SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
Commission file number: 0-22786
TIMBER LODGE STEAKHOUSE, INC.
(Name of small business issuer as specified in its charter)
Minnesota 41-1810126
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4021 Vernon Avenue South, St. Louis Park, Minnesota 55416
(612) 929-9353
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Check whether the Issuer (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 Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ____
Check if disclosure of delinquent filers in response to item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ____
The Issuer's revenues for its most recent fiscal year were $26,535,788.
On February 25, 1998, the Issuer had 3,634,417 shares of common stock, $.01 par
value, issued and outstanding, and the aggregate market value of the common
stock as of that date (based on the average of the closing bid and asked prices
as of that date as reported by the Nasdaq SmallCap Market ), excluding
outstanding shares beneficially owned by directors and officers, was
approximately $17,886,540.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes ____ ; No _X_
<PAGE>
PART I
This Form 10-KSB contains certain forward-looking statements. For this
purpose, any statement contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
or "continue" or the negative or other variation thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and the
actual results may differ materially depending on a variety of factors.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Timber Lodge Steakhouse, Inc. (the "Company") currently manages and operates
seventeen (17) Timber Lodge Steakhouse(TM) restaurants. Since the Company's
initial public offering of its Common Stock in December 1993, the Company has
expanded and continues to expand its steakhouse restaurant concept.
On December 12, 1997 G B Foods Corporation (Nasdaq: "GBFC") of Anaheim,
California announced the execution of a letter of intent to acquire all the
outstanding capital stock of Timber Lodge Steakhouse, Inc. (Nasdaq: "TBRL").
On January 16, 1998, G B Foods Corporation and Timber Lodge Steakhouse, Inc.
executed a Definitive Merger Agreement whereby G B Foods Corporation will
acquire all of the outstanding common stock of Timber Lodge Steakhouse, Inc. The
parties expect to close the transaction in April 1998. Under the terms of the
agreement, each share of Timber Lodge will be converted into the right to
receive .80 of a share of G B Foods Corporation common stock together with cash
in lieu of any fractional shares (the "Exchange Ratio"). In addition, the
agreement has established a collar for the Exchange Ratio of "GBFC" common stock
of $14.00 on the high end and $7.50 on the low end. If the average closing
common stock price for "GBFC" during the ten day trading period ending on the
second business day prior to the closing, ("Average Closing Stock Price"),
exceeds the limits of the collar, then the Exchange Ratio will be adjusted. If
the Average Closing Stock Price is more than $14.00, the Exchange Ratio shall be
reduced to a number (rounded to the nearest 1/10000) equal to the product of the
Exchange Ratio multiplied by a fraction, the numerator of which is $14.00 and
the denominator of which is the Average Closing Stock Price. If the Average
Closing Stock price is less than $7.50, G B Foods Corporation may elect to
increase the Exchange Ratio to the number (rounded to the nearest 1/10000)
determined by dividing $7.61 by the Average Closing Stock Price.
The Merger is subject to certain customary conditions, including (i)
Fairness Opinions; (ii) approvals from the shareholders of the Company and GBFC;
and (iii) the parties obtaining all regulatory approvals, including the
Securities and Exchange Commission declaring effective a Registration Statement
covering the shares of GBFC's common stock to be issued in the Merger. The
Merger is also subject to the purchase by the Company from CKE Restaurants, Inc.
("CKE") (NYSE:CKR) or its affiliate of between twelve (12) and (20) JB's
Restaurants for conversion to Timber Lodge Steakhouse restaurants. In this
regard, CKE has agreed under the Merger Agreement to negotiate in good faith
with the Company to consummate such purchase and sale. In addition, Fidelity
National Financial, Inc. (NYSE:FNF) has agreed under the Merger Agreement that,
subject to the approval of the Merger by the Company's shareholders, it will
exercise currently outstanding warrants to purchase shares of GBFC's common
stock for a cash purchase price aggregating not less than $5,000,000. G B Foods
Corporation plans to utilize such proceeds, in part, for the conversion of the
JB's Restaurants acquired by the Company into Timber Lodge Steakhouse
restaurants.
The Company's full-service steakhouse restaurants offer dinners of generous
portions at moderate prices. Menu selections include steaks, which are selected,
aged and trimmed to the Company's customized specifications, prime rib,
barbecued ribs, fresh seafood, chicken, pork chops, pasta and specialty regional
dishes and appetizers. The Company's restaurants appeal to a broad range of
patrons by emphasizing casual dining, high quality food, limited menu selections
to ensure consistency in preparation and a well-trained staff for attentive and
quality service. This appeal is enhanced by the restaurants' "north woods"
atmosphere which features log-framed interiors, fireplaces, hardwood floors,
wood tables, chairs and booths, and memorabilia reflecting the history of
northern tier states.
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Based upon the Company's current operations and experience, it believes that
its steakhouse restaurants can be expanded to markets across the northern and
western United States. Although competition in the restaurant industry is
intense, the Company believes its "north woods" steakhouse concept competes
favorably. Its growth strategy is to continue to develop a sufficient number of
Company-managed steakhouse restaurants in regional areas in order to provide
economies of scale in advertising, procurement and management, along with
greater exposure in each region. The Company believes it has accomplished this
in the Minnesota, South Dakota and Wisconsin region (thirteen restaurants).
The Company operates one steakhouse in upstate New York (Niagara Falls) that
the Company continues to believe has long-term potential. During fiscal year
1997 revenues increased 26% over fiscal year 1996 at the Niagara Falls
restaurant. Although the revenue increase helped the operating picture,
unit-level profitability and positive cash flow still has not been achieved at
the Niagara Falls site. The Company will continue to monitor its strategy and
marketing programs for this restaurant location, and will make the appropriate
business decision on long-term potential after the 1998 peak tourist season in
that market.
THE COMPANY'S STEAKHOUSE CONCEPT
GENERAL. The Company believes that many restaurants expanded their menus in
an attempt to reach a broader market, but lost their distinctiveness and blurred
their market niche as a result. The Company's steakhouse restaurants offer a
limited number of menu selections allowing it to ensure consistent high-quality
dishes and, more importantly, to retain its focus as a steakhouse. Traditional
American meals at moderate prices and in generous portions are viewed by the
Company as attractive to a large segment of the population. In addition to
offering quality food for the money, the Company's "north woods," log cabin
design promotes a casual and comfortable atmosphere. The Company trains its
employees to provide excellent service, enhancing the distinctive dining
experience.
All of the Company's restaurants' hours are limited to the service of
dinner. Such limited hours tend to reduce expenses associated with restaurant
management and employees, while still serving what is usually a restaurant's
most profitable meal. The Company expects most of its future restaurants will
similarly be limited to dinner.
The Company selects and hires experienced general managers for its
restaurants, who are motivated to provide excellent service and efficient
management through a bonus compensation plan based on restaurant unit-level
profitability and improvement in sales performance. Purchasing decisions are
made by the Company's home office management to ensure uniformity of food
quality among all of the steakhouse restaurants at competitive prices. Each
restaurant also provides daily reports to the home office so that changes
regarding operation of any or all the restaurants can be made immediately.
NORTH WOODS ATMOSPHERE. Each restaurant incorporates a "north woods" theme
with its log-framed interior, fireplaces, hardwood floors and wood tables,
chairs and booths, all of which help to create a cozy feeling of dining in a
warm, comfortable north woods log cabin. Hunting, fishing, trapping, logging and
other memorabilia reflecting the history particular to northern tier states
adorn the walls, together with murals depicting regional folklore such as Paul
Bunyan. Oversized silverware, plates, and food portions are consistent with a
hunting lodge atmosphere. The casual atmosphere makes the restaurants
appropriate for a number of occasions.
MENU. The menu is designed to appeal to a broad range of tastes, although it
contains a limited number of selections. The Company's menu provides
entertaining descriptions of the selections. Steaks, the restaurants' featured
entrees, are selected, aged and trimmed to the Company's customized
specifications. The menu also offers prime rib, barbecued ribs, fresh seafood,
chicken, pork chops and pasta. As part of the Company's commitment to quality,
it emphasizes fresh ingredients and uses beef that has never been frozen. The
Company offers daily specials, and regularly tests new menu selections which, if
well received, are added to the menu or replace less popular entrees.
Accompaniments such as Golden Wheat bread and specialty appetizers such as the
"Paul Bunyan Onion," as well as desserts and full liquor service, are also
offered. Menu items range from $7.95 to $18.95 in price with the average dining
check per customer totaling approximately $17 to $18 (including beverages served
with dinner, but excluding drinks served while customers are awaiting seating).
A children's menu with lower-priced selections is also available.
<PAGE>
ADVERTISING. The Company advertises through television, radio, newspapers
and billboards. In the Minneapolis/St. Paul market, the Company has recently
increased the use of television advertising. The Company currently has eight (8)
restaurants in the Twin Cities of Minneapolis / St. Paul, and the St. Cloud
restaurant is approximately 70 miles north west of Minneapolis and Twin City
television stations are carried into the St. Cloud market providing a total of
nine (9) restaurants that can be reached with Twin City television campaigns.
The Company currently has no billboard advertising in the Minneapolis / St. Paul
market, but may choose such advertising media in the future. The Company expects
to develop additional restaurants in the suburban Chicago and northern Illinois
market to make television advertising in that market place a viable option in
the near future. Billboard advertising is currently used in Duluth and St.
Cloud, Minnesota and Sioux Falls, South Dakota. During fiscal year 1997 the
Company spent approximately $893,000 in total for all forms of advertising, or
3.4% of net sales. The comparable number for fiscal year 1996 was approximately
$538,000, or 2.6% of net sales.
TARGET MARKET. The Company's target market is adults 25-65 with a primary
focus on the "early middle aged group" and moderate to moderately-high incomes.
The Company believes that its steakhouse restaurants, menu, pricing and
atmosphere appeal to this group and distinguishes them from other moderately
priced restaurants, as well as from other steakhouses. Because the restaurants'
patrons are likely to have children or grandchildren, the Company caters to
families as well with its children's menus, reasonable prices and casual
atmosphere. While each of the restaurants contains a bar, the Company believes
that its restaurants are generally selected for dining.
RESTAURANT SITE DEVELOPMENT. The success of the Company's steakhouse
restaurants is highly dependent on suitable locations. The Company's management
focuses substantial effort and time on the investigation and evaluation of
potential restaurant sites. Site selection involves the analysis of area
demographics, population density and household income levels, as well as site
characteristics including visibility, accessibility and traffic volume. The
Company also considers the competition from existing restaurants, both
steakhouses and others, in the market of each proposed site.
The Company's current and planned steakhouse restaurants range between 6,300
and 9,000 square feet, and seat an average of 230 persons, including
approximately 20 seats in the bar area. All of the Company's current restaurant
sites are leased. The Company's existing steakhouse restaurants are generally
located in suburban locations in strip centers or in free-standing buildings.
One steakhouse restaurant, located in Duluth, Minnesota, is located in a
renovated warehouse. The Company plans to develop additional steakhouses in
similar settings, with an emphasis on free-standing buildings and will consider,
when appropriate, end locations in strip centers.
Based on past experience, the Company has generally been able to complete
preparations to open a restaurant in 17 to 21 weeks, as to existing buildings,
and 26 to 30 weeks when located in a building built to the Company's
specifications. These times can vary significantly depending on the time
required to obtain necessary permits and licenses, including liquor licenses,
from governmental authorities. The cost of developing four steakhouse
restaurants during fiscal 1997 (three of which were free-standing locations and
one was an end-cap in a new retail strip center) was approximately $1,565,000
per restaurant, including pre-opening expenses of approximately $134,000 per
restaurant. Such cost includes spending related to construction, furnishings,
equipment, permits and licenses, among others. As the Company has opened
additional steakhouse restaurants and gained more experience, the Company has
concluded that the cost of developing such restaurants can vary considerably
based upon various factors including: free-standing vs. located in strip
centers, new construction vs. conversion; and time of year during construction
activity.
