect the Financing described in Section 3.2(d) or the
ability of the Company to consummate the Merger. The Company shall have received
an officer's certificate signed on behalf of the Purchaser to the effect set
forth in this paragraph.
(e) PERFORMANCE OF OBLIGATIONS AND COVENANTS OF THE COMPANY. The Company
shall have performed in all material respects all obligations and covenants
required to be performed by it under this Agreement at or prior to the Closing
Date. Company shall have received an officer's certificate signed on behalf of
Purchaser to the effect set forth in this paragraph.
(f) TERMINATION OF MERGER AGREEMENT. The Merger Agreement shall not have
been terminated in accordance with its terms.
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SECTION 6.3. CONDITION TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER.
In addition to the conditions set forth in Section 6.1, the obligation of the
Company to effect the Merger is further subject to the satisfaction, or waiver
by the Company, on or prior to the Closing Date, of the following conditions:
(a) NON-AFFILIATED STOCKHOLDER APPROVAL OF MERGER. A majority of the Shares
held by the stockholders of the Company (the "Non-Affiliated Stockholders")
other than Charles F. Sarkis, The Westwood Group, Inc., the members of
Management and William B. Finneran shall have voted to approve and authorize
this Agreement and the Merger.
(b) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Purchaser set forth in Section 3.2 that are qualified by materiality shall be
true and correct and such representations and warranties of Purchaser set forth
in Section 3.2 that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, except to the extent
such representations and warranties speak as of an earlier date and except for
changes permitted or contemplated by this Agreement, and except, in the case of
any such breach, where such breach would not, individually or in the aggregate,
materially and adversely affect the Financing described in Section 3.2(d) or the
ability of Purchaser to consummate the Merger. The Company shall have received
an officer's certificate signed on behalf of the Purchaser to the effect set
forth in this paragraph.
(c) PERFORMANCE OF OBLIGATIONS AND COVENANTS OF THE PURCHASER. Purchaser
shall have performed in all material respects all obligations and covenants
required to be performed by it under this Agreement at or prior to the Closing
Date. The Company shall have received an officer's certificate signed on behalf
of the Purchaser to the effect set forth in this paragraph.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. TERMINATION. This Agreement may be terminated and abandoned
at any time prior to the Effective Time, whether before or after any approval
of the Merger by the stockholders of the Company: (a) by mutual written consent
of Purchaser and the Company; or (b) by either Purchaser or the Company: (i)
if, upon a vote at the Stockholders Meeting or any adjournment thereof, the
adoption and approval of this Agreement and the Merger by the stockholders of
the Company required by Delaware law, the Company's Restated Certificate of
Incorporation or the terms of this Agreement shall not have been obtained; (ii)
if the Merger shall not have been consummated on or before June 30, 1999,
provided that the failure to consummate the Merger is not attributable to the
failure of the terminating party to use its commercially reasonable best
efforts to fulfill its obligations pursuant to this Agreement; (iii) if there
shall be any law or regulation that makes consummation of the Merger illegal or
otherwise prohibited, or if any judgment, injunction, order or decree enjoining
or otherwise restraining Purchaser or the Company from consummating the Merger
is entered and such judgment, injunction, order or decree shall become final
and nonappealable; or (iv) by the Company, if a majority of the Shares held by
the Non-Affiliated Stockholders shall not have voted to approve and authorize
this Agreement and the Merger; or (c) by the Company, immediately after payment
to Purchaser of the fee and expense reimbursement described in Section 7.2(b),
if prior to the Effective Time, either the Board of Directors of the Company or
the Special Committee of the Board of Directors of the Company has properly
elected to terminate this Agreement in accordance with the provisions of
Section 5.7; or (d) by Purchaser, if, prior to the Effective Time, the Company
shall breach in any material respect any of its representations, warranties or
obligations hereunder (including, without limitation, the terms and conditions
of Section 5.7) and such breach shall not have been cured in all material
respects or waived and the Company shall not have provided reasonable assurance
that such breach will be cured in all material respects on or before the
Closing Date, but only if such breach, singly or together with all other such
breaches would have a Material Adverse Effect; or (e) by the Company, if
Purchaser shall breach in any material respect any of its representations,
warranties or obligations hereunder and such breach shall not have been cured
in all material respects or waived, and Purchaser shall not have provided
reasonable assurance that such breach will be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with
all other such breaches would have a Material Adverse Effect; provided,
however, that the party seeking termination pursuant to clause (d) or (e)
hereof is not in breach of any of its material representations, warranties,
covenants or agreements contained in this Agreement.
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SECTION 7.2. EFFECT OF TERMINATION.
(a) AGREEMENT VOID. In the event of the termination and abandonment of this
Agreement pursuant to Section 7.1 hereof, this Agreement shall forthwith become
void and have no effect, without any liability on the part of any party hereto
or its affiliates, directors, officers or stockholders and all rights and
obligations of any party hereto shall cease except for agreements contained in
Sections 5.2, 7.2 and 8.2; provided, however, that nothing contained in this
Section 7.2 shall relieve any party from liability for any breach of this
Agreement or shall relieve the Company from any liability under this Article
VII.
(b) TERMINATION FEE.
(i) If this Agreement is terminated by the Company pursuant to Section
7.1(c) or, by the Purchaser pursuant to Section 7.1(d) as a result of a willful
breach by the Company of any of the terms and conditions of Section 5.7, then
the Company shall promptly pay to Purchaser in cash a fee equal to $2,500,000
(the "Termination Amount"), which amount shall be payable in same day federal
funds. The Termination Amount (provided the same shall be promptly paid) shall
be the exclusive remedy of Purchaser as a result of termination of this
Agreement pursuant to Section 7.1(c).
(ii) If this Agreement is terminated pursuant to Section 7.1(b),
provided that Purchaser has used commercially reasonable best efforts to
consummate the transactions contemplated hereunder, or 7.1(d), other than as a
result of a wilful breach by the Company of any of the terms and conditions of
Section 5.7, then the Company shall promptly pay to Purchaser in cash a portion
of the aggregate out-of-pocket, reasonable costs and expenses of Purchaser in
connection with this Agreement and the transactions contemplated hereby,
including, without limitation, commitment, appraisal and other fees relating to
the Financing and the reasonable fees and disbursements of accountants,
attorneys and investment bankers, whether retained by Purchaser or by any other
person, (collectively, "Expenses") as follows: (i) 100% of Expenses up to
$250,000; (ii) no reimbursement of Expenses greater than $250,000 and up to
$500,000; and (iii) 50% of Expenses greater than $500,000; provided, however,
that in no event shall the total reimbursement of aggregate Expenses exceed
$1,000,000. In such event, Purchaser shall reimburse the Company for 50% of the
filing fees incurred by the Company (if any) in connection with the filing of
the Preliminary Proxy Statement and Schedule 13E-3 pursuant to Section 5.1,
which amount shall be payable in cash.
(c) REASONABLE INDUCEMENT. The parties acknowledge and agree that the
provisions for payment of the Termination Amount are included herein in order to
reasonably induce Purchaser to enter into this Agreement and to reimburse
Purchaser for incurring the costs and expenses related to entering into this
Agreement, obtaining the Commitments and the Financing, and consummating the
transactions contemplated by this Agreement.
(d) COSTS OF ENFORCEMENT. Notwithstanding anything to the contrary set
forth in this Agreement, in the event Purchaser is required to file suit to seek
all or a portion of the Termination Amount or Expense reimbursement, it shall be
entitled, if substantially successful, to payment by the Company of all
reasonable additional expenses, including reasonable attorneys' fees and
expenses, which it incurs in enforcing its rights hereunder.
SECTION 7.3. AMENDMENT. This Agreement may be amended by the parties at
any time before or after any required approval of matters presented in
connection with the Merger by the stockholders of the Company; provided,
however, that after any such approval, there shall be made no amendment that by
law requires further approval by such stockholders without the further approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties.
SECTION 7.4. EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement, or (c)
subject to Section 7.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this Agreement
or otherwise shall not constitute a waiver of such rights.
17
<PAGE>
SECTION 7.5. PROCEDURE FOR TERMINATION, AMENDMENT, EXTENSION OR WAIVER. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3, an extension or waiver pursuant to Section
7.4, or any other approval or consent required or permitted to be given
pursuant to this Agreement shall, in order to be effective and in addition to
requirements of applicable law, require, in the case of Purchaser or the
Company, action by its Board of Directors, a duly authorized committee thereof
(including, in the case of the Company, the Special Committee), or the duly
authorized designee of such Board of Directors or such committee thereof,
provided that in the case of the Company, any such action contemplated by this
section shall be authorized by a majority of the disinterested directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties set forth in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time, including, without
limitation, Section 5.5, 5.7 and 7.2.
SECTION 8.2. FEES AND EXPENSES. Except as provided otherwise in this
Agreement, including, without limitation, in Section 7.2, whether or not the
Merger shall be consummated, each party hereto shall pay its own expenses
incident to preparing for, entering into and carrying out this Agreement and
the consummation of the transactions contemplated hereby.
SECTION 8.3. DEFINITIONS. For purposes of this Agreement:
(a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, provided that with respect to Purchaser, the definitions of
"Affiliate" and "Associate" shall not include any Non-Affiliated Stockholder;
and
(b) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
SECTION 8.4. NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given when delivered personally or sent by overnight courier (providing proof
of delivery) or telecopy to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
<TABLE>
<S> <C>
(a) if to Purchaser: SRC Holdings, Inc.
284 Newbury Street
Boston, Massachusetts 02115
Attn: President
Facsimile No.: (617) 425-5252
with a copy to: Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attn: Francis J. Feeney, Jr., Esq.
Facsimile No.: (617) 951-1295
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
(b) if to the Company: Back Bay Restaurant Group, Inc.
284 Newbury Street
Boston, Massachusetts 02115
Attn: Board of Directors
Facsimile No.: (617) 425-5252
with a copy to: Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attn: Alfred O. Rose, Esq.
Facsimile No.: (617) 951-7050
</TABLE>
SECTION 8.5. INTERPRETATION. When a reference is made in this Agreement
to a Section or Schedule, such reference shall be to a Section of, or a
Schedule to, this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation."
SECTION 8.6. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
SECTION 8.7. ENTIRE AGREEMENT; THIRD-PARTY BENEFICIARIES. This Agreement
and the other agreements referred to herein constitute the entire agreement,
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter of this Agreement. This
Agreement is not intended to confer upon any person, other than the parties
hereto and the third party beneficiaries referred to in the following sentence,
any rights or remedies. The parties hereto expressly intend the provisions of
Section 5.5 to confer a benefit upon and be enforceable by, as third party
beneficiaries of this Agreement, the third persons referred to in, or intended
to be benefited by, such provisions.
SECTION 8.8. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of The Commonwealth of Massachusetts,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof.
SECTION 8.9. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties, and any such assignment that is not
consented to shall be null and void, except that Purchaser may assign this
Agreement (i) to any wholly owned subsidiary of Purchaser or (ii) together with
all of the outstanding capital stock of Purchaser, to an entity organized under
the corporate or limited liability laws of a jurisdiction of one of the United
States of America, the ownership interests of which entity are substantially
identical to the ownership interests of Purchaser immediately prior to such
assignment and which entity specifically and expressly assumes by written
agreement the obligations of Purchaser under this Agreement; in either case so
long as such assignment shall not adversely affect the ability of Purchaser to
secure the Financing described in Section 3.2(d) and without Purchaser being
released from liability hereunder and such transfer or assignment will not
relieve Purchaser of its obligations under this Agreement or prejudice the
rights of stockholders to receive payment for Shares pursuant to the
transactions contemplated by this Agreement. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 8.10. ENFORCEMENT. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
(without requirement to post a bond) the terms and provisions of this
Agreement, this being in addition to any other remedy to which they are
entitled at law or in equity.
19
<PAGE>
SECTION 8.11. SEVERABILITY. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
SECTION 8.12. ATTORNEY'S FEES. If any legal proceeding is initiated by
any party hereto to enforce this Agreement or otherwise with respect to the
subject matter of this Agreement, the prevailing party or parties shall be
entitled to recover reasonable attorneys' fees incurred in connection with any
such proceedings.
IN WITNESS WHEREOF, the Company and Purchaser have caused this Agreement
to be executed as an agreement under seal by their respective officers
thereunto duly authorized, all as of the date first written above.
BACK BAY RESTAURANT GROUP, INC.
By: /s/ Irwin Chafetz
------------------------------------
Name: Irwin Chafetz
Title: Chairman, Special Committee
SRC HOLDINGS, INC.
By: /s/ Charles F. Sarkis
------------------------------------
Name: Charles F. Sarkis
Title: President
HWD: 373385-3
20
<PAGE>
Opinion of Schroder & Co
ANNEX II
December 2, 1998
The Board of Directors
Back Bay Restaurant Group, Inc.
284 Newbury Street
Boston, Massachusetts 02115
Members of the Board of Directors:
We understand that Back Bay Restaurant Group, Inc. (the "Company") is
contemplating a transaction pursuant to which SRC Holdings, Inc., a new
corporation formed by Charles F. Sarkis and certain members of Back Bay's
management (the "Buyer"), would acquire all of the outstanding shares (the
"Shares") of Common Stock of the Company (the "Transaction") not owned by
Charles F. Sarkis, The Westwood Group, Inc. or the members of management. The
Transaction will be effected through a merger (the "Merger") of the Buyer with
the Company pursuant to which, among other things, (i) the Buyer will be merged
with and into the Company with the Company being the surviving corporation,
(ii) each outstanding Share (other than shares owned by Charles F. Sarkis, The
Westwood Group, Inc., the members of management and shares held in treasury)
will be converted into the right to receive $10.25 in cash (the "Transaction
Consideration"), and (iii) concurrent with the consummation of the Merger, the
holder of each outstanding option to purchase Shares not previously exercised
would receive in cash, upon cancellation of such option, the positive
difference, if any, between $10.25 and the exercise price per share of such
option. The terms and conditions of the Transaction are more fully described in
the proposed Agreement and Plan of Merger (the "Merger Agreement").
You have requested that Schroder & Co. Inc. ("Schroders") render an opinion
(the "Opinion"), as investment bankers, as to the fairness, from a financial
point of view, of the Transaction Consideration to the stockholders of the
Company other than Charles F. Sarkis, The Westwood Group, Inc., and the members
of management (the "Transaction Consideration").
Schroders, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. We have, in the past, provided investment banking services to
the Company, including reviews of potential acquisition candidates, financing
alternatives, and the feasibility of a sale and of a management buyout.
In connection with the Opinion set forth herein, we have, among other things:
o reviewed a draft, dated November 24, 1998, of the Merger Agreement;
o reviewed drafts of the bank commitment letters received by the Buyer in
connection with the financing for the Transaction;
o reviewed the Company's Annual Reports on Form 10-K and 10-K/A filed with
the Securities and Exchange Commission for the fiscal years ended December
31, 1993 through 1997, including the audited consolidated financial
statements of the Company included therein;
o reviewed the Company's Quarterly Reports on Form 10-Q filed with the
Securities and Exchange Commission for the quarters ended March 29, 1998,
June 28, 1998 and September 27, 1998, including the unaudited consolidated
financial statements of the Company included therein;
<PAGE>
o reviewed the proxy statement for the 1997 Shareholders' Meeting filed with
the Securities and Exchange Commission;
o reviewed historical financial results of the Company by restaurant
prepared by management;
o reviewed forecasts and projections for the Company prepared and supplied
by management of the Company for the fiscal years ending December 31, 1998
through December 31, 2003;
o held discussions with the Company's management regarding the business,
operations and prospects of the Company and each of its restaurants;
o performed due diligence, including restaurant visits and meetings with
management;
o performed various valuation analyses, as we deemed appropriate, of the
Company using generally accepted analytical methodologies, including (i)
the application to the financial results of the Company of the public
trading multiples of companies which we deemed comparable to the Company;
(ii) the application to the financial results of the Company of the
multiples reflected in recent mergers and acquisitions for businesses
which we deemed comparable to the Company; and (iii) a discounted cash
flow analyses of the Company's operations.
o performed a leveraged buyout analysis;
o reviewed the historical trading prices and volumes of the Company's Common
Stock; and
o performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In rendering the Opinion, at your direction we have assumed and relied upon the
accuracy and completeness of all information supplied or otherwise made
available to us by the Company or obtained by us from other sources, and upon
the assurance of the Company's management that they are not aware of any
information or facts that would make the information provided to us incomplete
or misleading. We have not independently verified such information, undertaken
an independent appraisal of the assets or liabilities (contingent or otherwise)
of the Company, or been furnished with any such appraisals. With respect to
financial forecasts and projections of the Company referred to in clause (viii)
above, we have been advised by the Company, and we have assumed, without
independent investigation, that they have been reasonably prepared and reflect
the best currently available estimates and judgments of management of the
Company as to the expected future financial performance of the Company.
The Opinion is necessarily based upon financial, economic, market and other
conditions as they exist, and the information made available to us, as of the
date hereof. We disclaim any undertakings or obligations to advise any person
of any change in any fact or matter affecting the Opinion which may come or be
brought to our attention after the date of the Opinion.
In the ordinary course of our business, we may hold and actively trade debt or
equity securities of the Company (including the Shares) for our own account or
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
The Opinion does not constitute a recommendation as to any action the Board of
Directors of the Company or any stockholder of the Company should take in
connection with the Transaction or any aspect thereof. The Opinion relates
solely to the fairness from a financial point of view as of the date hereof of
the Transaction Consideration to the stockholders of the Company other than
Charles F. Sarkis, The Westwood Group, Inc., and the members of management. We
express no opinion herein as to the structure, terms or effect of any other
aspect of the Transaction or as to the merits of the underlying decision of the
Company to enter into the Transaction.
2
<PAGE>
This letter is for the information of the Board of Directors of the Company for
its use in evaluating the fairness from a financial point of view of the
Transaction Consideration to the stockholders of the Company other than Charles
F. Sarkis, The Westwood Group, Inc., and the members of management. It may not
be used for any other purpose or referred to without our prior written consent.
Based upon and subject to all of the foregoing, we are of the opinion, as
investment bankers, that, as of the date hereof, the Transaction Consideration
is fair, from a financial point of view, to the stockholders of the Company
other than Charles F. Sarkis, The Westwood Group, Inc., and the members of
management.
Very truly yours,
SCHRODER & CO., INC.
By: /s/ M. Bora Sila
--------------------------
M. Bora Sila
3
<PAGE>
ANNEX III
Excerpts from Delaware General Corporation
Law Relating to Dissenters' Rights
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to [sec]228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to [sec]251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the holders of the
surviving corporation as provided in subsection (f) of [sec]251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to [sec][sec]251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof,
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at
the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under [sec]253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares.
Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented
to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to [sec]228 or
253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of
stock of such constituent corporation, and shall include in such notice a
copy of this section provided that, if the notice is given on or after
the effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation shall, also notify such
stockholders of the effective date of the merger or consolidation. The
notice shall be sent by certified or registered mail, return receipt
requested, addressed to the stockholder at his address as it appears on
the records of the corporation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the
appraisal of such shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date
of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice need
only be sent to each stockholder who is entitled to appraisal rights and
who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or
of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided
that, if the notice is given on or after the effective date of the merger
or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date,
the record date shall be the close of business on the day next preceding
the day on which the notice is given.
2
<PAGE>
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise entitled
to appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound as the
Court may direct. Payment shall be so made to each stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced,
whether such surviving or resulting corporation be a corporation of this State
or of any state.
3
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date or the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
349, L. '96, eff. 7-1-96.)
4
<PAGE> 1
ANNEX IV
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
---------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
COMMISSION FILE NUMBER 0-19810
BACK BAY RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 284 NEWBURY STREET 04-2812651
(State or other BOSTON, MASSACHUSETTS 02115 (I.R.S. Employer
jurisdiction of (Address of principal executive Identification No.)
incorporation or offices, including Zip Code)
organization)
(617) 536-2800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
--------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
--------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of the registrant's Common Stock as
quoted on the National Association of Securities Dealers Automatic Quotation
System on March 2, 1998 was $10,481,288.
On March 2, 1998, there were 3,435,176 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III.
1
<PAGE> 2
BACK BAY RESTAURANT GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business 4
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Stock and Related 12
Stockholder Matters
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements With Accountants on Accounting 37
Disclosure and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and 38
Management
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
2
<PAGE> 3
CAUTIONARY STATEMENT
This Form 10-K Annual Report, including without limitation "Management's
Discussion and Analysis of Financial Condition and Results of Operation,"
contains various "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward-looking statements represent the
Company's expectations or belief concerning future events, including the
following: any statements regarding future sales and gross profit percentages,
any statements regarding the continuation of historical trends, and any
statements regarding the sufficiency of the Company's cash balances and cash
generated from operating and financing activities for the Company's future
liquidity and capital resource needs. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The Company cautions that
these statements are further qualified by important economic and competitive
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, risks of the
restaurant industry, including a highly competitive industry with many
well-established competitors with greater financial and other resources than
the Company, and the impact of changes in consumer tastes, local, regional and
national economic conditions, demographic trends, traffic patterns, employee
availability and cost increases. In addition, the Company's ability to expand
is dependent upon various factors, such as the availability of attractive sites
for new restaurants, the ability to negotiate suitable lease terms, the ability
to generate or borrow funds to develop new restaurants and obtain various
government permits and licenses and the recruitment and training of skilled
management and restaurant employees. Accordingly, such forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
3
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
Back Bay Restaurant Group, Inc. (the "Company") owns and operates full
service restaurants located in New England, New York, New Jersey and Washington,
D.C. As of March 1, 1998, the Company operated 34 restaurants, 14 of which
feature Northern Italian cuisine and are operated under the Papa.Razzi trade
name and 20 of which offer casual American dining. Since it opened its first
restaurant in 1964, the Company has followed an operating philosophy of
providing value to its customers by featuring generous portions of high quality
food, a level of service that is typical of higher priced restaurants, and
moderate prices.
The Company emphasizes freshness, quality, cleanliness, service and
distinctive decor in each of its restaurants. Menu items are prepared on the
restaurant premises from original recipes by skilled and experienced chefs. The
Company employs two executive chefs who are responsible for developing new menu
items, setting presentation standards and working with unit level chefs as
needed to improve performance and resolve problems. The Company's restaurants
use fresh ingredients almost exclusively and generally do not rely on frozen or
prepared foods as do some national chains. The Company employs quality control
consultants who conduct frequent unannounced inspections of its restaurants. The
Company believes that its adherence to the high-quality food standards has
promoted strong customer loyalty and has contributed to the longevity of its
restaurant concepts.
The Company recognizes that menus, and sometimes restaurant concepts, need
to be changed periodically to satisfy changing public tastes. The Company's core
restaurant concepts have proven adaptable to changing customer preferences and
the Company believes that its ability to modify and refresh its existing
restaurants by periodically revising their menus and concepts allows the Company
to maintain or increase its customer base within its market area.
The Company's restaurants provide specialty menus in addition to their
standard menus, such as weekend brunch menus. Both standard and specialty menus
are periodically updated by the executive chefs according to changing customer
preferences. The Company considers the extensive selection of items on its menus
to be an important factor in the appeal of its restaurants.
All of the Company's restaurants offer a full liquor selection and all have
a bar. The Company believes that, although such beverage service contributes to
the overall success of a restaurant, attention to the quality of the food and
service increases repeat customer business and minimizes volume fluctuations
associated with trends in bar popularity. All of the Company's restaurants are
open seven days a week and serve lunch and dinner.
4
<PAGE> 5
NORTHERN ITALIAN-STYLE MENU AND CONCEPT
The Papa.Razzi concept creates a distinctive upscale, casual dining
atmosphere. Each of the Papa.Razzi restaurants features earth colors, marble or
granite and light wood decor to create the ambiance of a European trattoria. The
Papa.Razzi menu is tailored to this dining atmosphere and offers a selected
array of Northern Italian cuisine featuring several types of freshly prepared
pasta with sauces. The menu also includes a variety of pizzas with creative
toppings which are flash cooked in brick ovens under extreme heat to create a
thin, light crust and preserve the flavor and consistency of the toppings.
The "secondi" or entree portion of the Papa.Razzi menu offers a selection
of grilled and sauteed veal, chicken, seafood and meat dishes.
The Papa.Razzi concept and menu allow the Company to take advantage of the
lower food costs and popularity of Italian food. The Papa.Razzi restaurants have
proven equally suitable for urban and shopping mall locations.
In 1997 the average lunch and dinner checks per customer at Papa.Razzi were
approximately $12.50 and $19.00, respectively. Sales of alcoholic beverages
accounted for 24.9% of Papa.Razzi revenues in 1997.
AMERICAN-STYLE MENUS, CONCEPTS AND TRADE NAMES
The Company's American-style restaurants offer substantially similar menus
which emphasize fresh, moderately-priced fare, including a variety of chicken
and seafood dishes, grilled steaks, gourmet hamburgers, Mexican dishes, pasta,
soups and salads.
While the Company's American-style restaurants are operated under several
trade names, each restaurant creates a warm, casual dining atmosphere attracting
a wide diversity of customers. The Company's strategy of using different
restaurant names enhances its ability to open a number of restaurants in a
strong restaurant market, such as the Back Bay section of Boston where the
Company operates four American-style restaurants. Although the menus of
American-style restaurants are substantially similar, menu items vary slightly
and different prices are charged, depending on the restaurant's location and
trade name.
In 1997, the average lunch and dinner checks per customer at the Company's
American-style restaurants were approximately $11.00 and $16.00, respectively.
Sales of alcoholic beverages accounted for 28.7% of American concept revenues in
1997.
5
<PAGE> 6
RESTAURANT LOCATIONS
The following table presents certain information regarding the restaurants
operated by the Company as of March 1, 1998.
<TABLE>
<CAPTION>
APPROX. RESTAURANT
DATE SEATING SIZE (APPROX. LEASE(1)
OPENED LOCATION NAME CAPACITY SQ. FT.) EXPIRATION
Northern Italian Concept
- - ------------------------
<S> <C> <C> <C> <C> <C>
Nov. 1989 Boston, MA Papa.Razzi 220 6,700 2010
June 1991 Chestnut Hill, MA Papa.Razzi 160 4,050 2014
Oct. 1991 Cambridge, MA Papa.Razzi 219 6,170 2007
June 1992 Concord, MA Papa.Razzi 220 14,000 2019
Aug. 1992 West Hartford, CT Papa.Razzi 239 5,000 2014
Nov. 1992 White Plains, NY Papa.Razzi 280 6,750 2022
Dec. 1992 Burlington, MA Papa.Razzi 350 12,600 2017
Mar. 1993 Wellesley, MA Papa.Razzi 320 9,300 2018
June 1993 Cranston, RI Papa.Razzi 225 6,000 2018
Oct. 1993 Short Hills, NJ Papa.Razzi 202 5,450 2009
May 1994 Hanover, MA Papa.Razzi 230 7,200 2023
June 1994 Westbury, NY Papa.Razzi 280 10,200 2016
Sept. 1994 Paramus, NJ Papa.Razzi 220 5,800 2005
Feb. 1995 Georgetown, D.C. Papa.Razzi 243 8,400 2015
American Concept
- - ----------------
June 1973 Chestnut Hill, MA Charley's Eating & Drinking Saloon 170 5,000 2014
Sept. 1975 Dedham, MA J.C. Hillary's 270 7,920 2011
Oct. 1975 Boston, MA J.C. Hillary's (2) 411 9,870 2006
Oct. 1978 Boston, MA The Famous Atlantic Fish Company(2) 169 4,557 2006
Dec. 1984 Boston, MA Joe's American Bar & Grill 251 6,317 2010
Nov. 1985 Waterford, CT Charley's Eating & Drinking Saloon 190 7,108 2000
Aug. 1986 Wayland, MA Hillary's 188 6,100 2015
Feb. 1987 Nashua, NH Charley's Eating & Drinking Saloon 208 6,597 2002
July 1988 Worcester, MA Charley's Eating & Drinking Saloon 205 6,370 2003
Sept. 1988 West Hartford, CT Joe's American Bar & Grill 230 8,000 2014
Sept. 1989 Woburn, MA Joe's American Bar & Grill(3) 275 8,100 2023
Jan. 1990 North Attleboro, MA Charley's Eating & Drinking Saloon 239 6,633 2005
July 1990 Trumbull, CT J.C. Hillary's 250 7,090 2005
Nov. 1990 Boston, MA Charley's Eating & Drinking Saloon 270 7,888 2011
Dec. 1992 Peabody, MA Joe's American Bar & Grill 268 6,016 2008
Dec. 1993 Hanover, MA Joe's American Bar & Grill 260 7,400 2023
Oct. 1994 Paramus, NJ Joe's American Bar & Grill 240 6,100 2005
Dec. 1994 Short Hills, NJ Joe's American Bar & Grill 195 5,300 2009
Sept.1996 Braintree, MA Joe's American Bar & Grill 310 9,200 2016
May 1997 Boston, MA Joe's American Bar & Grill 344 7,500 2016
</TABLE>
(1) Assumes that the Company exercises all of its extension options.
(2) Operated under a lease with an affiliate of Charles F. Sarkis, President
and Chief Executive Officer of the Company.
(3) Operated as J.C. Hillary's until November of 1997.
6
<PAGE> 7
GROWTH STRATEGY
The Company's current growth strategy is to expand its operations on a very
select basis in markets along the Boston-Washington, D.C. corridor. However, if
a suitable opportunity arose, the Company would also consider expansion into
other metropolitan markets. The Company does not franchise and currently has no
plans to develop a domestic franchise program. The ability of the Company to
open new restaurants and achieve its expansion goals is dependent upon, among
other factors, locating satisfactory sites, obtaining or generating adequate
capital, negotiating favorable leases or purchasing land or buildings on
acceptable terms, securing appropriate government permits and approvals,
obtaining liquor licenses and recruiting and training additional qualified
restaurant management personnel.
SITE SELECTION, DESIGN AND CONSTRUCTION
The Company believes that location is a key factor in a restaurant's
ability to operate a profitable lunch and dinner business and considers several
demographic factors in selecting sites, including the size of the middle to
upper income residential population, the proximity of retail and office
facilities, traffic patterns and the visibility of the location. Senior
management inspects and approves each restaurant site. The Company generally
designs its restaurants utilizing outside architects under the supervision of
its in-house architect.
MANAGEMENT TRAINING AND RESTAURANT OPERATIONS
The Company invests a substantial amount of time in training and testing
its restaurant personnel. Management trainees must complete a ten-week on-site
training program during which they are familiarized with kitchen, bar and dining
room operations of the restaurant and are instructed in areas such as food
quality and preparation, customer service, alcoholic beverage service, liquor
liability avoidance and employee relations. Periodic seminars are conducted by
Company personnel and outside experts on a broad range of topics to provide
additional training for its managers. The training programs are designed to
ensure that uniform standards of quality and service are followed in all of the
restaurants and are further designed so that the managers can be transferred
from one American concept restaurant to another, or one Papa.Razzi restaurant to
another, with minimal disruption.
The Company believes that an important element of its success lies in
employee adherence to the Company's standard of quality. The Company encourages
the promotion of its qualified restaurant employees to managerial positions and
maintains employee morale by rewarding individual achievement through increased
salaries and bonuses. The Company has an incentive program under which general
managers, chefs and regional managers may receive bonuses and stock option
grants based on the contribution to the Company's earnings by the restaurants
for which they are responsible.
7
<PAGE> 8
The Company employs regional managers who are each responsible for
supervising an average of seven restaurants. The day-to-day operations of each
restaurant, including personnel management, food procurement, inventory control
and guest relations, are the responsibility of a general manager who generally
reports to a regional manager. The management staff of a typical Company
restaurant consists of one general manager, two assistant managers, one chef and
one sous chef. Each restaurant also employs approximately 80 hourly employees,
many of whom work part-time.
Centralized financial and management controls, which are fundamental in
controlling restaurant operating margins, are maintained through the use of an
automated data processing system and prescribed reporting procedures. Each
restaurant has a point of sale system that captures restaurant operating
information. The restaurants forward daily sales reports, vendor invoices,
payroll information and other data to the Company's corporate headquarters.
Company management utilizes this data to monitor quality, cost and sales mix and
to prepare periodic financial and management reports. This system is also used
for budget analyses, planning, and determining menu composition. Restaurant
managers perform daily inventories on key products and weekly inventories on all
products. Cash is controlled through frequent deposits of sales proceeds in
local operating accounts, the balances of which are wire transferred regularly
to the Company's principal account.
PURCHASING AND SUPPLIES
The Company centrally controls the purchasing criteria for its restaurants,
including criteria related to acceptable suppliers and product quality.
Management develops product specifications and continually monitors vendors to
ensure that food suppliers comply with the Company's quality standards. The
Company's restaurants purchase certain perishable items, beverages and other
branded items directly from company-specified suppliers. The Company is not
dependent on any single supplier and believes that adequate alternative
suppliers are available.
EMPLOYEES
At December 28, 1997, the Company employed approximately 2,700 persons,
approximately 20 of whom were corporate personnel and approximately 220 of whom
were associated with the management or supervision of the restaurants. The
Company considers relations with its employees to be good.
8
<PAGE> 9
MARKETING
Management believes that the Company's commitment to customer service and
value is the most effective approach to attracting customers. Accordingly, the
Company has historically focused its resources on providing its customers with
superior service and value, and has relied primarily on word of mouth to attract
new and repeat customers. Management believes that its strategy of locating
multiple restaurants under the same name within a defined geographic area has
enabled newer restaurants to benefit from the name recognition and reputation
for quality developed by existing restaurants. The Company employs little print
or direct mail advertising, and conducts some radio advertising and local
restaurant promotions. During 1997, the Company's expenditures for advertising
were less than one percent of its revenues.