EXPANSION STRATEGY
The Company anticipates it will open five or six steakhouse restaurants by
the end of fiscal 1998. The Company opened a Timber Lodge Steakhouse on January
15, 1998 in Arlington Heights, Illinois (suburban Chicago) and currently is
constructing a new Timber Lodge Steakhouse in Rochester, Minnesota. The
Rochester site is expected to open mid-year of fiscal 1998. The majority of the
anticipated expansion during fiscal 1998 and fiscal 1999 will involve the
purchase and conversion of approximately sixteen JB's restaurants into the
Timber Lodge Steakhouse concept. This strategy is part of the pending merger
with G B Foods Corporation mentioned elsewhere in this Form 10-KSB.
<PAGE>
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of each restaurant consists
of a general manager, assistant manager, kitchen manager and assistant kitchen
manager. Each general manager is generally assigned one restaurant for a minimum
of four years, which the Company believes promotes stability and accountability.
The general managers are paid a base salary and a performance bonus based on
unit-profitability and improved sales performance of the restaurant which they
manage. The Company has traditionally hired general managers who have restaurant
management experience, and plans to do so for future restaurants.
Each restaurant employs approximately 55 hourly employees, most of whom are
employed part-time. The Company limits the number of tables served by its wait
staff in order to maintain high customer service and satisfaction.
SUPERVISION AND TRAINING. The restaurants are closely supervised by the
general managers with guidance from the Company's home office management.
General managers are directly responsible for each restaurant's success.
Moreover, home office management visits each restaurant on a periodic basis to
oversee operations.
The Company uses "secret diners," provided by an independent company, who
regularly visit and critique each restaurant three times per month. These
"secret diners" prepare a detailed report of their visit, including impressions
of the restaurant's service, food and cleanliness. The Company uses these
reports to monitor each restaurant's performance and to refine service policies
and procedures, food quality and preparation specifications, and the appearance
and appeal of all restaurants in general. The Company expects to continue to use
this practice in the future.
The Company conducts a significant amount of training of its employees.
Although the Company generally hires general managers with restaurant
experience, each general manager spends up to ten weeks training in an
established Company restaurant before being assigned to a new restaurant.
Kitchen managers undergo similar training. Detailed policy and procedure manuals
provide a blueprint for restaurant operations for all levels of employees, from
greeting a customer to preparing a meal.
PURCHASING. The Company's home office management negotiates directly with
suppliers for most food and beverage products on behalf of the restaurants to
ensure uniformity of product quality at competitive prices. Restaurant managers
then place orders as needed from these pre-approved suppliers. Prices charged by
other suppliers for comparable products are monitored by the home office to
verify competitive pricing. Although the Company typically uses the same
suppliers, the Company has no long-term contracts with any of its food or
beverage suppliers. It believes alternative suppliers are available, if
necessary. The Company intends to use its existing suppliers as it continues to
expand, but if this practice becomes uneconomical, the Company will engage
suitable regional suppliers in the new areas.
Meat is currently supplied primarily by one vendor (Westlunds's), which
delivers fresh supplies several times per week to the restaurants. The Company
has provided its meat supplier with customized specifications as to cut,
selection, trimming and aging in order to maintain the high quality and
consistency of its meat entrees. The Company believes alternative meat suppliers
are available which would be able to provide comparable cuts of meat at
competitive prices if the need arises. Timber Lodge Steakhouse, with the support
of its meat supplier, was awarded the 1996 Beef Backer Award from the Minnesota
Beef Council. The Beef Backer Award, established by the National Cattleman's
Beef Association, honors food service operations on a regional and national
level that enthusiastically promote beef.
RESTAURANT REPORTING. Each restaurant has a point-of-sale system that is
monitored by its restaurant managers. This allows daily cash and other reports
to be prepared regarding the total amount and comparison of sales. Weekly and
monthly profit and loss reports are also compiled by each restaurant for review
and analysis by the home office management, which compares such reports with its
own internally generated profit and loss analysis so as to respond to
inefficiencies and make necessary adjustments at each restaurant on a weekly
basis.
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 and
regulation by a number of government authorities, which may include alcoholic
beverage control, health and safety, and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining, or
failures to obtain, the required licenses or approvals could delay or prevent
the development
<PAGE>
of a new restaurant in a particular area.
Approximately 15% of the Company's steakhouse revenues are attributable to
the sale of alcoholic beverages (including alcoholic beverages sold while
customers are awaiting seating). Alcoholic beverage control regulations require
each of the Company's restaurants to apply to a state authority and, in certain
locations, county or municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. 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 operation of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages. Failure of a restaurant to obtain or retain liquor or food
service licenses would adversely affect its operations.
In certain states, including Minnesota, the Company may be subject to
"dram-shop" statutes, which generally provide that a person injured by an
intoxicated person has the right to recover damages from the establishment which
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries liquor liability coverage as part of its existing comprehensive general
liability insurance and never has been named in a lawsuit involving a
"dram-shop" statute.
The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of the Company's employees are paid at rates
related to the federal minimum wage and, accordingly, further increases in the
minimum wage could increase the Company's labor costs. Minnesota is one of the
few states that does not permit "tip credit" (the practice of employers paying
tipped employees below the minimum wage, with tips from customers making up the
balance of the minimum wage obligation). Currently ten of the Company's
seventeen restaurants are located in Minnesota, and further increases in the
minimum wage could significantly increase labor costs for the Company.
The American with Disabilities Act (the "ADA") prohibits discrimination in
employment and public accommodations, such as restaurants, on the basis of
disability. Under the ADA, the Company is required to provide service to, or
make reasonable accommodations, for the employment and service of, disabled
persons. The Company believes its restaurants are in substantial compliance with
the ADA.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality. There are several well-established
competitors with substantially greater financial and other resources than the
Company. In the Company's view, its principal competitors are not only other
steakhouses but also any other restaurants which offer a casual atmosphere and
moderately-priced meals.
Expansion of the steakhouse concept has increased in recent years. In
addition to traditional steakhouse restaurants, the Company expects to face
competition from new entries into the steakhouse market, such as national
steakhouse chains which have greater name recognition, are more well-established
and have significantly greater resources than the Company. Other competitors
include a large number of national and regional restaurant chains, many of which
have been in existence for a substantially longer period than the Company and
may be better established in the markets where the Company's restaurants are or
may be located. During the past year, Outback Steakhouse entered the
Minneapolis/St. Paul market and currently has three restaurants in operation in
that market.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns, and the type, number and location of competing restaurants. In
addition, factors such as inflation, increased food, labor and benefits costs
and the lack of experienced management and hourly-paid employees may adversely
affect the restaurant industry in general and the Company's restaurants in
particular.
TRADEMARKS
The Company holds federal registrations from the United States Patent and
Trademark Office for "Timber Lodge Steakhouse(TM)" and "The Lodge in the Heart
of the City."
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EMPLOYEES
The Company currently employs approximately 940 employees, 298 of whom are
full-time and the balance of 642 are part-time persons. Of the full-time
employees, 68 are restaurant management personnel and 13 work in the
home/corporate office. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes it maintains good
relations with its employees.
ITEM 2. DESCRIPTION OF PROPERTIES
PROPERTIES/RESTAURANT LOCATIONS
The Company's seventeen Timber Lodge Steakhouse restaurants are located in
the Minneapolis/St. Paul metropolitan area (Burnsville, Roseville, Eden Prairie,
West St. Paul, St. Louis Park, Spring Lake Park, Woodbury, and Crystal) of
Minnesota, with outstate Minnesota locations in Duluth and St. Cloud, Sioux
Falls, South Dakota, Niagara Falls, New York, Green Bay and Madison, Wisconsin
and the suburban Chicago area (Naperville, Vernon Hills and Arlington Heights).
All of these locations are occupied under leases which will expire between the
years 2001 and 2017, with renewal options of between three and ten years. The
leases for the Company's current restaurants provide for an average rent, as
measured over the term of each lease, of between $9 and $28 per square foot,
plus charges for real estate taxes and common area maintenance based on the
number of square feet leased. These long-term leases are non-cancelable.
Accordingly, if an existing or future restaurant is not profitable and the
decision is made to close the restaurant, the Company could be required to
perform its obligations under the lease. Such an event would likely have a
significant adverse impact on the Company's operations.
The Company's corporate offices in St. Louis Park, Minnesota are leased
from a related party.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any threatened litigation that would have a material adverse effect on its
business. Restaurant operators, such as the Company, are from time to time
involved in suits incidental to their business, which are generally covered by
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters which were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1997. The
Company is currently in the process of preparing for a vote by security holders
for the pending merger with G B Foods Corporation of Anaheim, California.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades on the Nasdaq SmallCap Market under
the symbol "TBRL." The following table sets forth, for the calendar quarters
indicated, the high and low closing bid prices for the Company's Common Stock as
quoted by Nasdaq. These quotations reflect inter-dealer prices, without retail
markup, markdown or commissions, and may not reflect actual transactions.
HIGH LOW
FISCAL YEAR ENDED JANUARY 1, 1997
First quarter $ 4 1/4 $ 3
Second quarter $ 4 3/8 $ 3 3/8
Third quarter $ 4 5/8 $ 3 1/2
Fourth quarter $ 4 1/2 $ 3 3/8
FISCAL YEAR ENDED DECEMBER 31, 1997
First quarter $ 5 1/8 $ 3 3/16
Second quarter $ 4 1/4 $ 3 1/2
Third quarter $ 5 1/4 $ 3 3/8
Fourth quarter $ 7 5/8 $ 4 1/4
As of February 19, 1998, the Company had 99 shareholders of record of its
Common Stock. The Company estimates its actual number of shareholders to be in
excess of 1,300.
In connection with the Company's 401 (k) program, participants have the
option to purchase Timber Lodge common stock as an investment option. As of
December 31, 1997, 7,102 shares of Timber Lodge common stock were allocated to
the accounts of 47 participants.
The Company has never paid or declared cash dividends on its Common Stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company expects to retain its earnings to finance the development
and expansion of its business. The payment by the Company of cash dividends, if
any, on its Common Stock in the future is subject to the discretion of the Board
of Directors and will depend on the Company's earnings, financial condition,
capital requirements and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
As of December 31, 1997, the ending date of fiscal 1997, the Company
operated sixteen steakhouse restaurants. On January 15, 1998, the Company opened
its seventeenth restaurant in Arlington Heights, Illinois. The locations of the
other sixteen restaurants include eight in the Minneapolis-St. Paul metropolitan
area, and one each in Niagara Falls, New York, Duluth and St. Cloud, Minnesota,
Sioux Falls, South Dakota, Green Bay and Madison, Wisconsin, and Naperville and
Vernon Hills, Illinois. The Company uses a 52/53 week fiscal year ending on the
Wednesday nearest the end of the calendar year. Both fiscal 1997 and fiscal 1996
consisted of 52 weeks of business.
The Company capitalizes pre-opening costs and amortizes them over a
twelve-month period commencing with the restaurant opening. Pre-opening costs
consist of direct costs of hiring and training the initial work force and other
direct costs associated with opening a new restaurant. The Company's revenues
and expenses can be significantly affected by the number and timing of the
opening of additional restaurants. The timing of restaurant openings can also
affect net sales and other period-to-period comparisons.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of items in the Company's statements of operations.