In September 1994, the Company instituted its Preferred Guest Program.
Under the program, preferred guests receive a $20 dining certificate good at any
of the Company's restaurants each time $200 in food and beverage purchases are
reflected in the customer's account. The Company records the liability
associated with dining certificates as they vest. As of March 1, 1998, the
Company had approximately 20,000 members in its Preferred Guest Program.
COMPETITION
The restaurant business is highly competitive and is affected by, among
other things, changes in eating habits and preferences, local, regional and
national economic conditions, population trends and traffic patterns. The
Company competes within each market with locally-owned restaurants as well as
with national and regional restaurant chains, some of which operate more
restaurants and have greater financial resources and longer operating histories
than the Company. The principal bases of competition in the industry are the
quality and price of the food products served. Restaurant location, quality and
speed of service, name identification and attractiveness of facilities are also
important. The acquisition of sites is highly competitive as well, with the
Company often competing with other restaurant companies and retail businesses
for suitable sites for the development of new restaurants.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's restaurants is subject to licensing by
governmental authorities and a variety of regulatory provisions relating to
zoning of restaurant sites, alcoholic beverage control, sanitation, health and
safety and the environment. Difficulties or failures in obtaining required
licenses or approvals may delay or prevent the Company from opening new
restaurants.
9
<PAGE> 10
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses 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, and storage and dispensing
of alcoholic beverages. The failure to receive or retain, or a delay in
obtaining, a liquor license in a particular location could adversely affect the
Company's ability to obtain such a license elsewhere. The Company has not
encountered any material problems relating to alcoholic beverage licenses to
date.
Various federal and state labor laws govern the Company's relationship with
its employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases in
minimum wages, paid leaves of absence, mandated health benefits or increased tax
payment requirements for employees who receive gratuities could have a material
adverse effect on the Company's results of operations.
SERVICE MARKS
The Company regards its service marks as having significant value and as
being an important factor in the marketing of its services. The Company has
registered as service marks the words Papa.Razzi, Papa.Razzi's Cucina, Joe's
American Bar & Grill, J.C. Hillary's, Hillary's, Charley's Eating & Drinking
Saloon, Atlantic Fish Co., Rayz Riverside Cafe, and Abe & Louie's with the
United States Patent and Trademark Office. The Company's policy is to pursue
registration of its marks and to strenuously oppose infringement of its marks.
The Company is aware of similar names being used in some areas. To the
extent that these names were in use prior to the Company's registration of the
name as a service mark, the Company may be prevented from operating under the
name in the area of such prior use. The Company does not expect any such prior
use of similar names to have a material effect on its operations.
SEASONALITY
A large proportion of the Company's restaurants are located in mall
locations or other retail areas. Consequently, the Company's sales are generally
highest during the holiday shopping season in the fourth quarter of each year
and lowest during the first quarter of each year.
10
<PAGE> 11
ITEM 2. PROPERTIES
All of the Company's restaurant locations are held under long term leases.
See "Business - Restaurant Locations" and "- Site Selection, Design and
Construction." The Company's leases generally provide for a fixed base rent plus
additional rent based on the level of sales generated by the restaurant. Most of
the Company's leases require the Company to pay all or a portion of the costs of
owning and operating the premises, including the cost of insurance, taxes and
maintenance.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions, such as slip
and fall and other general liability claims, that arise in the ordinary course
of its business. The Company does not believe that any of these claims will have
a material adverse effect on its business or results from operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth quarter
of fiscal year 1997.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter on the NASDAQ
National Market System under the symbol PAPA. As of March 3, 1998, there were
approximately 58 holders of record of the Company's Common Stock. The Company
believes there are substantially more beneficial owners of its Common Stock than
there are holders of record.
The Company has not paid dividends since becoming a public company. The
Company presently intends to retain all earnings for use in the operation and
expansion of its business and has no present intention to pay cash dividends.
The quarterly range of high and low sales prices for the Common Stock as
reported on NASDAQ for fiscal years 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1st Fiscal Quarter $5.00 $3.50 $4.00 $2.63
2nd Fiscal Quarter 5.50 3.00 5.50 2.88
3rd Fiscal Quarter 4.75 3.25 8.00 4.25
4th Fiscal Quarter 4.13 2.63 8.50 5.50
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain historical financial information
derived from the Consolidated Financial Statements of the Company. The Selected
Consolidated Financial Information (except for Restaurant Operating Data) for
the fiscal years ended December 26, 1993, December 25, 1994, December 31, 1995,
December 29, 1996 and December 28, 1997 is derived from the audited Consolidated
Financial Statements. This information should be read in conjunction with and is
qualified by reference to the Consolidated Financial Statements of the Company
and the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this Annual Report.
12
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED
DEC. 26, DEC. 25, DEC. 31, DEC. 29, DEC. 28,
1993 1994 1995 1996 1997
------- ------- -------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $74,172 $85,831 $ 93,496 $87,753 $94,904
Costs and expenses:
Cost of sales 20,286 23,230 25,980 24,785 26,401
Payroll and related costs 22,301 27,633 30,102 28,327 30,221
Operating expenses 14,567 18,948 21,440 20,398 22,121
Depreciation and amortization 3,876 4,541 4,891 3,880 4,197
------- ------- -------- ------- -------
Total restaurant operating expenses 61,030 74,352 82,413 77,390 82,940
------- ------- -------- ------- -------
Income from restaurant operations 13,142 11,479 11,083 10,363 11,964
General and administrative expenses 8,532 10,517 15,129 8,874 8,669
------- ------- -------- ------- -------
Operating income/(loss) 4,610 962 (4,046) 1,489 3,295
Interest expense 104 118 795 748 548
Interest income (49) (4) -- -- --
Gain on sale of property (1,202) -- -- -- --
------- ------- -------- ------- -------
Income/(loss) from continuing
operations before income taxes 5,757 848 (4,841) 741 2,747
Income taxes 2,303 347 (2,031) 274 1,016
------- ------- -------- ------- -------
Income/(loss) from continuing 3,454 501 (2,810) 467 1,731
operations
Discontinued operations:
Income from operations of discontinued
division (net of income taxes) 83 -- -- -- --
Estimated loss on disposal of discontinued
division (net of income taxes) (75) -- -- -- --
------- ------- -------- ------- -------
Net income/(loss) $ 3,462 $ 501 $ (2,810) $ 467 $ 1,731
======= ======= ======== ======= =======
Income/(loss) from continuing operations per
share Basic/Diluted $ 0.95 $ 0.14 $ (0.82) $ 0.14 $ 0.50
======= ======= ======== ======= =======
Net income/(loss) per share Basic/Diluted $ 0.95 $ 0.14 $ (0.82) $ 0.14 $ 0.50
======= ======= ======== ======= =======
Average common shares and equivalents
Basic 3,637 3,600 3,430 3,434 3,432
Diluted 3,654 3,623 3,431 3,436 3,474
RESTAURANT OPERATING DATA:
Average sales per restaurant open for full period(1) $ 2,674 $ 2,570 $ 2,595 $ 2,613 $ 2,744
Restaurants open for full period 25 30 33 33 32
Percentage change in comparable restaurant sales(1) 0.6% (3.5%) (2.2%) (0.8%) 0.04%
Total restaurants open at end of period 31 37 33 34 34
BALANCE SHEET DATA (AT YEAR END):
Total assets $38,884 $47,314 $ 46,100 $43,911 $43,072
Long term debt -- 7,600 7,525 6,025 4,000
Current maturities of long term debt 683 542 2,500 1,500 --
Total stockholders' equity 28,831 27,537 24,727 25,202 27,012
</TABLE>
(1) Does not include the 53rd week in the fiscal year ended December 31, 1995.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements which are included herein.
RESULTS OF OPERATIONS
The following table sets forth the components of income from operations as
a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 27.8 28.2 27.8
Payroll and related costs 32.2 32.3 31.9
Operating expenses 22.9 23.3 23.3
Depreciation and amortization 5.2 4.4 4.4
----- ----- -----
Total restaurant operating expenses 88.1 88.2 87.4
----- ----- -----
Income from restaurant operations 11.9 11.8 12.6
General and administrative expenses 16.2 10.1 9.1
----- ----- -----
Operating income/(loss) (4.3) 1.7 3.5
Interest expense 0.9 0.9 0.6
----- ----- -----
Income/(loss) before income taxes (5.2) 0.8 2.9
Income taxes (2.2) 0.3 1.1
----- ----- -----
Net income/(loss) (3.0) 0.5 1.8
===== ===== =====
</TABLE>
14
<PAGE> 15
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Sales
Sales increased by $7,151,000, or 8.2%, to $94,904,000 in 1997 from
$87,753,000 in 1996. Same store sales increased $31,000, or 0.04%, in the 52
weeks in 1997 as compared to the 52 weeks in 1996.
The overall increase in sales in 1997 as compared with 1996 was primarily
attributable to sales from two new stores opened by the Company in September,
1996 and May, 1997, which contributed $8,057,000. This amount was partially
offset by one store which closed in June 1997. The decrease in sales from the
closed store was approximately $909,000.
The Company operated 34 restaurants at December 28, 1997, and 34
restaurants at December 29, 1996. Total restaurant customer count for 1997
increased 4.6% to 5,307,000 from 5,076,000 in 1996.
Cost of Sales
Cost of sales as a percentage of sales decreased to 27.8% in 1997 from
28.2% in 1996. This decrease was attributable to a 0.3% decrease in food cost as
a percentage of food revenue (29.6% in 1997 versus 29.9% in 1996), and a 0.7%
decrease in beverage cost as a percentage of beverage revenue (23.0% in 1997
versus 23.7% in 1996). The food cost decreases were due principally to price
decreases in olive oil and pasta. The beverage cost decreases were due
principally to modest sales price increases in selected wines.
Payroll and Related Costs
Payroll and related costs as a percentage of sales decreased to 31.9% in
1997 from 32.3% in 1996. Payroll and related costs increased by $1,894,000 in
1997 to $30,221,000 from $28,327,000 in 1996. The increase in dollars is
primarily attributable to the payroll for the two new restaurants referred to
above.
Operating Expenses
Operating expenses increased by $1,723,000 in 1997 to $22,121,000 from
$20,398,000 in 1996. The increase in operating expenses is primarily
attributable to the two new restaurants referred to above. Operating expenses as
a percentage of sales remained constant from year to year at 23.3%.
15
<PAGE> 16
Depreciation and Amortization
Depreciation and amortization increased by $317,000 in 1997 to $4,197,000
from $3,880,000 in 1996. The increase in depreciation and amortization is
principally attributable to the two new restaurants referred to above. Included
in the 1997 and 1996 amortization is the amortization of pre-opening costs of
new restaurants opened during the prior 12-month period. The Company amortizes
such pre-opening costs over the 12-month period immediately following an opening
or conversion.
General and Administrative Expenses
General and administrative expenses decreased by $205,000 in 1997 to
$8,669,000 from $8,874,000 in 1996. The decrease is primarily attributable to a
decrease in insurance expense which was partially offset by increases in
salaries and wages and marketing expenses.
Interest Expense
Interest expense decreased by $200,000 in 1997 to $548,000 from $748,000 in
1996. This decrease was attributable to the Company's reduced borrowings in 1997
as compared to 1996.
Income Taxes
Income taxes increased by $742,000 in 1997 to an expense of $1,016,000 from
an expense of $274,000 in 1996. The increased expense in 1997 reflects the
pre-tax income of $2,747,000 in 1997 as compared to the pre-tax income of
$741,000 in 1996. The estimated effective tax rate was 37% for both periods.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Sales
Sales decreased by $5,743,000, or 6.1%, to $87,753,000 in 1996 from
$93,496,000 in 1995. The decrease in sales was attributable in part to
$1,821,000 of sales in the additional week in 1995 as compared to 1996. Same
store sales decreased $652,000, or 0.8%, in the 52 weeks in 1996 as compared to
the 52 weeks in 1995.
The overall decrease in sales was from five restaurants that closed in 1995
which contributed $5,018,000 in 1995. This decrease in closed store sales was
partially offset by an increase in new store sales and miscellaneous other
sales, which contributed $1,748,000 in 1996.
The Company operated 34 restaurants at December 29, 1996, up from 33
restaurants at December 31, 1995. Total restaurant customer count for 1996
decreased 11.5% to 5,076,000 from 5,733,000 in 1995, of which 300,000 is
attributable to closed locations.
16
<PAGE> 17
Cost of Sales
Cost of sales as a percentage of sales increased to 28.2% in 1996 from
27.8% in 1995. This increase was attributable to a 0.5% increase in food cost as
a percentage of food revenue (29.9% in 1996 versus 29.4% in 1995). The food cost
increases were due principally to price increases in some food items. Beverage
cost as a percentage of beverage revenue was 23.7% for both the 1996 and 1995
years.
Payroll and Related Costs
Payroll and related costs as a percentage of sales increased to 32.3% in
1996 from 32.2% in 1995. The payroll and related costs decreased by $1,775,000
in 1996 to $28,327,000 from $30,102,000 in 1995. This decrease is the result of
the Company closing four under performing restaurants in 1995, as well as having
one less week of payroll in 1996 as compared to 1995.
Operating Expenses
Operating expenses decreased by $1,042,000 in 1996 to $20,398,000 from
$21,440,000 in 1995. The decrease in operating expenses is attributable to the
Company closing four under performing restaurants in 1995. The decrease in
operating expenses from closed stores was partially offset by increases in
various general operating expenses.
Depreciation and Amortization
Depreciation and amortization decreased by $1,011,000 in 1996 to $3,880,000
from $4,891,000 in 1995. The decrease is principally attributable to the closing
of four under performing restaurants in 1995 and a lower amount of pre-opening
cost amortization in 1996 as compared to 1995. Included in the 1996 amortization
is the amortization of pre-opening costs of new restaurants opened during the
prior 12-month period. The Company amortizes such pre-opening costs over the
12-month period immediately following an opening or conversion.
General and Administrative Expenses
General and administrative expenses decreased by $6,255,000 in 1996 to
$8,874,000 from $15,129,000 in 1995. Included in the 1995 general and
administrative expenses are approximately $5,441,000 of charges that the Company
took in 1995. Included in the $5,441,000 is approximately $4,449,000 of charges
associated with the closing of three poorly performing restaurants at the end of
1995. The remaining balance consists principally of charges associated with
capitalized costs from restaurant projects that were abandoned and reserves the
Company provided for to close an additional unit. The adjusted general and
administrative decrease of $814,000 in 1996 as compared to 1995 is primarily
attributable to decreases in insurance, advertising and payroll expense.
17
<PAGE> 18
Interest Expense
Interest expense decreased by $47,000 in 1996 to $748,000 from $795,000 in
1995. This decrease was attributable to the Company having less borrowings in
1996 as compared to 1995.
Income Taxes
Income taxes increased by $2,305,000 in 1996 to a tax expense of $274,000
from a tax benefit of $2,031,000. The increase in income taxes reflects the
pre-tax earnings of $741,000 in 1996 as compared to the pre-tax loss of
$4,841,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company, similar to many restaurant businesses, requires little or no
working capital because it does not have significant inventory or trade
receivables and receives several weeks of trade credit in purchasing food and
supplies. At December 28, 1997, the Company's cash position was $1,915,000 and
the Company had a net working capital deficit of $7,736,000. At December 29,
1996, the Company's cash position was $1,344,000 and the Company had a net
working capital deficit of $8,887,000.
The Company requires capital primarily for the development and construction
of new restaurants and the conversion of existing restaurants. In recent years,
the Company's primary sources of capital have been cash flow from its
operations, borrowings and landlord contributions to restaurant construction
costs. The Company intends to be very selective in its approval of sites for new
units and will be limiting the number of restaurant openings in 1998. The
Company expects to fund any capital expenditures for 1998 from internally
generated cash. The Company believes that cash flow from operations and credit
available under the revolving loan agreement will be sufficient to meet future
needs.
On March 24, 1998, the Company reached an agreement with BankBoston, NA to
amend its loan agreement. Under the amended loan agreement, the Company can
borrow up to $20,000,000 on a three year revolver that thereafter converts to a
4 year term note.
YEAR 2000 DISCLOSURE
Certain of the Company's internal computer systems are not Year 2000 ready
(i.e., such systems use only two digits to represent the year in date data
fields and, consequently, may not accurately distinguish between the 20th and
21st centuries or may not function properly at the turn of the century). The
Company has been taking actions intended to either correct such systems or
replace them with Year 2000 ready systems. The Company expects to implement
successfully the systems and programming changes necessary to address Year 2000
issues and does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Accountants 20
Consolidated Balance Sheets as of December 29, 1996 and
December 28, 1997 21
Consolidated Statements of Operations for the Years
Ended December 31, 1995, December 29, 1996 and
December 28, 1997 22
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995,
December 29, 1996 and December 28, 1997 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, December 29, 1996 and December 28, 1997 24
Notes to Consolidated Financial Statements 25
19
<PAGE> 20
COOPERS Coopers & Lybrand L.L.P.
&LYBRAND
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Back Bay Restaurant Group, Inc. Board of Directors and Stockholders:
We have audited the accompanying consolidated balance sheets of the Back Bay
Restaurant Group, Inc. and subsidiaries as of December 29, 1996 and December
28, 1997, and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three fiscal years in the period ended
December 28, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance as to whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Back Bay Restaurant Group, Inc. and subsidiaries as of December 29, 1996 and
December 28, 1997, and the consolidated results of its operations and cash
flows for each of the three fiscal years in the period ended December 28, 1997
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
Boston, Massachusetts
February 16, 1998, except
as to information presented
in Note 4, for which the date
is March 24, 1998.
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
20
<PAGE> 21
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
DECEMBER 29, 1996 DECEMBER 28, 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,344 $ 1,915
Accounts receivable 252 219
Inventories 687 783
Prepaid expenses and other current assets 904 874
Deferred income taxes 169 259
------- -------
Total current assets 3,356 4,050
------- -------
Buildings and improvements 4,303 4,303
Furniture, fixtures and equipment 16,124 18,119
Leasehold improvements 31,965 32,339
Lease rights 2,826 2,826
------- -------
55,218 57,587
Less: accumulated depreciation and amortization 23,436 27,182
------- -------
Net property, plant and equipment 31,782 30,405
------- -------
Other assets:
Goodwill, net of accumulated amortization 5,052 4,884
Trade names and trademarks, net of
accumulated amortization 1,286 1,252
Deferred income taxes 1,698 1,698
Other assets, net of accumulated amortization 737 783
------- -------
Total other assets 8,773 8,617
------- -------
Total assets $43,911 $43,072
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,709 $ 3,333
Accrued expenses 7,750 8,058
Current maturities of long-term debt 1,500 --
Income taxes payable 284 395
------- -------
Total current liabilities 12,243 11,786
------- -------
Deferred rent 441 216
Other long term liability -- 58
Long term debt 6,025 4,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized
20,000 shares; 3,434 shares issued and
outstanding in 1996 and 3,431 in 1997 36 36
Additional paid-in capital 23,039 23,118
Retained earnings 3,926 5,657
------- -------
27,001 28,811
Less treasury stock, 208 shares at cost
in 1996 and 1997 1,799 1,799
------- -------
Total stockholders' equity 25,202 27,012
------- -------
Total liabilities and stockholders' equity $43,911 $43,072
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
FIFTY-THREE FIFTY-TWO FIFTY-TWO
WEEKS ENDED WEEKS ENDED WEEKS ENDED
DECEMBER 31, 1995 DECEMBER 29, 1996 DECEMBER 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Sales $93,496 $87,753 $94,904
Costs and expenses:
Cost of sales 25,980 24,785 26,401
Payroll and related costs 30,102 28,327 30,221
Operating expenses 21,440 20,398 22,121
Depreciation and amortization 4,891 3,880 4,197
------- ------- -------
Total restaurant operating expenses 82,413 77,390 82,940
------- ------- -------
Income from restaurant operations 11,083 10,363 11,964
General and administrative expenses 15,129 8,874 8,669
------- ------- -------
Operating income/(loss) (4,046) 1,489 3,295
Interest expense 795 748 548
------- ------- -------
Income/(loss) before income taxes (4,841) 741 2,747
Income taxes (2,031) 274 1,016
------- ------- -------
Net income/(loss) $(2,810) $ 467 $ 1,731
======= ------- =======
Net income/(loss) per share Basic/Diluted $ (0.82) $ 0.14 $ 0.50
======= ======= =======
Average common shares and equivalents
Basic 3,430 3,434 3,432
Diluted 3,431 3,436 3,474
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 25, 1994 $ 36 $23,031 $ 6,269 $ (1,799) $27,537
Net loss -- -- (2,810) -- (2,810)
------- ------- ------- -------- -------
Balance, December 31, 1995 36 23,031 3,459 (1,799) 24,727
Net income -- -- 467 -- 467
Restricted stock compensation -- 8 -- -- 8
------- ------- ------- -------- -------
Balance, December 29, 1996 36 23,039 3,926 (1,799) 25,202
Net income -- -- 1,731 -- 1,731
Exercise of stock option -- 7 -- -- 7
Restricted stock compensation -- (8) -- -- (8)
Deferred stock compensation -- 80 -- -- 80
------- ------- ------- -------- -------
Balance, December 28, 1997 $ 36 $23,118 $ 5,657 $ (1,799) $27,012
======= ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
BACK BAY RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 29, DECEMBER 28,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $(2,810) $ 467 $ 1,731
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,916 3,966 4,293
Loss on disposal of fixed assets 2,919 -- --
Loss on equity investment 44 473 --
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable (135) 103 33
(Increase)/decrease in inventories 21 2 (96)
(Increase)/decrease in prepaid expenses and other
current assets 259 (371) (265)
Decrease in prepaid income taxes 204 13 --
(Increase)/decrease in other assets 52 22 (87)
(Increase)/decrease in accounts payable and accrued expense 1,664 (404) 1,059
Increase in income taxes payable -- 284 111
Decrease in deferred rent (44) (44) (225)
Increase in other long term liability -- -- 58
(Increase)/decrease in deferred taxes (2,125) 282 (90)
------- ------- -------
Net cash provided by operating activities 4,965 4,793 6,522
------- ------- -------
Cash flows from investing activities:
Investment in partnership (360) (157) --
Capital expenditures (3,304) (3,843) (3,887)
Acquisition of other assets -- (275) --
Proceeds from sale of fixed assets 5 -- 1,382
------- ------- -------
Net cash used for investing activities (3,659) (4,275) (2,505)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt 1,925 300 --
Principal payments of debt (42) (2,800) (3,525)
Cancellation of stock option -- -- (8)
Cancellation of deferred stock compensation -- -- 80
Exercise of stock option -- -- 7
------- ------- -------
Net cash provided by (used for) financing activities 1,883 (2,500) (3,446)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 3,189 (1,982) 571
Cash and cash equivalents at beginning of period 137 3,326 1,344
------- ------- -------
Cash and cash equivalents at end of period $ 3,326 $ 1,344 $ 1,915
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 766 $ 823 $ 584
======= ======= =======
Income taxes paid $ 761 $ 315 $ 1,032
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Back Bay Restaurant Group, Inc. (the "Company") (formerly Westwood
Restaurant Group, Inc., a Massachusetts corporation) was reincorporated in
Delaware in 1991. The Company was a wholly-owned subsidiary of The Westwood
Group, Inc. ("WGI") prior to the Company's initial public offering effective on
March 13, 1992.
NATURE OF OPERATIONS
The Company owns and operates full service restaurants located in New
England, New York, New Jersey and Washington, D.C. As of March 1, 1998, the
Company operated 34 restaurants, 14 of which feature Northern Italian cuisine
and are operated under the Papa.Razzi trade name and 20 of which offer casual
American dining.
FISCAL YEAR
The Company's fiscal year ends on the Sunday closest to the end of December
and includes 53 weeks in 1995, 52 weeks in 1996 and 52 weeks in 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Back Bay
Restaurant Group, Inc. and its wholly owned subsidiaries. All inter-company
balances and transactions have been eliminated. Investments in non-consolidated
companies which are at least 20% owned are carried on the equity method.
PERVASIVENESS 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
The Company considers all certificates of deposit and highly liquid
marketable securities with maturities of three months or less at the date of
purchase to be cash equivalents.
INVENTORIES
Inventories, principally food supplies, are stated at cost, as determined
by the first-in, first-out method.
25
<PAGE> 26
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PRE-OPENING COSTS
Pre-opening costs represent staff training costs, rent and other costs
incurred exclusively prior to and specifically for a restaurant opening. These
costs are deferred and amortized over a 12-month period following the month of
the opening.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated
using the straight-line method over the following estimated useful lives:
Asset Classification Estimated Useful Life
Buildings and improvements.............. 30 Years
Furniture, fixtures and equipment....... 5-10 Years
Leasehold improvements are amortized over the lesser of the assets'
estimated useful lives or the lease terms, principally fifteen to twenty years.
Lease rights are amortized over the lives of the related leases.
Gains or losses are recognized upon the disposal of property, plant and
equipment, and the related accumulated depreciation and amortization are removed
from the accounts. Fully depreciated assets and the related accumulated
depreciation are removed from the accounts upon retirement. Maintenance, repairs
and betterments that do not enhance the value of or increase the life of assets
are charged to operations as incurred.
Interest is capitalized in connection with the construction of new
locations. The capitalized interest is recorded as part of the asset to which it
relates and is amortized over the asset's estimated useful life. Capitalized
interest amounted to $23,000 in 1995, $23,000 in 1996 and $0 in 1997.
INTANGIBLE ASSETS
Intangible assets, including goodwill, trade names and trademarks are
stated at cost and are amortized over 40 years on a straight-line basis.
Accumulated amortization was approximately $2,079,000 and $2,291,000 as of
December 29, 1996 and December 28, 1997, respectively.
IMPAIRMENT OF LONG LIVED ASSETS
Periodically, management assesses, based on undiscounted cash flows, if
there has been a permanent impairment in the carrying value of its long lived
assets and, if so, the amount of any such impairment by comparing anticipated
discounted future operating income from acquired businesses with the carrying
value of the related long lived assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other economic factors.
26
<PAGE> 27
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997,
including interim periods. SFAS 130 requires the presentation of comprehensive
income and its components. Comprehensive income presents a measure of all
changes in equity that result from recognized transactions and other economic
events of the period other than transactions with owners. SFAS 130 requires
restatement of all prior-period statements presented after the effective date.
The Company will adopt SFAS 130 in its fiscal year ended December 31, 1998 and
has not yet determined the impact of such adoption.
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information" which is effective for fiscal
years beginning after December 15, 1997. The interim reporting disclosures are
not required in the first year of adoption. SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS 131 changes current practice
under SFAS 14 by establishing a new framework on which to base segment
reporting. The "management" approach expands the required disclosures for each
segment. The Company will adopt SFAS 131 in its fiscal year ended December 31,
1998 and has not yet determined the impact of such adoption.
27
<PAGE> 28
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
In the first quarter of 1993, the Company retroactively adopted Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109") which
requires a change from an income statement to a balance sheet approach for
accounting for income taxes. Under FAS 109, deferred tax assets and liabilities
are recognizable based on temporary differences between the financial statement
and tax basis of assets and liabilities using current statutory tax rates.
NET INCOME PER COMMON SHARE
In 1997 the Company adopted FAS 128 where basic net income (loss) per
common share is calculated by dividing the net income (loss) for the period by
the weighted average number of common shares outstanding for the period. Diluted
earnings per common share is calculated by considering the impact of common
stock equivalents (outstanding stock options) as if they were converted into
common stock at the beginning of the period. Diluted earnings per share amounts
are not applicable for loss periods.
PREFERRED GUEST PROGRAM
The Company provides a liability for gift certificates issued to
participants in its preferred guest program. The liability associated with these
certificates is recorded as they vest.
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS (in thousands)
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
December 29, 1996 December 28, 1997
----------------- -----------------
<S> <C> <C>
Preopening costs $147 $73
Prepaid insurance 57 25
Prepaid rent 552 548
Other 148 228
---- ----
Total $904 $874
==== ====
</TABLE>
28
<PAGE> 29
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACCRUED EXPENSES (in thousands)
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 29, 1996 December 28, 1997
----------------- -----------------
<S> <C> <C>
Payroll and payroll taxes $1,701 $1,889
Rent expense 1,917 2,275
Reserve for store closings 1,245 771
Insurance 1,379 1,204
Other 1,508 1,919
------ ------
Total accrued expenses $7,750 $8,058
====== ======
</TABLE>
4. LONG-TERM DEBT (in thousands)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 29, 1996 December 28, 1997
----------------- -----------------
<S> <C> <C>
Revolving Credit and Term Loan Agreement base
rate or, at the option of the Company, LIBOR
plus 1.0% (9.0 % at December 28, 1997) 7,525 4,000
Less: current maturities 1,500 --
------ ------
Total long-term debt $6,025 $4,000
====== ======
</TABLE>
29
<PAGE> 30
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has a revolving credit and term loan agreement (the "Loan
Agreement") with BankBoston (the "Bank"). At December 28, 1997, the Company had
an outstanding balance of $4,000,000 under the Loan Agreement. On March 24,
1998, the Company reached an agreement with the Bank to amend its Loan
Agreement. Under the amended Loan Agreement, the Company can borrow up to
$20,000,000 on a three year revolver that converts to a 4 year term note. The
pricing of the loan is on a sliding scale based on a ratio of senior debt to
EBITDA. The Company's obligation under the Loan Agreement is collateralized by
certain property, plant and equipment and intangible assets. The Loan
Agreement contains restrictions relating to future indebtedness, contingent
liabilities, encumbrances, the merger, acquisition or sale of assets, additional
stock issuance, equity distributions, cash dividends, and redemptions, capital
expenditures, investments, ERISA and transactions with affiliates. The Loan
Agreement also requires the maintenance of certain financial ratios and
covenants, of which the most restrictive covenant is the total debt service
coverage. Under this arrangement the Company and its subsidiaries are required,
for each period of four consecutive fiscal quarters, commencing with the period
ending March 29, 1998, to maintain a ratio of consolidated cash available to pay
fixed charges to consolidated fixed charges of not less than 1.50 to 1.
30
<PAGE> 31
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases facilities under operating leases expiring at various
dates through October 2023, which includes available option renewal periods.
Most of the leases require payment of certain additional expenses such as
maintenance, repairs, insurance and real estate taxes, and additional contingent
rentals based on a percentage of sales specific to each leased facility. Rent is
charged to operations on a straight-line basis for certain leases with
escalation clauses. Rent expense for the years ended December 31, 1995, December
29, 1996 and December 28, 1997 was approximately $6,139,000, $5,518,000 and
$6,083,000 respectively (including approximately $727,000, $734,000 and $855,000
in 1995, 1996 and 1997 respectively, attributable to percentage rent in excess
of base amounts).
The Company has entered into a lease for a restaurant space with Charles
F. Sarkis, Chief Executive Officer, stockholder and director of the Company and
beneficial owner of the leased property. Payments under this lease are $300,000
annually, commencing October 1, 1991 and ending September 30, 2006. The Company
is also liable for real estate taxes, insurance and building operating expenses
as defined in the lease.
Future minimum payments relating to all operating leases as of December 28, 1997
are as follows:
<TABLE>
<CAPTION>
Years Amount
----- ------
<S> <C>
1998 $ 5,084,000
1999 5,136,000
2000 4,916,000
2001 4,759,000
2002 4,631,000
Thereafter 26,957,000
-----------
$51,483,000
===========
</TABLE>
31
<PAGE> 32
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LITIGATION
The Company is involved in routine litigation from time to time. The
litigation in which the Company is currently involved, in the opinion of Company
management, is not material to the Company's consolidated financial condition or
results of operations.
6. INCOME TAXES
The following is a comparative analysis of the provisions for income taxes:
<TABLE>
<CAPTION>
December 31, 1995 December 29, 1996 December 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income/(loss) before income taxes $(4,841,000) $741,000 $2,747,000
=========== ======== ==========
Provision/(benefit) for income taxes
Federal (1,967,000) 183,000 701,000
State (64,000) 91,000 315,000
----------- -------- ----------
Income tax provision/(benefit) $(2,031,000) $274,000 $1,016,000
=========== ======== ==========
Components of the provision/benefit
Current
Federal $ 123,000 $177,000 $686,000
State 217,000 124,000 421,000
----------- -------- ----------
94,000 301,000 1,107,000
Deferred
Federal (1,844,000) 6,000 15,000
State (281,000) (33,000) (106,000)
----------- -------- ----------
(2,125,000) (27,000) (91,000)
----------- -------- ----------
Total $(2,031,000) $274,000 $1,016,000
=========== ======== ==========
</TABLE>
32
<PAGE> 33
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 DECEMBER 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Pre-opening costs $ 276,000 $ 129,000 $ 134,000
Deferred rentals 195,000 177,000 87,000
Reserves and accruals 1,602,000 1,234,000 1,060,000
Step-rents 427,000 520,000 820,000
Credit carryforwards 472,000 358,000 --
State net operating loss carryforwards 313,000 435,000 566,000
Other 11,000 32,000 --
Fixed assets
-- -- 403,000
---------- ---------- ----------
GROSS DEFERRED TAX ASSETS $3,296,000 $2,885,000 $3,070,000
---------- ---------- ----------
LIABILITIES
Fixed assets $ 551,000 $ 13,000 --
Intangibles 593,000 570,000 547,000
---------- ---------- ----------
GROSS DEFERRED TAX LIABILITIES $1,144,000 $ 583,000 $ 547,000
---------- ---------- ----------
NET (LIABILITY)/ASSET BEFORE VALUATION $2,152,000 $2,302,000 $2,523,000
ALLOWANCE
Valuation allowance (313,000) (435,000) (566,000)
---------- ---------- ----------
Adjusted net (liability)/asset $1,839,000 $1,867,000 $1,957,000
========== ========== ==========
</TABLE>
The state net operating losses expire between 1999 and 2012.