For Fiscal Years Ended
----------------------
December 31, 1997 January 1, 1997
----------------- ---------------
Net sales ................................... 100.0% 100.0%
Restaurant costs and expenses:
Food and beverage costs ..................... 37.5 37.6
Labor and related benefit costs ............. 28.6 28.5
Restaurant operating expenses ............... 10.0 8.7
Occupancy costs ............................. 11.1 10.9
----- -----
Restaurant costs and expenses ............... 87.2 85.7
----- -----
Restaurant operating income ................. 12.8 14.3
Operating expenses:
General and administrative .................. 6.1 7.0
Amortization of pre-opening costs ........... 1.3 1.5
----- -----
Operating income ............................ 5.3 5.8
Interest (expense) .......................... (0.3) (0.2)
Interest and other income ................... .3 .5
----- -----
Income before income taxes .................. 5.3 6.1
Income taxes ................................ 1.6 1.3
----- -----
Net income .................................. 3.7% 4.8%
===== =====
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
NET SALES. The Company achieved an increase in net sales of 28.6% to
$26,535,788 for fiscal 1997 compared with $20,636,760 for fiscal 1996. The sales
increase is the result, in part, of opening four new restaurants during fiscal
1997 and the full year impact of the three restaurants that opened during fiscal
1996. The balance of the sales increase is attributed to a 4.4% sales increase
in same store sales for the eleven restaurants that have been open for eighteen
months or more. The Company made selective price increases to its Minnesota menu
during September 1997 to offset the impact of the September 1, 1997, increase in
the federal minimum wage to $5.15 an hour. The wage increase represents an 8.4%
increase over the previous minimum wage of $4.75 an hour that became effective
October 1, 1996. Minnesota is one of the few states that does not permit "tip
credit" (the practice of employers paying tipped employees below the minimum
wage, with tips from customers making up the balance of the minimum wage
obligation). The Company estimates the effect of these selective price increases
to be in the range of 1.5% to 2.0% for its Minnesota operations.
COSTS AND EXPENSES. Cost of restaurant sales, consisting of food and
beverage costs, decreased to 37.5% of net sales for fiscal 1997 compared to
37.6% for the same period last year. Increased business volume and the related
increase in purchase quantities of selected food items permitted the Company to
enjoy an improved volume pricing schedule and rebates from some of its food
suppliers during fiscal 1997.
Labor and related employee benefit costs increased slightly to 28.6% of net
sales during fiscal 1997 compared to 28.5% for fiscal 1996. No single cost
category exhibited a significant relative change in labor and benefit costs
during fiscal 1997.
<PAGE>
Restaurant operating expenses include utilities, supplies, maintenance and
repairs, liquor licenses and the service fees and charges for credit card
transactions. In fiscal 1997 restaurant operating expenses increased to 10.0%
compared to 8.7% for fiscal 1996. The increase is attributable primarily to a
change in charging the service fees for credit card transactions to the
individual restaurants as part of restaurant operating expenses in fiscal 1997.
In the prior year these expenses were part of general and administrative
expenses, and in both periods, represent approximately 1.0% of net sales. The
Company also experienced a modest increase in maintenance expenses during fiscal
1997.
Occupancy costs include rents, real estate taxes, common area maintenance,
building and contents insurance and depreciation on equipment and leasehold
improvements. Occupancy costs increased to 11.1% during fiscal 1997 compared to
10.9% for fiscal 1996. The increase is due to increased equipment rent expense
for the equipment operating leases used to help finance the five newest
restaurants
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to 6.1% of net sales in 1997 compared to 7.0% for fiscal 1996. The
decrease is due principally to the expense classification change for the service
fees for credit card transactions previously described. Advertising is a
significant component of general and administrative expenses, and during fiscal
1997 the advertising expense was approximately $893,000 in total, or 3.4% of net
sales. The comparable advertising expense for fiscal 1996 was $538,000, or 2.6%
of net sales.
AMORTIZATION OF PRE-OPENING COSTS. Amortization of pre-opening costs
decreased to 1.3% of net sales compared to 1.5% for the same period last year.
The modest change is driven by revenue growth in 1997.
INTEREST EXPENSE AND OTHER INCOME. Interest expense was paid to the
Company's bank for short-term borrowings during fiscal 1997. The Company has a
$500,000 credit line facility with its bank, and interest is charged at prime
plus one percent, or 9.5% at December 31,1997. The Company's bank also provided
a construction loan in the amount of $1,375,000 for the new restaurant in St.
Cloud, Minnesota. Interest on the construction loan was at a rate of 10.25%. The
maximum borrowed from the Company's bank during fiscal 1997 for both the credit
line facility and construction loan was $1,829,987. All bank borrowings were
repaid by December 31, 1997. Total interest paid to the bank in fiscal 1997 was
$110,939., of which approximately $22,736 was capitalized during the
construction period. A minor amount of interest was also paid to the state of
Minnesota on a tax adjustment.
Interest income was earned on the promissory note related to the Q. Cumbers
sale. The note earns interest at the prime rate, or 8.5% on December 31, 1997.
Interest income was also earned on money market accounts. During fiscal 1997 the
Company's cash balances were below the levels of the previous year, resulting in
less interest income.
PROVISION FOR INCOME TAXES. The Company's effective tax rate is estimated
at 29.5% for fiscal 1997 compared to 22% for fiscal 1996.
NET INCOME. The Company's net income for fiscal 1997 was $982,213 compared
to $982,981 for fiscal 1996. Basic earnings per share for fiscal 1997 was $.27,
compared to $.28 for fiscal 1996. Basic earnings per share have been calculated
for both fiscal 1997 and 1996 using the Financial Accounting Standards Board
Statement No. 128 (FASB 128). The lack of growth in net income for fiscal 1997
when compared to fiscal 1996 was principally affected because of the increase
during fiscal 1997 in four expense categories: the effective income tax rate of
29.5% versus 22%, increased interest expense from short-term borrowings, an
increase in monthly rent expenses for equipment operating leases for the five
newest restaurants and increased advertising expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has leased its restaurant sites under
non-cancelable leases for periods of six to twenty years, with renewal options
of three and ten years. In fiscal 1997, the Company funded the development of
its new restaurants through a combination of internally generated cash from
operations, short-term bank borrowings, sale/leaseback financing and equipment
leasing.
<PAGE>
Cash provided by operating activities was $1,792,886 for fiscal 1997
compared to $3,052,701 for fiscal 1996. The Company had a net working capital
deficit of ($1,034,045) at December 31, 1997 compared to a net working capital
deficit of ($337,912) at January 1, 1997. New restaurant development has caused
the reductions in working capital. The Company continues to draw on its $500,000
bank line of credit to meet short-term cash needs. At the end of fiscal 1997
this credit line did not have an outstanding balance. Most of the Company's
sales are paid in cash or credit card and the Company generally receives 30 days
credit from trade suppliers.
Sale/leaseback financing with AEI Fund Management, Inc. of St. Paul,
Minnesota provided $1,575,000 for the November 1997 purchase of the St. Cloud,
Minnesota restaurant. The financing agreement between the Company and AEI Fund
Management, Inc. executed on September 23, 1997, provides for funding of up to
four restaurants/parcels. The Rochester, Minnesota site that is under
construction is being financed pursuant to that agreement between the Company
and AEI. This financing facility could fund two more new restaurants beyond the
St. Cloud and Rochester sites.
The planned purchase and conversion of approximately sixteen (16) JB
restaurants into Timber Lodge Steakhouse restaurants has its own financing plan
as previously described for the pending Merger with G B Foods Corporation. If
for some reason, the pending Merger would not take place, the Company would slow
down its new restaurant growth strategy to match funding that would be provided
by internally generated cash, AEI sale/leaseback financing, and the use of
equipment leasing. The Company believes that these funding sources will fund
operations for at least the next twelve months.
IMPACT OF INFLATION
Inflation has not significantly impacted the Company's operations during
fiscal 1997 and 1996. Substantial increases in either food costs, particularly
meat prices, or labor costs could negatively impact the Company in the future.
Because many of the Company's employees are paid at the federal minimum wage
levels, a continued trend in rising federal minimum wage levels could have an
adverse impact on future operating costs. In the event that inflation increases
future operating costs, there is no assurance that the Company could fully
recover such increases by raising menu prices.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements and Independent Auditor's Report thereon
are included herein (page numbers refer to pages in this Report on Form 10-KSB):
Page
----
Independent Auditor's Report 12
Balance Sheets as of December 31, 1997 and January 1, 1997 13
Statements of Operations for the years ended December 31, 1997 and
January 1, 1997 14
Statements of Stockholders' Equity for the years ended December 31, 1997
and January 1, 1997 15
Statements of Cash Flows for the years ended December 31, 1997 and
January 1, 1997 16
Notes to Financial Statements 17 - 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Timber Lodge Steakhouse, Inc.
We have audited the accompanying balance sheets of Timber Lodge Steakhouse, Inc.
as of December 31, 1997 and January 1, 1997, and the related statements of
operations, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Timber Lodge Steakhouse, Inc.
at December 31, 1997 and January 1, 1997, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 13, 1998
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 January 1, 1997
----------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 482,598 $ 1,178,373
Accounts receivable 227,473 136,576
Inventories 352,289 203,268
Pre-opening costs, net 450,510 168,933
Deferred tax assets 0 64,300
Prepaid expenses and other current assets 541,529 366,240
----------- -----------
2,054,399 2,117,690
Property and equipment, net 12,463,740 10,970,370
Deferred tax assets 132,400 23,200
Note Receivable 346,000 396,000
Other assets 221,639 190,182
----------- -----------
Total assets $15,218,178 $13,697,442
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,512,713 $ 1,127,673
Accrued salaries and wages 386,371 262,346
Sales tax payable 187,153 136,327
Deferred revenue - gift certificates 871,360 535,997
Income taxes payable 0 295,690
Deferred tax liabilities 59,000 0
Accrued expenses and other liabilities 71,847 97,569
----------- -----------
3,088,444 2,455,602
Deferred rent 1,063,429 1,248,224
----------- -----------
Total liabilities 4,151,873 3,703,826
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 10,000,000
Issued shares - 3,566,833 at January 1, 1997 and
3,625,750 at December 31, 1997 36,257 35,668
Additional paid-in capital 8,883,701 8,793,814
Retained earnings 2,146,347 1,164,134
----------- -----------
Total shareholders' equity 11,066,305 9,993,616
----------- -----------
Total liabilities and shareholders' equity $15,218,178 $13,697,442
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
STATEMENTS OF OPERATIONS
For Fiscal Years Ended
----------------------
December 31, 1997 January 1, 1997
----------------- ---------------
Net sales $ 26,535,788 $ 20,636,760
Costs and expenses:
Food and beverage costs 9,944,401 7,767,907
Labor and related benefit costs 7,599,884 5,873,869
Restaurant operating expenses 2,648,596 1,805,317
Occupancy costs 2,957,428 2,234,300
------------ ------------
23,150,309 17,681,393
------------ ------------
Restaurant operating income 3,385,479 2,955,367
Operating expenses:
General and administrative 1,617,984 1,445,313
Amortization of pre-opening costs 353,336 316,077
------------ ------------
Operating income 1,414,159 1,193,977
Interest expense 89,068 31,269
Interest and other income (68,828) (98,513)
------------ ------------
Income before income taxes 1,393,919 1,261,221
Income taxes 411,706 278,240
------------ ------------
Net Income $ 982,213 $ 982,981
============ ============
Basic earnings per share $ .27 $ .28
============ ============
Diluted earnings per share $ .27 $ .27
============ ============
Basic weighted average shares 3,604,791 3,571,167
============ ============
Diluted weighted average shares 3,675,857 3,659,782
============ ============
SEE ACCOMPANYING NOTES.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 3, 1996 3,575,500 $ 35,755 $ 8,825,015 $ 181,153 $ 9,041,923
Purchase and retirement of common stock (10,000) (100) (34,688) (34,788)
Exercise of stock options 1,333 13 3,486 3,499
Net income -- -- -- 982,981 982,981
------------------------------------------------------------------
Balance at January 1, 1997 3,566,833 35,668 8,793,813 1,164,134 9,993,615
Purchase and retirement of common stock (2,000) (20) (7,292) (7,312)
Exercise of stock options 60,917 609 97,180 97,789
Net income -- -- -- 982,213 982,213
------------------------------------------------------------------
Balance at December 31, 1997 3,625,750 $ 36,257 $ 8,883,701 $ 2,146,347 $11,066,305
========= =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
STATEMENTS OF CASH FLOWS
For Fiscal Years Ended
----------------------
December 31, 1997 January 1, 1997
----------------- ---------------
OPERATING ACTIVITIES
Net income $ 982,213 $ 982,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,100,410 926,815
Amortization 353,336 316,077
Deferred rent (184,795) 421,812
Deferred taxes 14,100 142,800
Changes in operating assets and liabilities:
Receivables (90,897) (48,860)
Inventories (149,021) (37,266)
Pre-opening costs (631,013) (328,466)
Prepaid expenses and other current assets (175,289) (91,544)
Accounts payable 385,040 350,344
Accrued salaries and wages 124,025 75,433
Sales taxes payable 50,826 19,995
Deferred revenue - gift certificates 335,363 106,671
Income taxes payable (295,690) 281,093
Accrued expenses and other liabilities (25,722) (65,184)
----------- -----------
Net cash provided by operating activities 1,792,886 3,052,701
INVESTING ACTIVITIES
Purchases of property and equipment (4,168,779) (3,924,964)
Other assets (35,357) 51,828
----------- -----------
Net cash (used in) investing activities (4,204,136) (3,873,136)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 1,829,987 --
Repayment of short-term borrowings (1,829,987) --
Proceeds from sale/leaseback transaction 1,575,000 --
Exercise of stock options 97,788 3,499
Principal collected on long-term note 50,000 10,000
Common stock repurchased (7,313) (34,787)
----------- -----------
Net cash provided (used in) financing activities 1,715,475 (21,288)
Net (decrease) in cash and cash equivalents (695,775) (841,723)
Cash and cash equivalents at beginning of year 1,178,373 2,020,096
----------- -----------
Cash and cash equivalents at end of year $ 482,598 $ 1,178,373
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 806,697 $ 15,324
Interest paid $ 110,939 $ 31,269
SEE ACCOMPANYING NOTES.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS -- The Company manages and operates
full-service steakhouse restaurants. The Company currently has restaurants in
Minnesota, Wisconsin, New York, South Dakota and Illinois.