The valuation allowance is provided against state net operating loss
carry-forwards, the realization of which are uncertain due to state separate
entity limitations and short carry-forward periods.
33
<PAGE> 34
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the statutory federal income tax rate and effective tax
rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
DEC. 31, 1995 DEC. 29, 1996 DEC. 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal rate (34.0%) 34.0% 34.0%
State income taxes, net of federal benefit (0.9) 8.1 7.6
Non-deductible goodwill amortization 1.2 7.7 2.1
Wage based tax credits (8.2) (12.8) (7.3)
Other -- -- 0.6
----- ----- ----
(41.9%) 37.0% 37.0%
===== ===== ====
</TABLE>
7. STOCK-BASED COMPENSATION PLAN
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. FASB Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted,
changes the methods for recognition of cost on plans similar to that of the
Company. Adoption of SFAS 123 is optional; however, pro forma disclosures as if
the Company adopted the cost recognition requirements under SFAS 123 was
required in 1996. The Company adopted the disclosure provision of SFAS 123 and
has applied Opinion No. 25 and related Interpretations in accounting for its
plans.
On December 26, 1991, the Company adopted a stock option plan (the
"Plan") pursuant to which certain directors, officers and key employees of the
Company may be granted options to acquire shares of the Company's common stock.
The Plan includes provisions for both incentive and non-qualified stock options.
Each grant that is issued has a term life of not greater than 10 years. At the
1993 Annual Meeting of Stockholders, the Company's stockholders approved an
amendment to the Plan to increase the number of shares of common stock available
for issuance under the Plan upon the exercise of stock options to 730,000
shares. Annual grants are determined by a disinterested committee (the
"Committee") of the Company's Board of Directors. Incentive Stock Options may be
granted at an exercise price of not less than the fair market value of the
common stock at the date of grant. Non-Qualified Stock Options may be granted at
an exercise price of not less than 85% of the fair market value of the common
stock at the date of the grant. Options granted to officers and key employees
vest on a schedule determined by the Committee and options granted to directors
become exercisable on December 31 of the year in which they are granted. At
December 28, 1997 the Company has granted options for 576,832 shares of common
stock at prices of $2.88 to $18.00 per share. At December 28, 1997, there were
35,700 options outstanding that are vested. At December 28, 1997, 151,091 shares
were available for future option grants.
34
<PAGE> 35
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's stock option activity as of December 28, 1997,
December 29, 1996 and December 31, 1995 is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 471,521 $14.27 447,056 $8.67 459,615 $7.87
Granted at fair market value 208,188 7.07 106,764 4.13 530,337 4.17
Granted below fair market value 129,300 7.18 -- -- -- --
Exercised -- -- -- -- (1,811) 4.25
Canceled (361,953) 14.52 (94,205) 7.27 (411,309) 8.15
-------- ------- --------
Outstanding at end of year 447,056 8.67 459,615 7.87 576,832 4.28
======== ======= =======
Options exercisable at year-end 427,106 8.84 355,201 8.97 35,700 6.21
======== ======= =======
Options available for future grant 282,678 270,119 151,091
======== ======= =======
Weighted average fair value of options
granted during the year $ 4.11 $2.32 $2.07
====== ===== =====
</TABLE>
35
<PAGE> 36
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The fair value of each option granted during 1997 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 0, (2) expected volatility of 60%, (3)
risk-free interest rate ranging from 5.77% to 6.85% and (4) expected life of 5.0
years.
The following table summarizes information about stock options
outstanding at December 28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Number Wgtd. Ave. Wgtd. Ave. Number Wgtd. Ave.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 12/28/97 Contr. Life Price at 12/28/97 Price
- - ------------------------ ----------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$ 2.5000 - $ 6.0000 554,569 9.3 $4.1018 21,437 $3.9802
$ 6.0100 - $10.0000 18,863 8.3 $7.6300 10,863 $7.7873
$10.0100 - $14.0000 400 5.3 $12.5000 400 $12.5000
$14.0100 - $18.0000 3,000 5.6 $15.6166 3,000 $15.6166
------- --- ------- ------ -------
576,832 9.2 $4.2829 35,700 $6.2120
======= === ======= ====== =======
</TABLE>
Had compensation cost for the Company's 1997 grants under the Plan been
determined consistent with SFAS 123, the Company's compensation expense would
have increased by $242,000, $63,000 and $1,246,000, respectively for 1997, 1996
and 1995. The Company's net income, net income applicable to common share
owners, and net income per common share for 1997 would approximate the pro forma
amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
1997 1996 1995 1997 1996 1995
------ ----- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Net income/(loss) $1,731 $ 467 $(2,810) $1,578 $ 427 $(3,534)
Net income/(loss) applicable to common
share owners $1,731 $ 467 $(2,810) $1,578 $ 427 $(3,534)
Net income/(loss) per share $ 0.50 $0.14 $ (0.82) $ 0.45 $0.12 $ (1.03)
</TABLE>
The effects of applying SFAS in this pro forma are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1995.
36
<PAGE> 37
BACK BAY RESTAURANT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. FASB 128 EARNINGS PER SHARE
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
DECEMBER 28, 1997 DECEMBER 29, 1996 DECEMBER 31, 1995
------------------------ ------------------------ -------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Shares
------ ------ ----- ------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to
common stockholders $1,731 3,432 $0.50 $467 3,434 $0.14 $(2,810) 3,430 $(0.82)
Effect of Diluted Securities
Stock options -- 42 -- -- 2 -- -- 1 --
Diluted EPS $1,731 3,474 $0.50 $467 3,436 $0.14 $(2,810) 3,431 $(0.82)
</TABLE>
9. STORE CLOSINGS AND RELATED MATTERS
During 1995 the Company recorded $5,138,000 in charges relating to
management's plan to reduce the Company's cost structure by taking a number of
steps, including closing three under-performing restaurants. These charges
related principally to severance payments to terminated employees, the write off
of certain professional and other fees and expenses incurred in the development
of locations anticipated to be built, but subsequently not built, outstanding
lease obligations and anticipated losses relating to the disposal of fixed
assets for locations closed in 1995 or anticipated to close in 1996.
At December 29, 1996 the Company had settled its lease obligations for
two of the three stores that closed in 1995 at terms more favorable than
originally estimated and had closed an additional location. The closed location,
which was a joint venture accounted for under the equity method of accounting,
was closed during the third quarter of 1996 and the related charges were offset
against the accrual. During 1997 the Company closed another location and sold
one undeveloped restaurant site. The net asset value of both these locations
were offset against the accrual. Included in the charges for 1997 were cash
payments of approximately $312,000 to settle lease obligations. The Company has
added to the plan a provision for the conversion of a location to a different
concept. As of December 28, 1997 the remaining accrual is $771,000, which
management believes is adequate to complete the plan by the end of fiscal 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the Company's Directors and Executive
Officers contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting under the captions "Directors" and "Executive Officers" is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of the Company's executive
officers contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting under the caption "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the ownership of the Company's securities by
certain beneficial owners and management contained in the Company's definitive
Proxy Statement for its 1998 Annual Meeting under the caption "Beneficial
Ownership of Shares" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting under the caption "Transactions with Management and Affiliates"
is incorporated herein by reference.
38
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Financial Statements and related schedules filed as part of this report
are listed in the index to Financial Statements and Schedules.
2. The following exhibits are filed as part of this report.
Exhibit Index
-------------
Exhibit No.
-----------
3.1* Certificate of Incorporation of the Company, as amended
3.2* By-Laws of the Company, as amended
10.1* Amended and Restated Stock Option Plan
10.2* Lease dated January 10, 1992 between The Westwood Newbury
Restaurant, Inc., a subsidiary of the Company, and 284
Newbury Street Trust First Amendment thereto dated as of
July 1, 1993
10.3* Lease dated January 10, 1992 between the Company and 284
Newbury Street Trust, and the First Amendment thereto dated
as of July 1, 1993
10.4* Lease dated December 1, 1991 between Boraschi Cafe, Inc. and
Charles F. Sarkis
10.5* Employment Agreement dated as of January 16, 1992 between
the Company and Charles F. Sarkis
10.6* Form of Change of Control Severance Agreements between the
Company and certain executives.
10.7* Letter Agreement dated January 16, 1992 between the Company
and The Westwood Group, Inc.
10.8** Revolving Credit and Term Loan Agreement dated August 10,
1993 between Back Bay Restaurant Group, Inc. and its
subsidiaries and The First National Bank of Boston (the
"Loan Agreement"), as amended
10.9* Fifth Amendment to the Loan Agreement dated March 5, 1996
39
<PAGE> 40
21 List of Subsidiaries of the Company
23 Consent of Coopers & Lybrand to the incorporation of its
report Company's Registration Statements on Form S-8 and S-3
27 Financial Data Schedule
* Incorporated by reference from Back Bay Restaurant Group, Inc.'s Annual
Report on Form 10-K for the fiscal year ended December 26, 1993, as filed
with the Securities and Exchange Commission.
** Incorporated by reference from Back Bay Restaurant Group, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 24, 1995, as filed with
the Securities and Exchange Commission.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BACK BAY RESTAURANT GROUP, INC.
By: /s/ Charles F. Sarkis
-------------------------------
Charles F. Sarkis
Chairman, President and
Chief Executive Officer
March 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Charles F. Sarkis Chairman of the Board of March 15, 1998
- - -------------------------- Directors, President and
Charles F. Sarkis Chief Executive Officer
/s/ Francis P. Bissaillon Director, Executive Vice March 15, 1998
- - -------------------------- President, Chief Financial
Francis P. Bissaillon Officer and Secretary
/s/ Robert J. Ciampa Vice President, Chief March 15, 1998
- - -------------------------- Accounting Officer and
Robert J. Ciampa Treasurer
/s/ Joseph M. Cassin Director March 15, 1998
- - --------------------------
Joseph M. Cassin
/s/ Irwin Chafetz Director March 15, 1998
- - --------------------------
Irwin Chafetz
/s/ Richard P. Dalton Director March 15, 1998
- - --------------------------
Richard P. Dalton
/s/ Richard K. Howe Director March 15, 1998
- - --------------------------
Richard K. Howe
/s/ Robert S. Parker Director March 15, 1998
- - --------------------------
Robert S. Parker
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 28, 1997
Commission file number 0-19810
BACK BAY RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 284 NEWBURY STREET 04-2812651
(State or other jurisdiction BOSTON, MASSACHUSETTS 02115 (I.R.S. Employer
of Identification No.)
incorporation or (Address of principal
organization) executive offices, including
Zip Code)
</TABLE>
(617) 536-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No__
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of the registrant's Common Stock as
quoted on the National Association of Securities Dealers Automatic Quotation
System on March 2, 1998 was $10,481,288.
On March 2, 1998, there were 3,435,176 shares of the registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
BACK BAY RESTAURANT GROUP, INC.
FORM 10-K/A
TABLE OF CONTENTS
PART III
<TABLE>
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant.......... 3
Item 11. Executive Compensation...................................... 5
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 10
Item 13. Certain Relationships and Related Transactions.............. 11
</TABLE>
2
<PAGE> 3
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding each Director of the
Company.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE AND DIRECTOR
NAME CURRENT DIRECTORSHIPS AGE SINCE
---- ----------------------- --- --------
<S> <C> <C> <C>
(Class I -- Term to Expire 2001)
Joseph M. Cassin.................. Partner in the New York law firm Cassin, Cassin 57 1992
& Joseph.
Richard P. Dalton................. President and Chief Executive Officer of WGI 49 1992
since October 1992, Executive Vice President of
WGI from 1988 to 1992 and Chief Operating
Officer of WGI since 1989. From 1988 until 1989
he served as Chief Financial Officer of WGI,
from 1984 until 1988 he served as Vice President
of WGI and from 1974 to 1989 he served as
Treasurer of WGI. Mr. Dalton is also a Director
of WGI.
Irwin Chafetz..................... President and principal of Interface Group- 61 1995
Massachusetts, Inc., the operator of GWV
International, New England's largest charter
tour operator. Until April 1995, he was Vice
President and a principal of Interface
Group-Nevada, Inc., which operated COMDEX, the
largest American trade show. Mr. Chafetz is also
a Director of Syratech Corporation.
(Class II -- Term to Expire 1999)
Richard K. Howe................... President and Co-owner of Penobscot Bay 53 1992
Provisions Co. Consultant to John Hancock
Freedom Securities Corporation and its
subsidiary, Tucker Anthony, Inc. from July 1992
to March 1996. Prior to July 1992, Mr. Howe was
an Executive Vice President and Director of
Tucker Anthony, Inc. and an officer and/or
Director of its parent corporation and
affiliates. Mr. Howe is also a Director of Chic
by H.I.S., Inc.
Francis P. Bissaillon............. Chief Financial Officer of the Company since 49 1994
March 1993. Executive Vice President since
October 1995, Secretary since June 1997 and Vice
President from March 1993 to October 1995. Prior
to working for the Company, Mr. Bissaillon
served as Chief Operating Officer of La Quinta
Motor Inns, Inc. ("La Quinta"). Prior to July
1991, Mr. Bissaillon served as Senior Vice
President-Administration and Treasurer of La
Quinta.
(Class III -- Term to Expire 2000)
Charles F. Sarkis................. President, Chief Executive Officer and Chairman 58 1983
of the Board of Directors of the Company since
1983 and Chairman of the Board of The Westwood
Group, Inc. ("WGI") since 1978. Prior to October
1992, served as President and Chief Executive
Officer of WGI.
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE AND DIRECTOR
NAME CURRENT DIRECTORSHIPS AGE SINCE
---- ----------------------- --- --------
<S> <C> <C> <C>
Robert S. Parker.................. Dean Emeritus and Robert S. Parker Professor of 59 1992
Strategy and Finance of the School of Business
Administration at Georgetown University since
1986. Prior to that time, he was a partner at
McKinsey & Company, Inc., an international
management consulting firm. Mr. Parker is also a
Director of Middlesex Mutual Assurance Co., Inc.
and Excel Limited, which are insurance
companies.
</TABLE>
During 1997, the Board of Directors held three meetings. Each Director who
is not an officer or employee of the Company is entitled to receive $1,500 for
each meeting of the Board of Directors he attends and $1,500 for each committee
meeting he attends that takes place on a date other than the date of a Board of
Directors meeting. In addition, each Director receives a retainer fee of
$10,000. All of the Directors attended at least 75% of the aggregate of the
Board and relevant committee meetings during 1997.
The Audit Committee, composed of Richard K. Howe and Robert S. Parker, held
three meetings during 1997. The Audit Committee recommends to the Board of
Directors the independent public accountants to be engaged by the Company;
reviews with the independent public accountants and management the Company's
internal accounting procedures and controls; and reviews with the independent
public accountants the scope and results of the auditing engagement.
The Compensation Committee, composed of Joseph M. Cassin, Irwin Chafetz,
Richard P. Dalton and Robert S. Parker, held two meetings during 1997. The
Compensation Committee administers the Company's compensation plans and makes
decisions regarding the compensation of senior management and other matters
relating to compensation.
The Company does not have a nominating committee.
EXECUTIVE OFFICERS
Certain information regarding the identity and background of the Company's
executive officers is set forth below. All of the Company's executive officers
have been elected for terms continuing until their successors are duly elected
and qualified.
Charles F. Sarkis, age 58, is Chairman of the Board, President and Chief
Executive Officer of the Company and has served in such capacities for the
Company and its predecessors since 1964.
Francis P. Bissaillon, age 49, has served as Chief Financial Officer of the
Company since March 1993. Mr. Bissaillon has served as an Executive Vice
President of the Company since October 1995, as Secretary since June, 1997 and
served as Vice President from March 1993 to October 1995.
Mark L. Hartzfeld, age 51, has served as an Executive Vice President and
Chief Operating Officer of the Company since October 1995. He served as Senior
Vice President of Real Estate and Development of the Company from 1992 to
October 1995, and prior to that served as Vice President of Development since
1986.
Robert J. Ciampa, age 42, has served as Vice President, Chief Accounting
Officer and Treasurer of the Company since October 1992. Mr. Ciampa has served
as Chief Accounting Officer of the Company and its predecessors since 1978.
Ann Marie Lagrotteria, age 33, has served as Vice President, Operations and
Training since August 1997 and served as Director of Training from September
1995 to August 1997. Ms. Lagrotteria has been involved in restaurant operations
with the Company for ten years.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on the review of Forms 3, 4 and 5 and all amendments thereto
furnished to the Company with respect to its most recent fiscal year, it appears
that each Director, officer and 10% beneficial owner of Common Stock of the
Company complied with Section 16(a) of the Securities Exchange Act of 1934.