ACCOUNTING PERIOD -- The Company uses a 52/53 week fiscal year ending on the
Wednesday nearest to the end of the calendar year. Both fiscal 1997 and fiscal
1996 included 52 weeks of business activity.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents are carried at amortized cost which approximates market value and
are considered available-for-sale.
MARKETABLE SECURITIES -- At the time of purchase, management determines the
appropriate classification of marketable securities, consisting of U.S.
government and agency notes and commercial paper, are classified as
available-for-sale. Marketable securities are stated at fair value, which
approximates cost. Interest on securities is included in interest income.
INVENTORIES -- Inventories consist principally of food, beverages and supplies
and are stated at the lower of cost (first-in, first-out) or market.
PRE-OPENING COSTS -- Pre-opening costs consist of direct costs of hiring and
training the initial workforce and other direct costs associated with opening a
new restaurant. Such costs are amortized over a twelve-month period commencing
with the restaurant opening.
Accumulated amortization of pre-opening costs totaled $1,325,308 and $975,872 at
December 31, 1997 and January 1, 1997, respectively.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from five to ten years. Leasehold
improvements are amortized using the straight-line method over the shorter of
their estimated useful lives or the lease term, including option periods.
NET INCOME PER SHARE -- Net income per share has been calculated based on the
guidelines established by the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. Basic
earnings per share was calculated by dividing income available to common
stockholders by the weighted average common shares outstanding. Diluted earnings
per share was calculated using the dilutive effect of stock options and warrants
using the treasury stock method.
INCOME TAXES -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company will record impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION -- The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," but applies Accounting Principles Board Opinion
No. 25 (APB 25) and related interpretations in accounting for its plans. Under
APB 25, when the exercise price of employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, 1997 January 1, 1997
----------------- ---------------
Leasehold improvements $ 10,753,653 $ 8,432,010
Equipment 3,721,525 3,518,824
Furniture and fixtures 1,131,202 1,073,938
Office equipment 152,080 139,909
------------ ------------
15,758,460 13,164,681
Less accumulated depreciation and amortization (3,294,720) (2,194,311)
------------ ------------
$ 12,463,740 $ 10,970,370
============ ============
3. COMMON STOCK
In May 1995, the Company reincorporated as a Minnesota corporation. As a result
of the reincorporation, the par value of the Company's common stock was adjusted
from $1.00 to $.01. As a result, all periods presented have been adjusted to
reflect the new par value.
4. STOCK OPTIONS AND WARRANTS
Under the Company's stock option plan, the Company may grant either incentive
based or non-qualified options to employees, management and Directors. Under the
plan, options may be granted at prices not less than fair market value of the
Company's common stock at the grant date. Options become exercisable at the rate
of one-third of the granted shares after six, eighteen and thirty months from
the date of grant. The options are outstanding for ten years following the date
of grant.
In December 1995, the Company's Board of Directors decreased the exercise price
for incentive stock options previously granted to employees under the plan to
$2.63 per share, the closing price of the Company's common stock on the day of
the Board resolution.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS (CONTINUED)
Weighted Average
Shares Available Options Exercise Price
for Grant Outstanding Per Share
Balance at January 3, 1996 412,000 213,000 $ 2.73
Granted (59,500) 59,500 3.59
Canceled 51,000 (51,000) 3.06
Exercised -- (1,333) 2.63
------- -------
Balance at January 1, 1997 403,500 220,167 2.88
Granted (68,500) 68,500 3.81
Canceled 14,500 (14,500) 2.88
Exercised -- (27,167) 2.68
------- -------
Balance at December 31, 1997 349,500 247,000 $ 3.21
======= =======
In November 1992, the Company granted a non-qualified option to an officer to
purchases 33,750 shares at $.74 per share. This option was exercised in total in
February 1997.
At December 31, 1997 and January 1, 1997, options of 189,166 and 194,250,
respectively, were exercisable at weighted average prices of $3.04 and $2.30,
respectively.
The weighted average fair value of options granted during the years ended
December 31, 1997 and January 1, 1997 was $1.53 and $1.43 per share,
respectively.
PRO FORMA DISCLOSURES
Pro forma information regarding net income and earnings per share is required by
Statement 123, and is determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement. The fair
value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for both fiscal 1997 and 1996: risk free interest rate of 6%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's stock of .461; and a weighted-average expected life of the option of 4
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The effect of applying Statement 123's fair value method to the Company's
stock-based awards results in net income and earnings per share that are not
materially different from the actual amounts reported.
WARRANTS
In connection with the Company's initial public offering in December 1993, the
Company issued to the underwriter a warrant to purchase 120,000 shares of common
stock. The warrant became exercisable on December 9, 1994 and remains
outstanding until December 9, 1998. The warrant is exercisable at $7.20 per
share. The warrant contains antidilution provisions and is non-transferable.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. LINE OF CREDIT
The Company has a $500,000 line of credit facility with its bank. The line of
credit bears interest at the prime rate plus 1%, or 9.5% at December 31, 1997.
The line of credit expires in June 1998. At December 31, 1997, there were no
borrowings outstanding against the line of credit.
6. INCOME TAXES
The components of income tax expense for the years ended December 31, 1997 and
January 1, 1997 are as follows:
Fiscal 1997 Fiscal 1996
----------- -----------
Current:
Federal $295,366 $101,600
State 102,240 33,840
Deferred:
Federal 10,850 121,380
State 3,250 21,420
-------- --------
$411,706 $278,240
======== ========
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
December 31, 1997 January 1, 1997
----------------- ---------------
Deferred tax assets:
Alternative minimum tax credit carryforwards $ 90,700 $190,600
General business credit carryforwards 417,600 279,800
Other 18,800 20,400
-------- --------
Total deferred tax assets 527,100 490,800
Deferred tax liabilities:
Depreciation 300,600 345,900
Pre-opening costs 153,100 57,400
-------- --------
Total deferred tax liabilities 453,700 403,300
-------- --------
Net deferred tax assets $ 73,400 $ 87,500
======== ========
At December 31, 1997 the Company had AMT credit carryforwards and the general
business credit carryforwards of $508,300. These credits expire at various times
through the year 2011.
A reconciliation of statutory federal income taxes to the actual income tax
expense is as follows:
For the Fiscal Years Ended
December 31, 1997 January 1, 1997
----------------- ---------------
Income taxes at statutory rate $ 473,932 $ 428,815
State income taxes, net of federal benefit 60,733 54,950
Reduction of taxes previously provided for (122,959) (205,525)
--------- ---------
$ 411,706 $ 278,240
========= =========
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
Two shareholders of the Company own a construction company that managed the
construction of some of the Company's restaurants. Payments to this construction
company totaled $1,056,011 in fiscal 1997. The accounts payable balance of the
Company on December 31, 1997 included an amount of $432,634 that was payable to
that construction company.
The Company rents office space for $3,660 per month in a building owned by an
officer of the Company.
8. LEASE COMMITMENTS
The Company leases restaurant facilities and equipment under noncancelable
operating leases that expire at various dates, including renewal options,
through 2017. In addition, certain leases contain escalation clauses based upon
a fixed percentage increase and provisions for contingent rentals based on a
percentage of gross revenues, as defined. The Company also pays real estate
taxes, insurance and common area maintenance expenses related to these leases.
Rental expense under these lease agreements was $1,346,101 and $901,115 for the
years ended December 31, 1997 and January 1, 1997, respectively.
At December 31, 1997, future minimum lease payments under all noncancelable
lease agreements are as follows:
Period Ending:
1998 $ 1,860,009
1999 1,880,277
2000 1,914,721
2001 1,888,092
2002 1,635,044
Thereafter 13,814,066
----------
$ 22,992,209
=============
9. 401 (K) PLAN
In 1995, the Company adopted a defined contribution benefit plan which covers
virtually all full-time employees. Under the plan, eligible employees can elect
to contribute up to 15% of their annual compensation to the plan. The Company is
permitted, but not required, to make a matching contribution to the plan up to a
maximum of 6% of each participating employee's annual compensation.
The Company has not made a matching contribution since the plan's inception.
10. SALE OF A RESTAURANT
The Company sold its Q. Cumbers unit to the existing store manager, who was then
a related party, on June 14, 1995. The Company retained the services of an
independent consultant to assess the fair market value of the business and
validate the Company's selling price. The store was sold for $531,000. The
Company received $125,000 in cash and a promissory note for $406,000. The sale
resulted in a pre-tax gain of $278,120. The promissory note bears interest at
the prime rate. Interest is payable monthly. The buyer is required to make
future principal payments of an annual amount of $50,000 from 1998-2002. In
2003, the remaining principal balance is due in full. The balance of the note
receivable at December 31, 1997 was $346,000.
<PAGE>
TIMBER LODGE STEAKHOUSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT
On January 16, 1998, G B Foods Corporation and Timber Lodge Steakhouse, Inc.
executed a Definitive Merger Agreement whereby G B Foods Corporation will
acquire all of the outstanding common stock of Timber Lodge Steakhouse, Inc. The
parties expect to close the transaction in April 1998.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) DIRECTORS, EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR
- ---- --- -------- SINCE
--------
<S> <C> <C> <C>
Dermot F. Rowland 60 Chairman of the Board, Chief Executive Officer, Secretary and 1989
Director
Peter S. Bedzyk 46 President, Chief Operating Officer and Director 1996
William J. Birmingham 56 Chief Financial Officer ----
Laurence F. LeJeune (1) 60 Director 1991
John P. Uphoff (1) 65 Director 1994
</TABLE>
(1) Member of the Audit Committee and the Compensation Committee
DERMOT F. ROWLAND, a founder of the Company, has served as Chairman of the
Board, Chief Executive Officer, Secretary and as a Director of the Company since
1989. Prior to establishing the Company, Mr. Rowland was involved in the
formation and management of Homestyle Buffet, Inc., which subsequently changed
its name to Staceys Buffet Inc. ("Staceys"). Staceys, based in Largo, Florida,
develops and operates buffet restaurants. He co-founded Staceys in 1986 and
served as its President and Chief Executive Officer from 1986 to 1987. In 1987,
he became its Chairman of the Board and continued as a consultant and Director
until 1991.
PETER S. BEDZYK has served the Company in several executive and management
positions since 1991. Mr. Bedzyk has been the Company's President and Chief
Operating Officer since February 1997 and a Director since May 1996. From June
1995 to February 1997 he served as Executive Vice President of Operations and
from 1991 to June 1995, Mr. Bedzyk served as the Company's Operations Manager as
well as General Manager of the Minnesota Steakhouse ( a predecessor of the
Company). From 1985 through 1990, Mr. Bedzyk was an Operating Partner of a
Bonanza Family Restaurant franchisee in St. Louis, Missouri. Mr. Bedzyk has
previously been employed by various restaurants, including Ponderosa Steakhouse
and Cracker Barrel Restaurants.
WILLIAM J. BIRMINGHAM joined the Company in September 1997 as its Chief
Financial Officer. From July 1996 to May 1997 Mr. Birmingham served as Chief
Financial Officer of XOX Corporation, a St. Paul, Minnesota - based software
company that provides proprietary software for geometric computing. From January
1995 to March 1996, he served as Chief Financial Officer for B-Tree Verification
Systems, Inc., a Minneapolis - based company that provides test stations that
validate the software in devices containing embedded microprocessors. From
December 1992 through December 1994, he was Chief Financial Officer of Waters
Instruments, Inc., Rochester, Minnesota, a company that manufactures
electro-mechanical devices for the medical, computer, communications and
agriculture markets. Prior to this time, Mr. Birmingham was Chief Financial
Officer of a start-up medical device company in Minneapolis (f/k/a Cherne
Medical) and had an extended career with 3M Company, St. Paul, Minnesota
involving financial and marketing management positions.
LAURENCE F. LEJEUNE has, since 1981, been the owner, and has served as Chairman
of the Board, of LeJeune Investment, Inc., a corporate holding company which
operates Carousel Automobiles and Maplewood Imports, both of which are
automobile dealerships located in the Minneapolis - St. Paul metropolitan area.
He served as President and Chief Executive Officer of L.L. LeJeune Co., a
Minneapolis - based structural steel fabricator, from 1967 to 1989. Mr. LeJeune
currently serves as a Director of Vaughn Communications, Inc. based in Edina,
Minnesota, which provides video duplication services and broadcast video
equipment rental.
<PAGE>
JOHN P. UPHOFF has served since 1993 as President and Chief Executive Officer of
Uphoff Capital Management, Inc., an investment firm. He also is active as a
private investor. Mr. Uphoff served as Senior Vice President and a Director of
Leisure Research for Raymond James & Associates, Inc. from 1984 to 1993. Prior
to 1984, he served as President and Chief Executive Officer of Uppy's Family
Restaurants, Inc., a chain of multi-concept restaurants located in Wisconsin and
Florida. Mr. Uphoff currently serves as a Director of Monarch Casino & Resort,
Inc., a publicly-held gaming company based in Reno, Nevada.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Board has an Audit Committee comprised of Mr. LeJeune and
Mr. Uphoff. The Audit Committee reviews the results and scope of the audit and
other services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls, and reports
the results of its review to the Board. The Audit Committee held three meetings
during the fiscal year ended December 31, 1997.
COMPENSATION COMMITTEE. The Board has a Compensation Committee comprised of Mr.
LeJeune and Mr. Uphoff who are responsible for setting the compensation of the
executive officers of the Company. The Compensation Committee met three times
during the fiscal year ended December 31, 1997.
(b) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and all persons who beneficially own
more than 10% of the outstanding shares of the Company's Common Stock to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of the Company's Common Stock. Officers,
directors and persons owning more than 10 percent of the Company's outstanding
Common Stock are required by Securities and Exchange Commission regulation to
furnish the Company with copies of all Section 16(a) forms filed. Based solely
on a review of the copies of such reports and amendments thereto furnished to or
obtained by the Company or written representations that no other reports were
required, the Company believes that during the fiscal year ended December 31,
1997, the Company's directors, officers and beneficial owners of more than 10
percent of the Company's shares of Common Stock complied with all applicable
filing requirements, except that Mr. Rowland, Mr. Bedzyk, Mr. LeJeune and Mr.
Uphoff did not timely file one report each. All such reports have now been
filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information for the past three
years ended December 31 concerning executive compensation paid or accrued by the
Company to the Company's Chief Executive Officer (the "Named Executive
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
Name and Principal Position Year Salary Bonus Securities Underlying Options
- --------------------------- ---- ------- ----- ------------------------------
<S> <C> <C> <C> <C>
Dermot F. Rowland 1997 $ 52,516 (1) -- 10,000 (2)
(Chief Executive Officer) 1996 84,808 -- 15,000
1995 67,212 -- 50,000 (3)
</TABLE>
(1) Mr. Rowland was on disability for a portion of fiscal year 1997 and under
terms of the Company's disability benefit program, received those benefit
payments directly from the insurance company.
(2) In addition to the options for 10,000 shares granted in fiscal year 1997,
Mr. Rowland was granted options for 10,000 shares at an exercise price of $5.91
per share on January 15, 1998.
(3) Represents 50,000 options previously granted to Mr. Rowland which were
repriced from exercise prices of $5.55 and $4.95 per share to an amended
exercise price of $2.89 per share.
<PAGE>
STOCK OPTION GRANTS DURING FISCAL YEAR 1997
The following table provides information regarding stock options granted during
fiscal year 1997 to the Named Executive Officer in the Summary Compensation
Table.
% of Total Options
Options Granted in Fiscal Exercise Price
Name Granted Year Per Share Expiration Date
---- ------- ---- --------- ---------------
Dermot F. Rowland 10,000 (1) 14.6% $4.125 May 29, 2007
(1) The date of grant of the stock option was May 30, 1997. Options become
exercisable at the rate of one-third of the granted shares after six, eighteen
and thirty months from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
Number of Number of Unexercised Value (1) of Unexercised
Shares Options at December 31, 1997 Options at December 31, 1997
Acquired Value (1) ---------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dermot F. Rowland 33,750 $196,425 61,667 13,333 $215,472 $35,215
</TABLE>
(1) Value is the difference between the exercise price of the option and the
closing price of the common stock on December 31, 1997 of $6.56 per share.
DIRECTOR COMPENSATION
During the fiscal year ended December 31, 1997 the Company paid no fees or
compensation or expense reimbursement to each non-employee director. The Company
grants to its non-employee directors non-qualified stock options to purchase
shares of the Company's Common Stock at prices which are equal to the fair
market value on the date of grant. These non-qualified stock options are
exercisable at any time from the date of grant and have a ten-year life. During
the fiscal year ended December 31, 1997, the Company granted to each of its
non-employee directors, Laurence F. LeJeune and John P. Uphoff, options to
purchase 5,000 shares of Common Stock at exercise prices of $3.375 per share and
5,000 shares of Common Stock at an exercise price of $3.75, the respective
closing bid prices of the Company's Common Stock on the date of such grants. On
January 15, 1998 Mr. LeJeune and Mr. Uphoff were each granted non-qualified
options to purchase 10,000 shares of Common Stock at exercise prices of $5.375
per share, the closing bid price on January 15, 1998.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this Form
10-KSB, the number of shares of the Company's Common Stock beneficially owned by
(i) each executive officer and director of the Company; (ii) each person known
by the Company to beneficially own more than 5% of the outstanding shares of
Common Stock; and (iii) all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percentage of Outstanding
Name and Address of Beneficial Owner Beneficially Owned (1) Common Shares (9)
- ------------------------------------ ---------------------- -----------------
<S> <C> <C>
Dermot F. Rowland 595,119 (2) 16.1%
4021 Vernon Avenue South
Minneapolis, Minnesota 55416
Peter S. Bedzyk 40,042 (3) 1.1%
4021 Vernon Avenue South
Minneapolis, Minnesota 55416
William J. Birmingham 1,667 (4) *
4021 Vernon Avenue South
Minneapolis, Minnesota 55416
Laurence F. LeJeune 161,500 (5) 4.4%
8989 Wayzata Boulevard
Minneapolis, Minnesota 55426
John P. Uphoff 35,000 (6) 1.0%
P.O. Box 6611
Incline Village, Nevada 89450
All executive officers and directors as a group
(5 persons) 833,328 (7) 21.8%
Heartland Advisors, Inc. 506,000 (8) 13.9%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
- -----------------------------------
</TABLE>
* less than one percent
(1) Shares of Common Stock subject to options exercisable within 60 days after
the date of this Form 10-KSB are deemed to be outstanding for purposes of
computing the percentage of shares beneficially owned by the person holding such
options but are not deemed to be outstanding for purposes of computing such
percentage for any other person. Except as indicated by footnote, each person or
group identified has sole voting and investment powers with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Includes options to purchase up to 61,667 shares of Common Stock and 6,250
shares of Common Stock owned by Mr. Rowland's spouse.
(3) Includes options to purchase up to 36,667 shares of Common Stock.
(4) Represents options to purchase up to 1,667 shares of Common Stock.
(5) Includes options to purchase up to 50,000 shares of Common Stock.
(6) Includes options to purchase up to 30,000 shares of Common Stock.
(7) Includes options to purchase up to 180,001 shares of Common Stock.
(8) Based on information supplied on Schedule 13G, filed with the Securities and
Exchange Commission on January 8, 1998.
(9) The percentage of outstanding shares of Common Stock shown in the table
above is calculated based on 3,634,417 shares outstanding as of the date of this
Form 10-KSB and assumes that in each case the person or group exercised his or
its outstanding options which have vested or will vest within 60 days of this
Form 10-KSB.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two shareholders of the Company own a construction company that managed the
construction of some of the Company's restaurants. Payments to this construction
company totaled $1,056,011 in fiscal 1997. The accounts payable balance of the
Company on December 31, 1997 included an amount of $432,634 that was payable to
that construction company.
The Company rents office space for $3,660 per month in a building owned by an
officer of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
3.1 Articles of Incorporation of Timber Lodge Steakhouse, Inc. (1)
3.2 Bylaws (2)
10.4 Agreement and Plan of Merger dated as of January 16, 1998 among G B Foods
Corporation TLS Acquisition Corp. and Timber Lodge Steakhouse, Inc.
24.1 Power of Attorney (3)
27.1 Financial Data Schedule (4)
- --------------------------
(1) Incorporated by reference to the specific exhibit included in the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 14, 1995.
(2) Incorporated by reference to the specific exhibit included in the Company's
Registration Statement on Form SB-2, SEC File No. 33-71176-C.
(3) Included in signature page of this Form 10-KSB.
(4) Filed herewith electronically.
- --------------------------
(b) REPORTS ON FORM 8-K. The Company filed no reports on Form 8-K during the
fourth quarter of fiscal 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 27, 1998 Timber Lodge Steakhouse, Inc.
By /s/ Dermot F. Rowland
---------------------
Chief Executive Officer
By /s/ William J. Birmingham
-------------------------
Chief Financial Officer
In accordance with the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities indicated on February 27, 1998.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Dermot F.
Rowland and William J. Birmingham as their true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-KSB and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.