4
<PAGE> 5
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
the fiscal years ended 1997, 1996 and 1995 for the Company's Chief Executive
Officer and to each of the Company's other executive officers whose annual
compensation exceeds $100,000. This information includes the dollar value of
base salaries and bonus awards and the number of stock options granted.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
NAME AND ----------------------- COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) AWARDS-OPTIONS(2) COMPENSATION($)
------------------ ---- --------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles F. Sarkis,................. 1997 340,435 -- 92,500(3) 72,671(4)
President and 1996 338,979 -- -- 35,650
Chief Executive Officer 1995 338,395 -- -- 28,600
Francis P. Bissaillon,............. 1997 190,029 -- 55,000(3) 16,200(4)
Executive Vice President, Chief 1996 187,664 -- -- --
Financial Officer and Secretary 1995 173,405 -- 10,000 --
Mark L. Hartzfeld,................. 1997 205,013 -- 60,000(3) 13,212(4)
Executive Vice President 1996 199,534 -- -- 6,100
and Chief Operating Officer 1995 146,617 16,000 15,000 1,350
Robert J. Ciampa,.................. 1997 104,633 -- 23,250(3) 6,840(4)
Vice President, Chief Accounting 1996 101,233 -- -- --
Officer, Treasurer and Assisant 1995 97,751 -- -- --
Secretary
</TABLE>
- - ---------------
(1) Cash bonuses and option grants are included in compensation for the year for
which they were earned, even if actually paid or granted in the subsequent
year.
(2) Represents the number of shares of the Company's Common Stock subject to
options.
(3) Includes stock options granted in connection with an exchange of newly
issued stock options for stock options previously held by the executive
officer. (See "Executive Compensation - Stock Option Repricing.")
(4) Includes bonus earned in 1993 which was deferred and subsequently paid out
in cash in 1997.
OPTION GRANTS IN FISCAL YEAR 1997 AND YEAR-END OPTION VALUES
The following table provides certain information regarding options to
purchase shares of the Company's Common Stock granted to the named executive
officers in fiscal year 1997.
OPTIONS GRANTED IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT VALUE AT ASSUMED
OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS MARKET STOCK PRICE
SECURITIES GRANTED TO PRICE ON APPRECIATION FOR
UNDERLYING EMPLOYEE EXERCISE OR DATE OF OPTION TERM
OPTIONS IN FISCAL BASE PRICE GRANT EXPIRATION -------------------------
GRANTED # YEAR 1997 ($/SHARE) ($/SHARE) DATE 0%($) 5%($) 10%($)
---------- ---------- ----------- --------- ---------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles F. Sarkis........... 92,500 17.4 4.125 4.125 06/03/07 0 239,945 608,095
Francis P. Bissaillon....... 55,000 10.4 4.125 4.125 06/03/07 0 142,670 361,570
Mark L. Hartzfeld........... 60,000 11.3 4.125 4.125 06/03/07 0 155,640 394,440
Robert J. Ciampa............ 23,250 4.4 4.125 4.125 06/03/07 0 60,311 152,846
</TABLE>
5
<PAGE> 6
The table below summarizes for each of the named executive officers the
total number of unexercised options, if any, held at December 28, 1997 and the
aggregate dollar value of in-the-money unexercised options held at December 28,
1997. The value of unexercised in-the-money options at fiscal year-end is the
difference between the exercise or base price and the fair market value of the
underlying stock on December 28, 1997, which was $5.625 per share, the closing
price of the Company's stock on the Nasdaq national market system. These values
have not been, and may never be, realized. The underlying options have not been,
and may not be, exercised; and actual gains, if any, on exercise will depend on
the value of the Company's Common Stock on the date of exercise. None of the
named individuals in the following table exercised options in the fiscal year
ended December 28, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles F. Sarkis......................... -- 92,500 0 138,750
Francis P. Bissaillon..................... 3,333 61,667 6,041 94,584
Mark L. Hartzfeld......................... 5,000 70,000 9,063 108,125
Robert J. Ciampa.......................... -- 23,250 0 34,875
</TABLE>
- - ---------------
(1) In-the-Money Options are those where the fair market value of the underlying
securities exceeds the exercise price of the option.
OPTION EXCHANGE OFFER
In June 1997, officers and employees were given the opportunity to exchange
their existing stock options for stock options with an exercise price closer to
the then current market value of the Company's Common Stock. This exchange offer
is the second option repricing the Company has undertaken in the past ten years.
The following table provides information on the options exchanged by the named
executive officers in connection with each exchange offer.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET EXERCISE ORIGINAL OPTION
SHARES PRICE AT PRICE AT TERM
UNDERLYING TIME OF TIME OF NEW REMAINING
OPTIONS REPRICING REPRICING EXERCISE AT DATE OF
NAME DATE REPRICED(#) ($) ($) PRICE($) REPRICING
---- ---- ----------- --------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles F. Sarkis................. 06/03/97 52,500 4.125 (1) 4.125 (1)
Francis P. Bissaillon............. 06/03/97 45,000 4.125 (2) 4.125 (2)
Mark L. Hartzfeld................. 06/03/97 30,000 4.125 (3) 4.125 (3)
Robert J. Ciampa.................. 06/03/97 23,250 4.125 (4) 4.125 (4)
Charles F. Sarkis................. 03/24/95 52,500 7.375 (5) 7.080 (5)
Francis P. Bissaillon............. 03/24/95 26,250 7.375 (6) 7.130 (6)
Mark L. Hartzfeld................. 03/24/95 18,000 7.375 (7) 7.360 (7)
Robert J. Ciampa.................. 03/24/95 23,250 7.375 (8) 7.460 (8)
</TABLE>
- - ---------------
(1) Options terminated had an exercise price of $7.08 per share and an
expiration date of March 24, 2005.
(2) Options terminated had exercise prices from $4.875 per share to $7.50 per
share and expiration dates from December 21, 2004 to October 10, 2005.
(3) Options terminated had exercise prices from $4.875 per share to $7.36 per
share and expiration dates from March 24, 2005 to October 10, 2005.
6
<PAGE> 7
(4) Options terminated had an exercise price of $7.46 per share and an
expiration date of March 24, 2005.
(5) Options terminated had exercise prices from $12.75 per share to $16.82 per
share and an expiration dates from February 17, 2004 to May 10, 2004.
(6) Options terminated had exercise prices from $12.00 per share to $16.92 per
share and expiration dates from March 4, 2003 to February 17, 2004.
(7) Options terminated had exercise prices from $14.00 per share to $17.23 per
share and expiration dates from December 26, 2001 to February 17, 2004.
(8) Options terminated had exercise prices from $11.75 per share to $16.86 per
share and expiration dates from December 26, 2001 to February 17, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's fiscal year ended December 28, 1997 and during its
current fiscal year, Charles F. Sarkis has served as an executive officer of the
Company and as Chairman of the Board of WGI, and Richard P. Dalton has served as
a member of the Company's Compensation Committee and as an executive officer of
WGI.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is composed solely of
non-employee Directors. The Compensation Committee determines all aspects of the
compensation to be paid to Charles F. Sarkis, the Chief Executive Officer,
Francis P. Bissaillon, the Chief Financial Officer, and Mark L. Hartzfeld, the
Chief Operating Officer, and determines all aspects of the compensation of the
Company's other executive officers, except their base salaries which are
determined by senior management. The objectives of the Compensation Committee in
determining the type and amount of executive officer compensation are to provide
a level of compensation which allows the Company to attract and retain superior
talent and to align the executive officers' interests with those of the
Company's stockholders. The compensation of the Company's executive officers
includes (i) cash compensation, consisting of a base salary and, if earned, a
performance bonus, (ii) long-term incentive compensation in the form of stock
options, and (iii) participation in various benefit plans, most of which are
generally available to employees of the Company.
Cash Compensation. Cash compensation of the Company's executive officers
consists of a base salary and, if earned, an annual performance bonus. The
Compensation Committee sets the base salaries of Messrs. Sarkis, Bissaillon and
Hartzfeld at levels competitive with those of executive officers at similarly
situated restaurant companies, taking into consideration the individual
experience of these officers. Mr. Sarkis' base salary has not changed since
1994. In determining Mr. Sarkis' base salary, the Compensation Committee
reviewed national and regional compensation information for executives in the
restaurant industry, including surveys regarding the compensation of restaurant
executives prepared by DeCotiis Erhard Strategic Consulting Group, Inc.
Management level employees, including executive officers, are eligible to
receive cash bonuses based on the Company's performance.
Stock Options. The executive officers, as well as other key employees, are
eligible to participate in the Company's Stock Option Plan. The purpose of the
Stock Option Plan is to provide increased incentives to salaried employees, to
encourage new employees to become affiliated with the Company and to align the
interests of such persons with those of the Company's stockholders. The Stock
Option Plan is administered by the Compensation Committee. The Compensation
Committee has the authority to determine the individuals to whom the stock
options are awarded, the terms upon which option grants shall be made and the
number of shares subject to each option, all subject to the terms and conditions
of the Stock Option Plan.
In June, 1997, the Compensation Committee offered all of the Company's
employees, including the executive officers and directors, the opportunity to
exchange their existing options for new options with an exercise price closer to
the then current market price of the Company's Common Stock. At the time of this
offer, due at least in part to general conditions in the restaurant industry,
the market price of the Company's
7
<PAGE> 8
Common Stock had declined substantially. As a result, the exercise price of
substantially all the outstanding options was significantly higher than the
market price of the Company's Common Stock. The Compensation Committee believed
that the stock options no longer served as an incentive to optionholders and
believed it was in the best interest of the Company to reprice the existing
options at a price closer to the then current market price of the Common Stock.
The replacement options were subject to vesting over three years from the date
of the exchange.
Other Compensation. The Company provides certain other benefits to the
executive officers, such as health insurance, that are generally available to
Company employees. In addition, officers and key employees of the Company
(including the named executive officers) may be eligible to receive supplemental
disability insurance coverage, automobile allowance and insurance benefits.
Compensation Committee
Joseph M. Cassin, Chairman
Irwin Chafetz
Richard P Dalton
Robert S. Parker
8
<PAGE> 9
STOCK PERFORMANCE GRAPH
<TABLE>
<CAPTION>
DEC 92 DEC 93 DEC 94 DEC 95 DEC 96 DEC 97
<S> <C> <C> <C> <C> <C> <C>
Back Bay Restaurant Group, Inc. $100.00 $125.00 $55.56 $27.78 $21.30 $ 41.20
Restaurants-500 $100.00 $116.74 $116.38 $174.55 $172.45 $185.17
NASDAQ Index Composite $100.00 $114.79 $112.21 $158.68 $195.18 $239.53
</TABLE>
The preceding stock performance price graph compares the cumulative total
return on the Company's Common Stock with the cumulative total return of The
NASDAQ Stock Market Index of U.S. stocks and of the Standard & Poor's Restaurant
Index, Restaurants-500. The beginning of the measurement period for the Company,
March 20, 1992, the date of the Company's initial public offering, and the
beginning of the measurement period for The NASDAQ Stock Market Index and the
S&P Restaurant Index is March 31, 1992. The last day of each measurement period
is the last business day in each calendar year.
The stock price performance on the graph above is not necessarily
indicative of future price performance.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company entered into a three-year employment agreement with Mr. Sarkis
on January 16, 1992 which provides that Mr. Sarkis will be employed as President
and Chief Executive Officer and that the term of his employment under the
agreement will continue from year to year thereafter unless either party
terminates the agreement. Effective December 27, 1993, Mr. Sarkis' base
compensation under the agreement was adjusted to $335,000 per year and may be
readjusted from time to time by the Board of Directors or its Compensation
Committee. In addition, Mr. Sarkis may receive annual bonuses as determined by
the Board of Directors or its Compensation Committee. The Company may terminate
Mr. Sarkis' employment only for cause. The employment agreement contains a
non-competition covenant which prohibits Mr. Sarkis, until the later of five
years from the date of the agreement, the date of a change of control, or such
time that neither he nor WGI owns more than 3% of the outstanding shares of
Common Stock of the Company, from engaging in any competing business, directly
or indirectly. Mr. Sarkis' real estate investments in two properties which
currently are leased to the Company are not subject to the non-competition
covenant.
The Company has entered into Change of Control Severance Agreements
("Severance Agreements") with Charles F. Sarkis, Francis P. Bissaillon, Mark L.
Hartzfeld, Robert J. Ciampa and Ann Marie Lagrotteria. The Severance Agreements
provide that if there were a change of control (as defined in the Severance
Agreements) of the Company, and such officer's employment by the Company is
terminated during the next two years for any reason other than dismissal by the
Company for cause (as defined in the Severance Agreements), the officer would be
entitled to certain benefits. These benefits include receipt of a
9
<PAGE> 10
payment equal to the sum of three times the amount of the officer's annual
salary and bonus, a pro rated amount of the officer's current year bonus, the
amount of salary and bonus deferred in prior years and not yet received by the
officer, and, in certain circumstances, a gross-up for certain taxes payable by
the officer in connection with the receipt of payments under the Severance
Agreements. The Severance Agreements also provide that upon a qualifying
termination of employment, the officer's stock options will become fully vested
and that the Company will continue the officer's life, medical and disability
insurance for two years after the termination of the officer's employment to the
extent that these benefits are not provided by another employer, and that any
non-competition agreements between the Company and the employee shall not be
effective.
ITEM 12. SECURITY OWERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF SHARES
The following table sets forth certain information regarding beneficial
ownership (as defined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934) as of May 1, 1997, except as otherwise indicated below, of
the Company's Common Stock by each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, by each of the
Company's Directors and named executive officers and by all of the Company's
Directors and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
DIRECTORS, EXECUTIVE OFFICERS ----------------------------
AND 5% BENEFICIAL NUMBER PERCENT OF
OWNERS(2) OF SHARES COMMON STOCK
----------------------------- --------- ------------
<S> <C> <C>
Charles F. Sarkis........................................... 241,566(3)(4) 7.0%
Francis P. Bissaillon....................................... 30,999(5) *
Joseph M. Cassin............................................ 6,000(6) *
Irwin Chafetz............................................... 88,000(7) 2.6%
Richard P. Dalton........................................... 10,000(3)(8) *
Richard K. Howe............................................. 6,000(9) *
Robert S. Parker............................................ 5,000(8) *
Mark L. Hartzfeld........................................... 30,500(10) *
Robert J. Ciampa............................................ 7,750(8) *
All Directors and executive officers as a group (10
persons).................................................. 437,536(3) 12.7%
5% Beneficial Owners
William B. Finneran......................................... 782,486(11) 22.8%
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, NY 10281
The Westwood Group, Inc..................................... 673,451(12) 19.6%
190 V.F.W. Parkway
Revere, MA 02151
Hathaway Associates......................................... 190,100 5.5%
119 Rowayton Avenue
Rowayton, CT 06853
Dimensional Fund Advisors Inc............................... 182,100(13) 5.3%
1299 Ocean Avenue, 11(th) Floor
Santa Monica, CA 90401
</TABLE>
(Footnotes)
* Less than one percent
(1) Except as otherwise noted, persons in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Unless otherwise indicated, the address of each beneficial owner is 284
Newbury Street, Boston, Massachusetts 02115.
10
<PAGE> 11
(3) Does not include 673,451 shares owned by WGI. Mr. Sarkis owns securities
representing approximately 88.63% of the voting power of WGI's outstanding
shares of Common Stock and approximately 66.85% of the outstanding shares
and is Chairman of the Board of WGI. Mr. Dalton is President and a Director
of WGI.
(4) Includes 30,833 shares Mr. Sarkis has the right to acquire within 60 days
under options granted to him pursuant to the Company's Amended and Restated
Stock Option Plan (the "Stock Option Plan").
(5) Includes 24,999 shares Mr. Bissaillon has the right to acquire within 60
days under options granted to him pursuant to the Stock Option Plan.
(6) Includes 5,000 shares Mr. Cassin has the right to acquire within 60 days
under options granted to him pursuant to the Stock Option Plan. Excludes
2,000 shares of Common Stock owned by Mr. Cassin's wife. Mr. Cassin
disclaims beneficial ownership of the shares owned by his wife.
(7) Includes 5,000 shares Mr. Chafetz has the right to acquire within 60 days
under options granted to him pursuant to the Stock Option Plan and 5,000
shares Mr. Chafetz has the right to acquire within 60 days pursuant to a
stock option grant (not under the Stock Option Plan).
(8) Represents shares such Director or officer has the right to acquire within
60 days under options granted to such Director or officer pursuant to the
Stock Option Plan.
(9) Consists of 1,000 shares Mr. Howe owns jointly with his wife and 15,000
shares Mr. Howe has the right to acquire within 60 days under options
granted to him pursuant to the Stock Option Plan.
(10) Includes 30,000 shares Mr. Hartzfeld has the right to acquire within 60
days under options granted to him pursuant to the Stock Option Plan.
(11) Shareholdings information is based on Mr. Finneran's Schedule 13D dated
September 14, 1995.