SIGNATURE POSITION
- --------- --------
/s/ Dermot F. Rowland
- ----------------------
Dermot F. Rowland Director, Chairman of the Board, Chief
Executive Officer and Secretary
/s/ William J. Birmingham
- --------------------------
William J. Birmingham Chief Financial Officer
/s/ Peter S. Bedzyk
- --------------------
Peter S. Bedzyk Director, President and Chief Operating Officer
/s/ Laurence F. LeJeune
- ------------------------
Laurence F. LeJeune Director
/s/ John P. Uphoff
- -------------------
John P. Uphoff Director
EXHIBIT 10.4
AGREEMENT AND PLAN OF MERGER
dated as of
January 16, 1998
among
GB FOODS CORPORATION
TLS ACQUISITION CORP.
and
TIMBER LODGE STEAKHOUSE, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER
1.1 The Merger............................................................ 2
1.2 Closing............................................................... 2
1.3 Effective Time of the Merger.......................................... 2
1.4 Effects of the Merger................................................. 2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS
2.1 Conversion of Shares.................................................. 2
2.2 Surrender and Payment................................................. 3
2.3 Fractional Shares..................................................... 4
2.4 Stock Options......................................................... 5
2.5 Warrants.............................................................. 5
ARTICLE III
THE SURVIVING CORPORATION
3.1 Certificate of Incorporation.......................................... 5
3.2 Bylaws................................................................ 5
3.3 Directors............................................................. 5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of the Company......................... 6
(a) Organization, Standing and Corporate Power........................ 6
(b) Capital Structure................................................. 6
(c) Authority; Noncontravention....................................... 7
(d) SEC Documents; Financial Statements; No Undisclosed Liabilities... 8
(e) Nature of Business and Assets..................................... 8
(f) Inventory......................................................... 9
(g) Licenses, Approvals, etc.......................................... 9
(h) Real Properties................................................... 9
(i) Tangible Personal Property........................................10
(j) Intellectual Property.............................................10
(k) Environmental Compliance..........................................10
(l) Absence of Certain Changes or Events..............................11
(m) Litigation........................................................12
<PAGE>
(n) Compliance with Laws..............................................12
(o) Absence of Changes in Stock or Benefit Plans......................13
(p) ERISA Compliance..................................................13
(q) Taxes.............................................................15
(r) Contracts; Debt Instruments.......................................16
(s) Insurance.........................................................18
(t) Interests of Officers and Directors...............................18
(u) Approval by Board.................................................18
(v) Brokers...........................................................18
(w) Fairness Opinion..................................................18
(x) Pooling of Interests..............................................18
(y) Disclosure........................................................18
4.2 Representations and Warranties of Parent and Merger Subsidiary........19
(a) Organization, Standing and Corporate Power........................19
(b) Capital Structure.................................................19
(c) Authority; Noncontravention.......................................19
(d) SEC Documents; Financial Statements; No Undisclosed
Liabilities......................................................20
(e) ..................................................................21
(f) Litigation........................................................21
(g) Absence of Changes................................................21
(h) Exchange Act Reports..............................................21
(i) Brokers...........................................................21
(j) Fairness Opinion..................................................21
(k) Pooling of Interests..............................................21
(1) Disclosure........................................................21
4.3 Delivery of Disclosure Schedules......................................22
ARTICLE V
COVENANTS OF THE COMPANY
5.1 Conduct of Business...................................................22
5.2 Affiliate Agreements..................................................24
5.3 Access to Information.................................................24
5.4 No Solicitation.......................................................24
5.5 Pooling of Interests; Tax Treatment...................................25
ARTICLE VI
COVENANTS OF PARENT
6.1 Conduct of Business...................................................25
6.2 Affiliate Agreements..................................................25
6.3 Confidentiality.......................................................26
6.4 Obligations of Merger Subsidiary......................................26
<PAGE>
6.5 Employee Benefit Plans................................................26
6.6 Indemnification and Insurance.........................................26
6.7 Nasdaq Listing........................................................27
6.8 Publication of Combined Financial Results.............................27
6.9 Registration Relating to Company Options..............................27
6.10 Access to Information.................................................27
6.11 Pooling of Interests; Tax Treatment...................................27
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
7.1 HSR Act Filings; Reasonable Efforts; Notification.....................27
7.2 Stockholder Meeting; Proxy Material...................................28
7.3 Press Releases........................................................30
7.4 Securities Reports....................................................30
7.5 Stockholder Approvals.................................................30
ARTICLE VIII
CONDITIONS TO THE MERGER
8.1 Conditions to the Obligations of Each Party...........................31
8.2 Conditions to the Obligations of Parent and Merger Subsidiary.........31
8.3 Conditions to the Obligations of the Company..........................33
ARTICLE IX
TERMINATION
9.1 Termination...........................................................35
9.2 Effect of Termination.................................................36
ARTICLE X
MISCELLANEOUS
10.1 Notices...............................................................37
10.2 Survival of Representations and Warranties............................37
10.3 Amendments; No Waivers................................................38
10.4 Fees and Expenses.....................................................38
10.5 Successors and Assigns; Parties in Interest...........................39
10.6 Severability..........................................................39
10.7 Governing Law.........................................................39
10.8 Entire Agreement......................................................39
10.9 Counterparts: Effectiveness; Interpretation...........................39
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is entered into as
of January 16, 1998, among TIMBER LODGE STEAKHOUSE, INC., a Minnesota
corporation (the "Company"), GB FOODS CORPORATION, a Delaware corporation
("Parent"), and TLS ACQUISITION CORP., a Minnesota corporation and a
wholly-owned subsidiary of Parent ("Merger Subsidiary").
WHEREAS, the respective Boards of Directors of Parent, Merger
Subsidiary and the Company have approved the merger of Merger Subsidiary into
the Company as set forth below (the "Merger"), upon the terms and subject to the
conditions set forth in this Agreement and the Minnesota Business Corporation
Act (the "MBCA"), whereby each issued and outstanding share of common stock, par
value $0.01 per share, of the Company (the "Shares") shall be converted into the
Merger Consideration (as deemed herein);
WHEREAS, the Board of Directors of the Company has unanimously (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to and in the best interests of the stockholders
of the Company, (ii) determined that the consideration to be paid in the Merger
is fair to and in the best interests of the stockholders of the Company, (iii)
approved this Agreement and the transactions contemplated hereby, including the
Merger, and (iv) resolved to recommend approval and adoption of this Agreement,
the Merger and the other transactions contemplated hereby by such stockholders;
WHEREAS, the Board of Directors of Parent has unanimously (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to and in the best interests of the stockholders
of the Parent, (ii) approved this Agreement and the transactions contemplated
hereby, including the Merger, and (iii) resolved to recommend approval of the
issuance of the Parent Common Stock (as defined herein) in connection with the
Merger by the Parent's stockholders;
WHEREAS, as a condition and inducement to Parent's willingness to enter
into this Agreement, certain stockholders of the Company have agreed to enter
into agreements with Parent in the form attached hereto as Exhibit A (the
"Affiliate Agreement");
WHEREAS, Fidelity National Financial, Inc. ("Fidelity") intends to
exercise options to purchase shares of stock of the Parent as more particularly
described in Article VIII;
WHEREAS, it is intended that the Merger be accounted for as a "pooling
of interests"; and
WHEREAS, Parent, Merger Subsidiary and the Company desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe various conditions to the consummation thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representations, warranties, covenants and agreements herein
contained, the parties hereto, intending to be legally bound, hereby agree as
follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the MBCA, Merger Subsidiary shall be merged
with and into the Company at the Effective Time (as defined herein). At the
Effective Time, (i) the separate corporate existence of Merger Subsidiary shall
cease, and (ii) the Company shall continue as the surviving corporation as a
direct wholly-owned subsidiary of Parent (Merger Subsidiary and the Company are
sometimes hereinafter referred to as "Constituent Corporations" and, as the
context requires, the Company, after giving effect to the Merger, is sometimes
hereinafter referred to as the "Surviving Corporation").
1.2 Closing. The closing of the Merger (the "Closing") shall take place as soon
as practicable, but in any case on or prior to the third business day after
which all of the conditions set forth in Article VIII hereof shall be fulfilled
or waived in accordance with this Agreement (the "Closing Date"). At the time of
the Closing, the Company and Merger Subsidiary will file a certificate of merger
with the Secretary of State of the State of Minnesota (the "Certificate of
Merger") and make all other filings or recordings required by the MBCA in
connection with the Merger.
1.3 Effective Time of the Merger. The Merger shall, subject to the MBCA, become
effective as of such time as the Certificate of Merger is duly filed with the
Secretary of State of the State of Minnesota or at such later time as is
specified in the Certificate of Merger (the "Effective Time").
1.4 Effects of the Merger. From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
shall be subject to all of the restrictions, disabilities, duties and
liabilities of the Company and Merger Subsidiary shall cease to exist, all as
provided under the MBCA.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
2.1 Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any Shares or the holder of any
shares of capital stock of Merger Subsidiary:
(a) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and become one
fully paid and nonassessable share of common stock of the Surviving Corporation
and such shares shall constitute the only outstanding shares of capital stock of
the Surviving Corporation; and
<PAGE>
(b) each Share outstanding immediately prior to the Effective Time
shall be converted into the right to receive 0.8000 of a share (the "Exchange
Ratio") of Parent's common stock, par value $0.08 per share (the "Parent Common
Stock"), without interest, together with cash in lieu of any fractional share of
Parent Common Stock as provided in Section 2.3 below (the "Merger
Consideration"); provided however, that the Exchange Ratio shall be subject to
adjustment as follows:
(i) If the Average Parent Common Stock Price (as defined in
Section 9.1(vi) below) is less than $7.50, Parent or the Company may terminate
this Agreement as provided in Section 9.1(vi) below or, alternatively, Parent
may elect to increase the Exchange Ratio to the number (rounded to the nearest
1/10000) determined by dividing $7.61 by the Average Parent Common Stock Price,
in which event the Company shall not have the right to terminate this Agreement;
and
(ii) If the Average Parent Common Stock Price is more than
$14.00, the Exchange Ratio shall be reduced to a number (rounded to the nearest
1/10000) equal to the product of the Exchange Ratio multiplied by a fraction,
the numerator of which is $14.00 and the denominator of which is the Average
Parent Common Stock Price.
In the event, prior to the Effective Time, of any recapitalization of
Parent through a subdivision of its outstanding shares into a greater number of
shares, or a combination of its outstanding shares into a lesser number of
shares, or any reorganization reclassification or other change in its
outstanding shares into the same or a different number of shares of other
classes, or a declaration of or dividend on its outstanding shares payable in
shares of its capital stock (a "Capital Change"), then the Exchange Ratio shall
be appropriately adjusted so as to maintain after such Capital Change the
relative proportionate interests in the number of shares of Parent Common Stock
(assuming consummation of the Merger) which the holders of Shares and the
holders of shares of Parent Common Stock had immediately prior to such Capital
Change.
2.2 Surrender and Payment.
(a) Prior to the Effective Time, Parent shall appoint a bank or trust
company (the "Exchange Agent") for the purpose of exchanging certificates
representing Shares for the Merger Consideration. Parent will make available to
the Exchange Agent the Merger Consideration to be paid in respect of the Shares
(the "Exchange Fund"). Promptly after the Effective Time, Parent will send, or
will cause the Exchange Agent to send, to each holder of Shares as of the
Effective Time a letter of transmittal for use in such exchange (which shall
specify that the delivery shall be effected, and risk of loss and title shall
pass, only upon proper delivery of the certificates representing Shares to the
Exchange Agent). The Exchange Agent shall, pursuant to irrevocable instructions,
make the payments provided in this Section 2.2. The Exchange Fund shall not be
used for any other purpose, except as provided in this Agreement.
(b) Each holder of Shares that have been converted into the Merger
Consideration, upon surrender to the Exchange Agent of a certificate or
certificates representing such Shares, together with a properly completed letter
of transmittal covering such Shares and other customary documentation, will be
entitled to receive the Merger Consideration payable in respect of such Shares.