(12) Shareholdings information is based on WGI's Schedule 13G dated June 1,
1994.
(13) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 182,100 shares of
Company Common Stock as of December 31, 1997, all of which shares are held
in portfolios of DFA Investment Dimensions Group, Inc., a registered
open-end investment company, or in a series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, all of which Dimensional Fund Advisors Inc. serves as
investment manager. Dimensional disclaims beneficial ownership of all such
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND AFFILIATES
Mr. Sarkis is the majority shareholder of WGI. WGI owns more than 10% of
the Common Stock of the Company. The following is a summary of certain
arrangements between the Company and WGI, its subsidiaries, Mr. Sarkis and Mr.
Sarkis' affiliates. Certain of these arrangements were made while the Company
was a wholly-owned subsidiary of WGI and accordingly, were established by
related parties and were not subject to arms length negotiations. The Company's
By-Laws provide that all future proposed agreements between the Company and WGI,
Mr. Sarkis or their respective affiliates are subject to advance approval by a
majority of the independent members of the Company's Board of Directors.
Leasing Arrangements
In December 1991, Boraschi Cafe, Inc. ("Boraschi"), a wholly-owned
subsidiary of the Company, entered into a lease which formalized a prior leasing
arrangement for 14,427 square feet of restaurant space in Boston, Massachusetts
which Mr. Sarkis beneficially owns. The lease, which expires on September 30,
2006, provides for annual rent of $300,000 and that the Company is responsible
for utilities, maintenance and taxes. The restaurants operated at this location
are J.C. Hillary's, Ltd. and The Famous Atlantic Fish Company.
11
<PAGE> 12
Concessions and Management Agreements
Prior to 1994, the Company and WGI were parties to agreements pursuant to
which the Company operated the concession business and received certain other
revenues in connection with the operation of Wonderland Greyhound Park and
Foxboro Park, two parimutuel race tracks owned by WGI. In May 1994, the Company
transferred its concession and related operations to WGI in return for a
$770,000 term note, to which $200,000 owed by WGI to the Company was added, to
bring the total principal amount of the note to $970,000. This note was
subsequently amended to provide that principal and interest payments under the
note would not begin until April 1, 1999.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on the
27th day of April, 1997.
BACK BAY RESTAURANT GROUP, INC.
By: /s/ CHARLES F. SARKIS
----------------------------------
CHARLES F. SARKIS
Chairman, President and Chief
Executive Officer
April 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHARLES F. SARKIS Chairman of the Board of April 27, 1998
- - --------------------------------------------------- Directors, President and Chief
CHARLES F. SARKIS Executive Officer
/s/ FRANCIS P. BISSAILLON Director, Executive Vice April 27, 1998
- - --------------------------------------------------- President, Chief Financial
FRANCIS P. BISSAILLON Officer and Secretary
/s/ ROBERT J. CIAMPA Vice President, Chief Accounting April 27, 1998
- - --------------------------------------------------- Officer, Treasurer and Assistant
ROBERT J. CIAMPA Secretary
/s/ JOSEPH M. CASSIN Director April 27, 1998
- - ---------------------------------------------------
JOSEPH M. CASSIN
/s/ IRWIN CHAFETZ Director April 27, 1998
- - ---------------------------------------------------
IRWIN CHAFETZ
/s/ RICHARD P. DALTON Director April 27, 1998
- - ---------------------------------------------------
RICHARD P. DALTON
/s/ RICHARD K. HOWE Director April 27, 1998
- - ---------------------------------------------------
RICHARD K. HOWE
/s/ ROBERT S. PARKER Director April 27, 1998
- - ---------------------------------------------------
ROBERT S. PARKER
</TABLE>
13
<PAGE> 1
ANNEX V
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
September 27, 1998 0-19810
BACK BAY RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2812651
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
284 NEWBURY STREET, BOSTON, MASSACHUSETTS 02115
(Address of principal executive offices)
(617) 536-2800
(Registrant's telephone number, including area code)
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
On November 4, 1998, there were 3,460,409 shares of the registrant's Common
Stock outstanding.
<PAGE> 2
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 27, 1998 DECEMBER 28, 1997
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 326 $ 1,915
Accounts receivable 166 219
Inventories 701 783
Prepaid expenses and other current assets 1,114 874
Deferred income taxes 259 259
------- -------
Total current assets 2,566 4,050
------- -------
Buildings and improvements 4,303 4,303
Furniture, fixtures and equipment 19,384 18,119
Leasehold improvements 35,070 32,339
Lease rights 2,826 2,826
------- -------
61,583 57,587
Less: accumulated depreciation and amortization 28,980 27,182
------- -------
Net property, plant and equipment 32,603 30,405
------- -------
Other assets:
Goodwill, net of accumulated amortization 4,758 4,884
Trade names and trademarks, net of
accumulated amortization 1,219 1,252
Deferred income taxes 1,698 1,698
Other assets, net of accumulated amortization 828 783
------- -------
Total other assets 8,503 8,617
------- -------
Total assets $43,672 $43,072
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,854 $ 3,333
Accrued expenses 7,561 8,058
Income taxes payable 164 395
------- -------
Total current liabilities 10,579 11,786
------- -------
Deferred rent 198 216
Other long term liability 82 58
Long term debt 4,000 4,000
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized
20,000 shares; 3,431 shares issued and
outstanding in 1997 and 3,458 in 1998 37 36
Additional paid-in capital 23,225 23,118
Retained earnings 7,350 5,657
------- -------
30,612 28,811
Less treasury stock, 208 shares at cost in 1997
and 1998 1,799 1,799
------- -------
Total stockholders' equity 28,813 27,012
------- -------
Total liabilities and stockholders' equity $43,672 $43,072
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 3
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------- ------------------
<S> <C> <C>
Sales $24,593 $23,859
Costs and expenses:
Cost of sales 6,890 6,725
Payroll and related costs 7,796 7,678
Operating expenses 5,801 5,617
Depreciation and amortization 1,030 1,088
------- -------
Total restaurant operating expenses 21,517 21,108
------- -------
Income from restaurant operations 3,076 2,751
General and administrative expenses 2,132 2,038
------- -------
Operating income 944 713
Interest expense net 77 116
------- -------
Income before income taxes 867 597
Income taxes 321 221
------- -------
Net income $546 $376
==== ====
Net income per share
Basic $.16 $.11
==== ====
Diluted $.15 $.11
==== ====
Average common shares and equivalents
Basic 3,458 3,431
Diluted 3,674 3,485
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------- ------------------
<S> <C> <C>
Sales $72,305 $69,877
Costs and expenses:
Cost of sales 19,976 19,505
Payroll and related costs 22,931 22,623
Operating expenses 17,120 16,330
Depreciation and amortization 3,024 3,082
------- -------
Total restaurant operating expenses 63,051 61,540
------- -------
Income from restaurant operations 9,254 8,337
General and administrative expenses 6,593 6,477
------- -------
Operating income 2,661 1,860
Interest expense net 223 447
------- -------
Income before income taxes 2,438 1413
Income taxes 745 523
------- -------
Net income $ 1,693 $ 890
======= =======
Net income per share
Basic $.49 $.26
==== ====
Diluted $.46 $.26
==== ====
Average common shares and equivalents
Basic 3,449 3,433
Diluted 3,650 3,452
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 36 $23,031 $3,459 $(1,799) $24,727
Net income -- -- 467 -- 467
Restricted stock compensation -- 8 -- -- 8
----- ------- ------ ------- -------
Balance, December 29, 1996 36 23,039 3,926 (1,799) 25,202
Net income -- -- 1,731 -- 1,731
Exercise of stock option -- 7 -- -- 7
Restricted stock compensation -- (8) -- -- (8)
Deferred stock compensation -- 80 -- -- 80
----- ------- ------ ------- -------
Balance, December 28, 1997 36 23,118 5,657 (1,799) 27,012
Net income -- -- 1,693 -- 1,693
Exercise of stock option 1 103 -- -- 104
Restricted stock compensation -- 4 -- -- 4
----- ------- ------ ------- -------
Balance, September 27, 1998 $ 37 $23,225 $7,350 $(1,799) $28,813
===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,693 $ 890
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,082 3,153
Loss on disposal of fixed assets 43 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 53 39
Decrease in inventories 82 43
Increase in prepaid expenses and
other current assets (337) (278)
Increase in other assets (72) (87)
Increase/(decrease) in accounts payable and
accrued expenses (807) 111
Increase/(decrease) in income taxes payable (232) 7
Decrease in deferred rent (18) (219)
Increase in other long term liability 24 60
------ ------
Net cash provided by operating activities 3,511 3,719
------ ------
Cash flows from investing activities:
Capital expenditures (5,215) (2,596)
Proceeds from disposal of property plant & equipment 7 1,382
------ ------
Net cash used for investing activities (5,208) (1,214)
------ ------
Cash flows from financing activities:
Principal payments of debt -- (2,525)
Restricted stock compensation 4 --
Cancellation of stock option -- 12
Exercise of stock option 104 6
------ ------
Net cash provided by (used for) financing
activities 108 (2,507)
------ ------
Net Decrease in cash and cash equivalents (1,589) (2)
Cash and cash equivalents at beginning of period 1,915 1,344
------ ------
Cash and cash equivalents at end of period $ 326 $1,342
====== ======
Supplemental disclosures of cash flow information:
Interest paid $ 232 $ 474
====== ======
Income taxes paid $1,167 $ 552
====== ======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
BACK BAY RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
NOTE 1 -- BASIS OF PRESENTATION
The preceding data is unaudited but, in the opinion of
management, includes all adjustments (consisting of normal
recurring accruals and deferrals) that management considers
necessary for a fair presentation of the financial position and
results of operations for the interim periods presented in
accordance with generally accepted accounting principles and
practices consistently applied.
The results of operations for the thirty-nine weeks ended
September 27, 1998 and September 28, 1997 are not necessarily
indicative of the results that may be expected for the entire
year, because the Company's business is subject to seasonal
influences.
NOTE 2 -- LONG TERM DEBT
The Company has a revolving credit and term loan agreement
which was amended and restated on May 7, 1998 (as amended and
restated, the "Loan Agreement") with BankBoston, N.A. (the
"Bank"). On September 27, 1998, the Company had an outstanding
balance of $4,000,000 under the Loan Agreement. Under the Loan
Agreement, the Company may borrow up to $20,000,000 on a three
year revolver that converts to a four year term note. The pricing
of the loan is on a sliding scale based on a ratio of senior debt
to EBITDA. The Company's obligation under the Loan Agreement is
collateralized by certain property, plant and equipment and
intangible assets. The Loan Agreement contains restrictions
relating to future indebtedness, contingent liabilities,
encumbrances, the merger, acquisition or sale of assets,
additional stock issuance, equity distributions, cash dividends,
and redemptions, capital expenditures, ERISA and transactions
with affiliates. The Loan Agreement also requires the maintenance
of certain financial ratios and covenants, of which the most
restrictive covenant is the total debt service coverage. Under
this arrangement, the Company and its subsidiaries are required,
for each period of four consecutive fiscal quarters, commencing
with the period ending March 29, 1998, to maintain a ratio of
consolidated cash available to pay fixed charges of not less than
1.50 to 1.
NOTE 3 -- INCOME TAXES
The income tax at March 29, 1998 includes a state tax refund
of approximately $157,000 from the Commonwealth of Massachusetts
for amended tax returns that were filed for 1994 and 1995 as a
result of a change in the way the Commonwealth of Massachusetts
treats the taxation of investments in subsidiaries.
7
<PAGE> 8
NOTE 4 -- NEWLY ISSUED ACCOUNTING STANDARD
In June 1997 the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
established standards for the reporting of information about
operating segments in annual financial statements by public
enterprises and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. This Statement requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments, which are components of an
enterprise for which separate financial information is available
and is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance. This Statement is effective for financial statements
for periods beginning after December 15, 1997. Management does
not believe the implementation of this Statement will have any
significant effect on the Company's financial reporting.
In April 1998, AcSec issued Statement of Position No. 98-5
(SOP 98-5) which requires start-up activities to be expensed
instead of capitalized. The Statement is effective for financial
statements for periods beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the
fiscal year in which the SOP is first adopted. Management does
not believe the implementation of this Statement will have any
significant effect on the Company's financial statements.
As of the beginning of fiscal 1998, management adopted
Statement of Position No. 98-1 (SOP 98-1) which requires certain
costs incurred in developing or obtaining internal-use computer
software to be capitalized. The SOP is effective for fiscal years
beginning after December 15, 1998. However, earlier application
is encouraged in fiscal years for which financial statements have
not been issued. The Company has made the early adoption election
and has capitalized approximately $41,000 as of September 27,
1998.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Thirteen Weeks Ended September 27, 1998 Compared to Thirteen Weeks Ended
September 28, 1997
The following table sets forth the percentage of net sales represented by
certain items included in the Company's income statements for the periods
indicated:
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------------------------
September 27, 1998 September 28, 1997
------------------ ------------------
<S> <C> <C>
Sales 100.0% 100.0%
Costs and expenses:
Cost of sales 28.0 28.2
Payroll and related costs 31.7 32.2
Operating expenses 23.6 23.5
Depreciation and amortization 4.2 4.6
Total restaurant operating expenses 87.5 88.5
Income from restaurant operations 12.5 11.5
General and administrative expenses 8.7 8.5
Operating income 3.8 3.0
Interest expense net 0.3 0.5
Income before income taxes 3.5 2.5
Income taxes 1.3 0.9
Net income 2.2% 1.6%
Number of restaurants:
Restaurants open at beginning
of period 33 (1) 34
Restaurants open at end of period 34 (1) 34
</TABLE>
(1) Includes one restaurant that was renovated and re-opened in the fourth
quarter of 1998.
9
<PAGE> 10
SALES
Sales increased by $734,000, or 3.1%, to $24,593,000 in the thirteen week
period ended September 27, 1998, from $23,859,000 in the same period in 1997.
Same store sales increased $920,000, or 4.0%, in the thirteen week period ended
September 27, 1998, compared to the same period in 1997.
The Company closed one location during the first quarter of 1998 and
renovated another location which re-opened in October of 1998. The lost revenues
from these locations in the third quarter of 1998 were partially offset by one
new location which opened in August, 1998.
The Company operated 34 restaurants at September 27, 1998, and 34
restaurants at September 28, 1997. Total restaurant customer count for
comparable stores for the thirteen weeks ended September 27, 1998 increased 0.6%
to 1,314,000 from 1,306,000 in the comparable period in 1997.
COST OF SALES
Cost of sales as a percentage of sales decreased to 28.0% in the thirteen
week period ended September 27, 1998, from 28.2% in the same period in 1997.
This decrease was attributable to a 0.7% decrease in beverage cost as a
percentage of beverage revenue (22.4% in the 1998 period versus 23.1% in the
1997 period). The beverage cost decreases were due principally to modest sales
price increases in selected beverages for certain locations. The food cost as a
percentage of food revenue was 30.1% for both the 1998 and 1997 periods.
PAYROLL AND RELATED COSTS
Payroll and related costs as a percentage of sales decreased to 31.7% in
the thirteen weeks ended September 27, 1998, from 32.2% in the same period in
1997. The decrease in payroll and related costs as a percentage of sales is
primarily attributable to the Company having increased sales from same stores
during the thirteen weeks ended September 27, 1998 as compared to the same
period in 1997.
OPERATING EXPENSES
Operating expenses as a percentage of sales increased to 23.6% in the
thirteen weeks ended September 27, 1998, from 23.5% in the same period in 1997.
Operating expenses increased by $184,000 in the thirteen weeks ended September
27, 1998 to $5,801,000 from $5,617,000 in the same period in 1997. The increase
in operating expenses both in dollars and as a percentage of sales is primarily
attributable to non material individual increases in several expense categories.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $58,000 in the thirteen weeks
ended September 27, 1998 to $1,030,000 from $1,088,000 in the same period in
1997. Included in the 1998 and 1997 amortization is the amortization of
pre-opening costs of new restaurants opened during the prior 12-month period.
The Company amortizes such pre-opening costs over the 12-month period
immediately following an opening or conversion. The decrease in depreciation and
amortization expense is primarily attributable to the decrease in pre-opening
amortization.
10
<PAGE> 11
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $94,000 in the thirteen
weeks ended September 27, 1998 to $2,132,000 from $2,038,000 in the same period
in 1997. The increase is primarily attributable to increases in salaries and
wages and legal expenses which were partially offset by decreases in insurance
expenses.
INTEREST EXPENSE
Interest expense decreased by $39,000 in the thirteen weeks ended September
27, 1998 to $77,000 from $116,000 in the same period in 1997. This decrease was
attributable to decreased borrowings as well as a decrease in the Company's
effective borrowing rate.