As of the Effective Time, all such Shares shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a certificate
<PAGE>
previously representing any such Shares shall cease to have any rights with
respect thereto, except the right to receive the Merger Consideration upon
surrender of the certificates representing such Shares, as contemplated hereby.
(c) If any portion of the Merger Consideration is to be paid to a
person other than the registered holder of the Shares represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a person other than the
registered holder of such Shares or establish to the satisfaction of the Parent
and the Exchange Agent that such tax has been paid or is not required. For
purposes of this Agreement, "person" means an individual, a corporation, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
(d) After the Effective Time, there shall be no further transfers of
Shares. If, after the Effective Time, certificates representing Shares are
presented to the Surviving Corporation, they shall be canceled and exchanged for
the consideration provided for, and in accordance with, the procedures set forth
in this Article II.
(e) Any portion of the Exchange Fund made available to the Exchange
Agent pursuant to this Agreement that remains unclaimed by the holders of Shares
twelve months after the Effective Time shall be returned to Parent, upon
Parent's demand, and any such holder who has not exchanged his Shares for the
Merger Consideration in accordance with this Section 2.2 prior to that time
shall thereafter look only to Parent for payment of the Merger Consideration in
respect of such holder's Shares. Notwithstanding the foregoing, Parent shall not
be liable to any holder of Shares for any amount paid to a public official
pursuant to and in accordance with the requirements of applicable abandoned
property, escheat or similar laws.
(f) No dividends or other distributions declared or made after the
Effective Time with respect to the Parent Common Stock for which the record date
is after the Effective Time shall be paid to the holder of any certificate
formerly representing Shares until such certificate is surrendered to the
Exchange Agent as provided herein. Following surrender of any such certificate,
there shall be paid to the holder of record thereof (i) certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (ii) as promptly as practicable the amount of dividends or
other distributions having a record date after the Effective Time paid with
respect to such whole shares of Parent Common Stock prior to their surrender and
(iii) on the appropriate payment date, the amount of dividends or other
distributions payable with respect to such whole shares of Parent Common Stock
and having a record date after the Effective Time but a payment date subsequent
to their surrender.
2.3 Fractional Shares. No fractional shares of Parent Common Stock will be
issued in connection with the Merger. In lieu of any fractional share of Parent
Common Stock to which the holder of any Share would otherwise be entitled to
receive, such holder shall be entitled to receive an amount of cash equal to the
value of such fractional shares of Parent Common Stock, which value shall be
based upon the Average Parent Common Stock Price (as defined in ss 9.1(vi)
below). The fractional interests of each holder of Shares will be aggregated so
that no holder of Shares will receive cash in an amount equal to or greater than
the value of one whole share of
<PAGE>
Parent Common Stock. Parent shall provide sufficient funds to the Exchange Agent
to make the payments contemplated by this Section 2.3.
2.4 Stock Options. At the Effective Time, each Company Option and NQSO (as
defined below) shall be assumed by the Parent and shall thereafter be deemed to
constitute an option to purchase, on the same terms and conditions as were
applicable under such Company Option, the same Merger Consideration as the
holder of such Company Option would have been entitled to receive pursuant to
the Merger had such holder exercised such Company Option in full immediately
prior to the Effective Time and been the holder of the Shares issuable upon
exercise of such Company Option, at an exercise price per share calculated by
dividing the aggregate exercise price for the Shares otherwise purchasable
pursuant to such Company Option by the number of full shares of Parent Common
Stock deemed purchasable pursuant to such option; provided, however, that in the
case of any Company Option to which Section 421 of the Code applies by reason of
its qualification as an "incentive stock option" the exercise price and the
number of shares purchasable pursuant to such option and the terms and
conditions of exercise of such option shall be determined in order to comply
with Section 424(a) of the Code. "Company Option" means any option granted,
whether or not exercisable, and not exercised or expired, to a current or former
employee, director or independent contractor of the Company or any predecessor
thereof to purchase Shares pursuant to the Company's 1995 Stock Option Plan, as
amended (the "Option Plan"). "NQSO" means the non-qualified stock options
granted to the Company's officers in November, 1992.
2.5 Warrants. At the Effective Time, the warrant to purchase 120,000 Shares,
dated December 9, 1993, issued to John G. Kinnard and Company, Incorporated (the
"Warrants") shall be assumed by the Parent in accordance with the provisions of
such Warrant and shall thereafter be deemed to constitute a warrant to purchase,
on the same terms and conditions as were applicable under such Warrant, the same
Merger Consideration as the holder of such Warrant would have been entitled to
receive pursuant to the Merger had such holder exercised such Warrant in full
immediately prior to the Effective Time and been the holder of the Shares
issuable upon exercise of such Warrant, at an exercise price to be determined in
accordance with the provisions of such Warrant.
ARTICLE III
THE SURVIVING CORPORATION
3.1 Articles of Incorporation. The Articles of Incorporation of the Company in
effect at the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until amended in accordance with applicable law.
3.2 Bylaws. The bylaws of the Merger Subsidiary in effect at the Effective Time
shall be the bylaws of the Surviving Corporation until amended in accordance
with applicable law.
3.3 Directors. Upon the Effective Time, the Board of Directors of the Surviving
Corporation shall consist of five (5) members, and the initial directors of the
Surviving Corporation shall, until successors are duly elected and qualified in
accordance with applicable law, be William P. Foley, II, Andrew F. Puzder, Frank
P. Willey, Dermot F. Rowland, and Tom Thompson.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of the Company. The Company represents and
warrants to Parent and Merger Subsidiary, as of the date hereof and as of the
Closing Date, subject to the exceptions and qualifications set forth in the
disclosure schedule delivered by the Company to Parent and Merger Subsidiary
pursuant to Section 4.3 of this Agreement (the "Disclosure Schedule"), as
follows (whenever the representations or warranties of the Company are qualified
by the knowledge of the Company, knowledge shall mean actual knowledge after
reasonable investigation of the fact or matter in question of the management
employees of the Company identified in Section 4.1 of the Disclosure Schedule):
(a) Organization. Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of Minnesota and has the requisite corporate power and authority to carry on its
business as now being conducted. 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) could not reasonably
be expected to have a "Company Material Adverse Effect," which for purposes of
this Agreement means to (i) have a material adverse effect on the value,
condition (financial or otherwise), prospects, business, insurability or result
of operations of the Company, (ii) impair the ability of any party hereto to
perform its obligations under this Agreement or (iii) prevent or materially
delay consummation of any of the transactions contemplated by this Agreement.
The Company has delivered to Parent complete and correct copies of its Articles
of Incorporation and bylaws. The Company is not a party to any joint venture,
partnership or similar business or entity (the "Joint Ventures"). The Company
does not have any subsidiary. For purposes of this Agreement, a "subsidiary" of
any person means another person in which such first person, directly or
indirectly, owns 50% or more of the equity interests or has the right, through
ownership of equity, contractually or otherwise, to elect at least a majority of
its Board of Directors or other governing body.
(b) Capital Structure. The authorized capital stock of the Company
consists of 10,000,000 Shares par value $0.01 per share. As of December 31,
1997, (i) 3,625,750 Shares were issued and outstanding, (ii) Company Options to
Purchase 247,500 Shares were outstanding, (iii) no Shares were reserved for
issuance pursuant to the NQSO, and (iv) 120,000 Shares were reserved for
issuance upon exercise of the Warrants. Except as set forth above, no shares of
capital stock or other equity or voting securities of the Company are
authorized, 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 Options or the Warrants will, when issued, be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are not any bonds, debentures, notes or other indebtedness or
securities of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of the Company may vote. Except as set forth above in this Section
4.1(b) and in Section 4.1(b) of the Disclosure Schedule there are not any
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company is a party or by
which it is
<PAGE>
bound obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other equity or voting
securities of the Company or obligating the Company to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. Section 4. 1(b) of the Disclosure
Schedule also sets forth a true and correct list of the Company Options and
Warrants which are outstanding as of the date hereof, which list sets forth, for
each holder of a Company Option or Warrant, the number of Shares subject
thereto, the exercise price and the expiration date thereof. There are no
outstanding rights, commitments, agreements, arrangements or undertakings of any
kind obligating the Company to repurchase, redeem or otherwise acquire or
dispose of any shares of capital stock or other equity or voting securities of
the Company or any securities of any type described in the two immediately
preceding sentences.
(c) Authority; Noncontravention. The Company has the requisite
corporate power and authority to enter into this Agreement and, subject to the
Company Stockholder Approval (as defined below) required in connection with the
consummation of the Merger, to consummate the transactions contemplated by this
Agreement. The Merger requires the approval by the affirmative vote of the
holders of a majority of the outstanding Shares (the "Company Stockholder
Approval"), which approval is the only vote of the holders of any class or
series of the capital stock of the Company necessary to approve the Merger and
this Agreement and the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of the Company, except for the Company
Stockholder Approval in connection with the consummation of the Merger. 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. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation,
modification or acceleration of any obligation or to a loss of a material
benefit under, or result in the creation of any Lien (as defined below) upon any
of the properties or assets of the Company under, (i) except as disclosed in
Section 4.1(c)(i) of the Disclosure Schedule, the Articles of Incorporation or
bylaws of the Company, (ii) except as disclosed in Section 4. 1(c)(ii) of the
Disclosure Schedule, any loan or credit agreement, note, bond, mortgage,
indenture, Lien, lease or any other contract, agreement, instrument, permit,
commitment, concession, franchise or license applicable to the Company, its
properties or assets, or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or its
properties or assets, other than any such conflicts, violations, or defaults
that, individually or in the aggregate, would not have a Company Material
Adverse Effect. No consent, approval, franchise, order, license, permit, waiver
or authorization of, or registration, declaration or filing with or exemption,
notice, application, or certification by or to (collectively, "Consents") any
federal, state or local government or any arbitration panel or any court,
tribunal, administrative or regulatory agency or commission or other
governmental authority, department, bureau, commission or agency, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the Company
in connection with the execution and delivery of this
<PAGE>
Agreement by the Company or the consummation by the Company of the transactions
contemplated by this Agreement except for (i) the required Consents listed in
Section 4.1(c)(i) and 4.1(c)(ii) of the Disclosure Schedule, (ii) the filing of
the Certificate of Merger in accordance with the MBCA and similar documents with
the relevant authorities of other states in which the Company is qualified to do
business, (iii) compliance with any applicable requirements of the Securities
Act of 1933, as amended, and the rules and regulations thereunder (the
"Securities Act"), and the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder (the "Exchange Act"), and (iv) such other
Consents as to which the failure to obtain or make, individually or in the
aggregate, could not reasonably be expected to have a Company Material Adverse
Effect. The term "Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other) or preference,
priority or other security agreement of any kind or nature whatsoever,
including, without limitation, any conditional sale or other title retention
agreement and any financing lease having substantially the same effect as any of
the foregoing.
(d) SEC Documents; Financial Statements: No Undisclosed Liabilities.
The Company has timely filed all reports, schedules, forms, statements, exhibits
and other documents required to be filed with the Securities and Exchange
Commission ("SEC") by the Company (the "Company SEC Documents") under or
pursuant to the Exchange Act or the Securities Act. True and correct copies of
each of the Company SEC Documents have been provided or made available to
Parent. As of their respective dates, or as subsequently amended prior to the
date of this Agreement, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act as the
case may be, applicable to such Company SEC Documents, and none of the Company
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Company included in the
Company SEC Documents comply in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with United States generally accepted
accounting principles ("GAAP") (except in the case of unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis throughout the
periods involved (except as specified on the Disclosure Schedule) and fairly
present the financial position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments). Except
as set forth in the Company SEC Documents, the Company has no liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise),
except for liabilities and obligations which, individually or in the aggregate,
could not reasonably be expected to have a Company Material Adverse Effect.