INCOME TAXES
Income taxes increased by $100,000 in the thirteen weeks ended September
27, 1998 to $321,000 from $221,000 in the same period in 1997. The increased
expense in the thirteen weeks ended September 27, 1998 reflects the pre-tax
income of $867,000 as compared to $597,000 for the same period in 1997. The
estimated effective tax rate was 37% for both periods.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Thirty-nine Weeks Ended September 27, 1998 Compared to Thirty-nine Weeks Ended
September 28, 1997
The following table sets forth the percentage of net sales represented by
certain items included in the Company's income statements for the periods
indicated:
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------------------------
September 27, 1998 September 28, 1997
------------------ ------------------
<S> <C> <C>
Sales 100% 100%
Costs and expenses:
Cost of sales 27.6 27.9
Payroll and related costs 31.7 32.4
Operating expenses 23.7 23.4
Depreciation and amortization 4.2 4.4
Total restaurant operating expenses 87.2 88.1
Income from restaurant operations 12.8 11.9
General and administrative expenses 9.1 9.3
Operating income 3.7 2.6
Interest expense net 0.3 0.6
Income before income taxes 3.4 2.0
Income taxes 1.0 0.7
--
Net income 2.4% 1.3%
Number of restaurants:
Restaurants open at beginning of period 34 34
Restaurants open at end of period 34(1) 34
</TABLE>
(1) Includes one restaurant that was renovated and re-opened in the fourth
quarter of 1998.
12
<PAGE> 13
SALES
Sales increased by $2,428,000 or 3.5%, to $72,305,000 in the thirty-nine
week period ended September 27, 1998, from $69,877,000 in the same period in
1997. Same store sales increased $3,508,000, or 5.4%, in the thirty-nine week
period ended September 27, 1998, compared to the same period in 1997.
The Company closed one location in June, 1997 and closed an additional
location during the first quarter of 1998. The Company renovated another
location which re-opened in October of 1998. The lost revenues from these
locations in the first nine months of 1998 were partially offset by two new
locations of which one opened in May, 1997 and the other in August, 1998.
The Company operated 34 restaurants at September 27, 1998, and 34
restaurants at September 28, 1997. Total restaurant customer count for
comparable stores for the thirty-nine weeks ended September 27, 1998 increased
2.0% to 3,681,000 from 3,609,000 in the comparable period in 1997.
COST OF SALES
Cost of sales as a percentage of sales decreased to 27.6% in the
thirty-nine week period ended September 27, 1998, from 27.9% in the same period
in 1997. This decrease was attributable to a 0.1% decrease in food cost as a
percentage of food revenue (29.6% in the 1998 period versus 29.7% in the 1997
period), and a 0.7% decrease in beverage cost as a percentage of beverage
revenue (22.4% in the 1998 period versus 23.1% in the 1997 period). The beverage
cost decreases were due principally to modest sales price increases in selected
beverages for certain locations.
PAYROLL AND RELATED COSTS
Payroll and related costs as a percentage of sales decreased to 31.7% in
the thirty-nine weeks ended September 27, 1998, from 32.4% in the same period in
1997. The decrease in payroll and related costs as a percentage of sales is
primarily attributable to the Company having increased sales from same stores
during the thirty-nine weeks ended September 27, 1998 as compared to the same
period in 1997.
OPERATING EXPENSES
Operating expenses as a percentage of sales increased to 23.7% in the
thirty-nine weeks ended September 27, 1998, from 23.4% in the same period in
1997. Operating expenses increased by $790,000 in the thirty-nine weeks ended
September 27, 1998 to $17,120,000 from $16,330,000 in the same period in 1997.
The increase in operating expenses both in dollars and as a percentage of sales
is primarily attributable to increased occupancy costs and increases in other
various operating expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $58,000 in the thirty-nine weeks
ended September 27, 1998 to $3,024,000 from $3,082,000 in the same period in
1997. Included in the 1998 and 1997 amortization is the amortization of
pre-opening costs of new restaurants opened during the prior 12-month period.
The Company amortizes such pre-opening costs over the 12-month period
immediately following an opening or conversion. The decrease in depreciation and
amortization expense is primarily attributable to the decrease in pre-opening
amortization.
13
<PAGE> 14
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $116,000 in the
thirty-nine weeks ended September 27, 1998 to $6,593,000 from $6,477,000 in the
same period in 1997. The increase is primarily attributable to increases in
salaries and wages, and legal expenses, which were partially offset by decreases
in advertising and insurance expenses.
INTEREST EXPENSE
Interest expense decreased by $224,000 in the thirty-nine weeks ended
September 27, 1998 to $223,000 from $447,000 in the same period in 1997. This
decrease was attributable to decreased borrowings as well as a decrease in the
Company's effective borrowing rate.
INCOME TAXES
Income taxes increased by $222,000 in the thirty-nine weeks ended September
27, 1998 to $745,000 from $523,000 in the same period in 1997. The increased
expense in the thirty-nine weeks ended September 27, 1998 reflects the pre-tax
income of $2,438,000 as compared to $1,413,000 for the same period in 1997. The
income tax expense at September 27, 1998 includes a state tax refund of
approximately $157,000 from the Commonwealth of Massachusetts for amended tax
returns that were filed for 1994 and 1995 as a result of a change in the way the
Commonwealth of Massachusetts treats the taxation of investments in
subsidiaries. The estimated effective tax rate was 37% for both periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company, similar to many restaurant businesses, requires little or no
working capital because it does not have significant inventory or trade
receivables and receives several weeks of trade credit in purchasing food and
supplies. At September 27, 1998, the Company's cash position was $326,000 and
the Company had a net working capital deficit of $8,013,000.
The Company requires capital primarily for the development and construction
of new restaurants and the conversion of existing restaurants. In recent years,
the Company's primary sources of capital have been cash flow from its
operations, borrowings and landlord contributions to restaurant construction
costs. The Company intends to be very selective in its approval of sites for new
units and will be limiting the number of restaurant openings in 1998. The
Company expects to fund any capital expenditures for 1998 from internally
generated cash. The Company believes that cash flow from operations and credit
available under the revolving loan agreement will be sufficient to meet future
needs.
On May 7, 1998, the Company executed an Amended and Restated Loan Agreement
with BankBoston, NA. Under the Amended Loan Agreement, the Company can borrow up
to $20,000,000 on a three year revolver that thereafter converts to a four year
term note.
14
<PAGE> 15
YEAR 2000 DISCLOSURE
The Company is aware of the potential for industry wide business disruption
which could occur due to problems related to the "Year 2000 issue." It is the
belief of the Company that the Company has a prudent plan in place to address
these issues. The components of our plan include: an assessment of internal
systems for modification and/or replacement; communication with external vendors
to determine their state of readiness to maintain an uninterrupted supply of
goods and services to the Company; an evaluation of our equipment as to its
ability to function properly after the turn of the century; an evaluation of
facility related issues; and the development of a contingency plan.
STATE OF READINESS
The Company has developed a comprehensive plan to reduce the probability of
operational difficulties due to Year 2000 related failures. While there is still
a significant amount of work to do the Company believes that it is on track
towards a timely completion. Overall, the Company estimates the organization to
be approximately 85% complete in regard to the identification and remediation of
Year 2000 issues.
INTERNAL SYSTEMS
The process the Company is following to achieve Year 2000 compliance for
internal systems is as follows: The Company expects to have all of its financial
accounting software to be year 2000 compliant by the end of 1998. The Company
expects to have the hardware components of its financial accounting system to be
Year 2000 compliant by the end of the first quarter of 1999. The Company has
point of sales cash register systems at all of its locations. At this time the
Company is not aware of any cash register systems that will be affected by the
Year 2000 issue.
SUPPLIERS
The Company is in the process of communicating with its external vendors to
gain an understanding of their state of readiness to maintain an uninterrupted
supply of goods and services to the Company. The Company has contacted many of
its suppliers regarding the Year 2000 issue. The Company has been assured by its
major suppliers that there will be no interruption of the delivery of goods and
services.
EQUIPMENT
The Company is in the process of completing an inventory of currently used
equipment at the Company. The Company will determine the Year 2000 readiness
through communication with the equipment manufacturers and testing where
appropriate. At this time the Company is not aware of any equipment which is
affected by the Year 2000 issue and will not be repaired or replaced prior to
operating problems. The Company, as in most companies, remains aware of the
potential for imbedded logic within microchips to cause equipment failure. The
Company believes that our action plan provides a prudent approach towards
evaluating equipment, however, some equipment may prove not feasible or
impossible to test.
FACILITY RELATED ISSUES
The Company is in the process of completing an inventory and evaluating
facilities related equipment with the potential for Year 2000 related failures.
The Company will determine the Year 2000
15
<PAGE> 16
readiness through communication with the equipment manufactures and testing
where appropriate. At this time the Company is not aware of any facilities
related equipment which is affected by the Year 2000 issue and will not be
repaired or replaced prior to operating problems. The Company, as in most
companies, remains aware of the potential for imbedded logic within microchips
to cause equipment failure. The Company believes that our action plan provides a
prudent approach towards evaluating production equipment, however, some
equipment may prove not feasible or impossible to test.
COSTS
The Company is evaluating the total cost of Year 2000 compliance. At this
time the Company estimates the total cost of Year 2000 related activities to be
less than $100,000.
CONTINGENCY PLAN
At this time the Company is not aware of any internal systems or external
vendors issues related to the Year 2000 which would prevent, or seriously impact
the Company from continuing operations before, during, or after the turn of the
century.
Although the Company believes that we are taking prudent action related to
the identification and resolution of issues related to the Year 2000 our
assessment is still in progress. The Company may never be able to know with
certainty whether certain key vendors are compliant, especially those outside
the United States. There are also technical vagaries to logic imbedded within
microchips which may prove not feasible or impossible to test.
The Company continues to evaluate the risks associated with potential Year
2000 related failures. As the Company better understands the risks within our
unique set of business partners, production processes, and internal systems, the
Company will develop a formal contingency plan to alleviate the impact of high
potential or serious failures. The Company anticipates having this contingency
plan outlined by the end of the first quarter of 1999.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
external agents. The Company believes that, with the implementation of new
business systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced. Readers are
cautioned that forward-looking statements contained in the Year 2000 Update
should be read in conjunction with the Company's disclosures under the heading;
"CAUTIONARY STATEMENT."
16
<PAGE> 17
CAUTIONARY STATEMENT
The foregoing Form 10Q contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent the Company's expectation or belief concerning future
events, including the following: any statements regarding future sales and gross
profit percentages, any statements regarding the continuation of historical
trends, and any statements regarding the sufficiency of the Company's cash
balances and cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs. Without limiting the
forgoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The Company
cautions that these statements are further qualified by important economic and
competitive factors that could cause actual results to differ materially from
those in the forward-looking statements, including, without limitation, risks of
the restaurant industry, including a highly competitive industry with many
well-established competitors with greater financial and other resources than the
Company, and the impact of changes in consumer tastes, local, regional and
national economic conditions, demographic trends, traffic patterns, employee
availability and cost increases. In addition, the Company's ability to expand is
dependant upon various factors, such as the availability of attractive sites for
new restaurants, the ability to negotiate suitable lease terms, the ability to
generate or borrow funds to develop new restaurants and obtain various
government permits and licenses and the recruitment and training of skilled
management and restaurant employees. Accordingly, such forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BACK BAY RESTAURANT GROUP, INC.
November 4, 1998 /s/ Francis P. Bissaillon
------------------------------------
Francis P. Bissaillon
Executive Vice President and Chief
Financial Officer
November 4, 1998 /s/ Robert J. Ciampa
------------------------------------
Robert J. Ciampa
Vice President, Chief Accounting
Officer and Treasurer
19
Exhibit (d)(2)
BACK BAY RESTAURANT GROUP, INC.
PROXY FOR THE SPECIAL MEETING OF STOCKHOLDERS ON ___________, 1999 THIS PROXY
IS BEING SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, having received the Notice of Special Meeting of Stockholders
and Proxy Statement of Back Bay Restaurant Group, Inc. (the "Company"), hereby
appoint(s) _____________ and ______________, or either of them, proxies for
the undersigned, with full power of substitution in each of them, to represent
the undersigned at the Special Meeting of Stockholders of the Company to be
held at Papa-Razzi Restaurant CambridgeSide Galleria, Cambridge, Massachusetts
02141 at 11:00 a.m. on _______________, 1999, and at any adjournment or
postponement thereof, and thereat to vote and act in regard to all matters
which may properly come before said meeting (except those matters as to which
authority is hereinafter withheld) upon and in respect of all shares of Common
Stock of the Company upon or in respect of which the undersigned would be
entitled to vote or act and with all powers the undersigned would possess, if
personally present, and especially (but without limiting the general
authorization and power hereby given) to vote and act as indicated on the
reverse.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. IF NO INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED FOR
PROPOSAL 1.
The undersigned hereby confer(s) upon said proxies, and each of them,
discretionary authority to vote upon any other matters or proposals not known
at the time of solicitation of this proxy which may properly come before the
meeting.
Attendance of the undersigned at said meeting or at any adjournment or
postponement thereof will not be deemed to revoke this proxy unless the
undersigned shall affirmatively indicate thereat his or her intention to vote
said shares in person. If a fiduciary capacity is attributed to the undersigned
hereon, this proxy will be deemed signed by the undersigned in that capacity.
PLEASE VOTE, DATE, SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1. To consider and vote upon a proposal to approve For Against Abstain
/X/ PLEASE MARK VOTES and adopt the Agreement and Plan of Merger, [ ] [ ] [ ]
AS IN THIS EXAMPLE dated as of December 3, 1998, by and between
SRC Holdings, Inc., a Delaware corporation
("Acquiror"), and Back Bay Restaurant Group,
Inc., a Delaware corporation (the "Company"),
pursuant to which Acquiror will be merged with
and into the Company with the Company being
the surviving corporation. A copy of the Merger
Agreement is attached as ANNEX I to the
accompanying Proxy Statement.
2. To transact such other and further business as may
properly come before the Special Meeting or any
adjournments or postponements thereof.
Please be sure to sign and date this Proxy. Date
Stockholder sign here Co-owner sign here
--------------------- ------------------
Mark the box at right if an address change or comment has been / /
noted on the reverse side of this card.
</TABLE>
FOR IMMEDIATE RELEASE
December 3, 1998
CONTACT: Francis P. Bissaillon
Executive Vice President,
Chief Financial Officer
(617) 536-2800
BOSTON, MA (December 3, 1998) -- Back Bay Restaurant Group, Inc.
(NASDAQ:PAPA) and its Chairman, President and Chief Executive Officer, Charles
F. Sarkis, announced today that they have entered into an Agreement and Plan of
Merger, pursuant to which SRC Holdings, Inc., a new corporation formed by Mr.
Sarkis, will acquire Back Bay.
Under the terms of the merger agreement, which was approved by a special
committee of Back Bay's Board of Directors at a meeting held yesterday, SRC
Holdings will be merged with and into Back Bay and each outstanding public
share of Back Bay common stock will be converted into the right to receive
$10.25 per share, net to the seller in cash. In addition, Back Bay's existing
indebtedness of approximately $4 million will be refinanced as part of the
merger. Mr., Sarkis, and certain members of Back Bay's senior management and
their affiliates collectively control approximately 26% of the outstanding Back
Bay stock and have agreed to vote in favor of the merger.
The proposed merger will be conditioned upon, among other things, the
approval by the stockholders of Back Bay, including a majority of its
non-affiliated public stockholders, and the receipt of approximately $38
million of cash proceeds from financing commitments to fund the merger. The
financing is subject to satisfaction of certain conditions, which will be
described in the proxy materials.
Back Bay's Board of Directors formed a special committee of independent
directors to evaluate the transaction. Schroder & Co., Inc. served as financial
advisor to the special committee in connection with the transaction.
In announcing the proposed merger, Mr. Sarkis stated: "We believe that
this transaction is in the best interest of our stockholders. The merger will
provide much needed liquidity to our public stockholder base at a price which
is a significant premium over the historical trading range of the stock at any
time in recent years."
Back Bay and Mr. Sarkis expect that the necessary filings with the
Securities and Exchange Commission in connection with the merger will be made
during December 1998, and that the proxy materials will be mailed to Back Bay
stockholders promptly after SEC approval. The transaction is anticipated to
close by March of 1999.
Back Bay Restaurant Group, Inc. owns and operates thirty-four
full-service restaurants located in New England, New York, New Jersey and the
District of Columbia. Fourteen restaurants feature Italian cuisine and are
operated the Papa-Razzi trade name. Twenty restaurants serve American-style
food and are operated under several trade names including Joe's American Bar &
Grill, Charley's Eating & Drinking Saloon, Hillary's Ltd. Abe & Louie's and The
Famous Atlantic Fish Company.
Some of the statements in this press release may be considered
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking information is inherently
subject to risks and uncertainties, which include, but are not limited to, the
successful completion of this transaction, overall economic, market, and
industry conditions, and the risks described from time to time in reports filed
by Back Bay with the Securities and Exchange Commission, including its most
recently filed Form 10-K report. Should any such risks or uncertainties
materialize, or underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those anticipated.