(e) Nature of Business and Assets. The Company is engaged in the
business (the "Business") of owning and operating seventeen full-service
steakhouse restaurants (the "Restaurants"), under the name "Timber Lodge
Steakhouse." All assets used in the operation of the Business (the "Restaurant
Assets") constitute all of the assets necessary to conduct the operations of the
Restaurants in the ordinary course of business. All of the assets owned and
leased by the Company that are used or held for use in the operation of the
Restaurants are included in the Restaurant Assets and, except as set forth in
Sections 4.1(h) and 4.1(i)(ii) below at
<PAGE>
the Effective Time good and marketable title to the Restaurant Assets will be
vested in the Surviving Corporation, free and clear of all claims, indebtedness,
liabilities, Liens and rights of any third party. All of the Restaurant Assets,
including all equipment, machinery and other items of tangible property, have
continuously been maintained by the Company in the ordinary course of business.
As of the Effective Time, the Restaurant Assets will be in good working
condition and repair (ordinary wear and tear excepted) and are suitable for use
in connection with the operation of the Restaurants. The Restaurant Assets do
not require any material repair other than in the normal course of business
which would require an expenditure in excess of $5,000 per Restaurant or $25,000
in the aggregate. Schedule 4.1(e) of the Disclosure Schedule sets forth a true,
correct and complete list of each item of personal property representing
Restaurant Assets having a net book value of more than $5,000.
(f) Inventory. The Company's inventory of food, beverages, utensils and
supplies (the "Inventory") for each Restaurant, as of the Effective Time, is (i)
sufficient for the operation of such Restaurant consistent with the ordinary
course of business; (ii) consists of items which are good and
merchantable within commercially reasonable standards in the restaurant
industry; and (iii) are of a quality and quantity presently usable or saleable
in the ordinary course of business.
(g) Licenses, Approvals. etc. The Company possesses or has been granted
all registrations, filings, applications, certifications, notices, consents,
licenses, permits, approvals, certificates, franchises, orders, qualifications,
authorizations and waivers of any Governmental Entity (federal, state and local)
necessary to enable it to conduct its business in the manner in which it is
presently being conducted (the "Licenses"), which Licenses are listed in Section
4.1(g) of the Disclosure Schedule. Except as described in Section 4.1(g) of the
Disclosure Schedule, all of the Licenses are in full force and effect. Except as
described in Section 4.1(g) of the Disclosure Schedule, no action of any kind is
pending or, to the knowledge of the Company, threatened seeking the revocation
or limitation of any of the Licenses.
(h) Real Properties. The Company does not own any real property.
Section 4. 1(h) of the Disclosure Schedule lists all real property (including
all land and buildings, "Real Estate") leased by the Company, stating the name
of the lessor or sublessor, whether the property is leased as lessee or
sublessee, and giving each property's address. The Company has delivered or
caused to be delivered to Parent complete and accurate copies of the written
leases and subleases which relate to the Real Estate, together with all
amendments or supplements thereto (the "Leases"). The Company has not received
written notice of condemnation or eminent domain proceedings and is not aware of
any such proceedings pending or threatened against any Real Estate property.
Except as disclosed in Section 4.1(h) of the Disclosure Schedule, the Company
has not received any notice from any city, village or other Governmental Entity
of any zoning, ordinance, building, fire or health code or other legal violation
in respect of any Real Estate. The Leases are in full force and effect and are
valid, binding and enforceable in accordance with their respective terms; no
amount payable under any Lease is past due; the Company is in compliance in all
material respects with all commitments and obligations on its part to be
performed or observed under each Lease and is not aware of the failure by any
other party to any Lease to comply in all material respects with all of its
commitments and obligations; the Company has not received any written notice (A)
of a default (which has not been cured), offset or counterclaim under any Lease,
or, any other communication calling upon it to comply with
<PAGE>
any provision of any Lease or asserting noncompliance, or asserting the Company
has waived or altered its rights thereunder, and no event or condition has
happened or presently exists which constitutes a default or, after notice or
lapse of time or both, would constitute a default under any Lease on the part of
the Company or any other party, or (B) of any complaint, claim, prosecution,
indictment, action, suit, arbitration, investigation or proceeding by or before
any Governmental Entity (an "Action") against any party under any Lease which if
adversely determined would result in such Lease being terminated or cut off; and
(v) the Company has not assigned, mortgaged, pledged or otherwise encumbered its
interest, if any, under any Lease.
(i) Tangible Personal Property. Except as disclosed in Section 4.1(i)
of the Disclosure Schedule, the Company (i) has good and valid title to all the
tangible personal property material to its business and reflected in the latest
audited financial statements included in the Company SEC Documents as being
owned by the Company or acquired after the date thereof (except properties
consumed, sold or otherwise disposed of in the ordinary course of business since
the date thereof), free and clear of all Liens except (A) statutory Liens
securing payments not yet due and (B) such imperfections or irregularities of
title or Liens as do not materially affect the use of the properties or assets
subject thereto or affected thereby or otherwise materially impair its Business
operations, and (ii) is the lessee of all tangible personal property material to
the Company's Business and reflected as leased in the latest audited financial
statements included in the Company SEC Documents (or on the books and records of
the Company as of the date thereof or acquired after the date thereof, except
for leases that have expired by their terms or that have been transferred in the
ordinary course of business) and is in possession of the properties purported to
be leased thereunder, and each such lease is valid and in full force and effect
without default thereunder by the lessee or, to the Company's knowledge, the
lessor. The Company enjoys peaceful and undisturbed possession under all such
leases. Such owned and leased tangible personal property is in good working
order, reasonable wear and tear excepted.
(j) Intellectual Property. The Company has presently effective federal
and state registrations of its trade marks, trade names and service marks (the
"Registered Marks") as listed in Section 4.1(j) of the Disclosure Schedule, and
the same are adequate for use in, and the protection of, the Business. No person
other than the Company has any right to use any Registered Mark in any fashion
other than as described on Schedule 4.l(j), no person has claimed or is
claiming that any Registered Mark infringes any property or right of such
person, and no person is engaged in any infringing use of a Registered Mark or
uses any name or mark confusingly similar to any Registered Mark. The Company
does not own any patents (including design patents) except as listed in Schedule
4.1(j) of the Disclosure Schedule.
(k) Environmental Compliance.
(i) For purposes of this Section 4.1(k), (A) "Hazardous
Substance" means any pollutant contaminant, hazardous or toxic substance or
waste, solid waste, petroleum or any fraction thereof, or any other chemical
substance or material listed or identified in or regulated by or under any
Environmental Law; (B) "Environmental Law" means the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. ss 9601 et seq., the Solid
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. ss 6901 et seq., the Clean Water Act, 33 U.S.C. ss 1251 et seq., the
Clean Air Act, 42 U.S.C. ss 7401 et seq., the Toxic Substances Control Act, 15
U.S.C. ss 2601 et seq., the Safe
<PAGE>
Drinking Water Act, 42 U.S.C. ss 300f et seq., the Emergency Planning and
Community Right to Know Act, 42 U.S.C. ss 11001 et seq., the Occupational Safety
and Health Act, 29 U.S.C. ss 651 et seq., the Oil Pollution Act, 33 U.S.C. ss
2701 et seq., in each case as amended from time to time, and all regulations
promulgated thereunder, and any other statute, law, regulation, ordinance,
bylaw, rule, judgment, order, decree or directive of any Governmental Entity
dealing with pollution or the protection of natural resources or the indoor or
ambient environment or with the protection of human health or safety, and (C)
"RCRA Hazardous Waste" means a solid waste that is listed or classified as a
hazardous waste, as that term is defined in or pursuant to the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. ss 6901 et seq.
(ii) Except as set forth on Section 4.1(k) of the Disclosure
Schedule: (A) there are no claims pending against the Company, or any of its
predecessors (the "Company Interests") relating to or arising out of a Hazardous
Substance nor are any such claims, to the Company's knowledge, threatened
against Company Interests, nor has the Company received any notice, alleging or
warning that any Real Estate or any real property previously operated by any
Company Interests is, has been or may be in violation of or in noncompliance
with any Environmental Law; (B) to the Company's knowledge, no Hazardous
Substance is now present in amounts, concentrations or conditions requiring
removal, remediation or any other response, action or corrective action under,
or forming the basis of a claim pursuant to, any Environmental Law, in, on, from
or under the Real Estate or any real property previously owned or operated by
any Company Interests; (C) the Real Estate is not being and has not been during
the period of time they have been leased by any Company Interests used in
connection with the business of manufacturing, storing or transporting Hazardous
Substances, and no RCRA Hazardous Wastes are being or have been during the
period of time operated by any Company Interests treated, stored or disposed of
there in violation of any Environmental Law; and (D) there neither are now nor
have there been during the period of time they have been operated by any Company
Interests any underground storage tanks, lagoons or other containment facilities
of any kind which contain or contained any Hazardous Substances on the Real
Estate.
(iii) The Company has made available to the Parent true and
correct copies of any and all written communications received by the Company
from any Governmental Entity relating in whole or in part to the existence of
Hazardous Substances at any Real Estate or any real property previously owned or
operated by any Company Interests or the compliance of the owners, operators or
lessees thereof with respect to any Environmental Law.
(l) Absence of Certain Changes or Events. Except as contemplated by
this Agreement or disclosed in Section 4.1(l) of the Disclosure Schedule, since
September 10, 1997, the Company has conducted the Business only in the ordinary
course consistent with past practice, and there has not been (i) any event,
occurrence or development which, individually or in the aggregate, has had or
could reasonably be expected to have a Company Material Adverse Effect, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company's
capital stock or any repurchase, redemption or other acquisition by the Company
of any outstanding shares of capital stock or other securities of the Company,
(iii) any adjustment, split, combination or reclassification of any of its
capital stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, (iv) (A) any granting by the Company to any current or former
director, officer or employee of the
<PAGE>
Company of any material increase in compensation or benefits, except for grants
to employees who are not officers or directors in the ordinary course of
business consistent with past practice, (B) any granting by the Company to any
such director, officer or employee of any increase in severance or termination
pay (including the acceleration in the vesting of Shares (or other property) or
the provision of any tax grossup), or (C) any entry by the Company into any
employment, deferred compensation, severance or termination agreement or
arrangement with or for the benefit of any such current or former director,
officer or employee, (v) any damage, destruction or loss, whether or not covered
by insurance, that has had or could have a material adverse effect on the
Restaurants or a Company Material Adverse Effect, (vi) any change in accounting
methods, principles or practices by the Company, (vii) any amendment, waiver or
modification of any material term of any outstanding security of the Company,
(viii) any incurrence, assumption or guarantee by the Company of any material
indebtedness for borrowed money or other material obligations, other than in the
ordinary course of business consistent with past practice, (ix) any creation or
assumption by the Company of any Lien on any asset, other than financing
transactions in the ordinary course of business consistent with past practice,
(x) any making of any lease, loan, advance or capital contributions to or
investment in any person other than in the ordinary course of business
consistent with past practice, but in no event in the amount of more than
$10,000 for any one transaction or $50,000 in the aggregate, (xi) any
transaction or commitment made, or any contract or agreement entered into, by
the Company relating to its assets or business of more than $10,000 for any one
transaction or $50,000 for any series of transactions, (xii) any acquisition or
disposition of any assets involving more than $10,000 per transaction or $50,000
in the aggregate or any merger or consolidation with any person, (xiii) any
relinquishment by the Company of any contract or other right, in either case,
material to the Company, other than transactions and commitments in the ordinary
course of business consistent with past practice, or (xiv) any agreement,
commitment, arrangement or undertaking by the Company to perform any action
described in clauses (i) through (xiii).
(m) Litigation. Except as disclosed in Section 4.1(m) of the Disclosure
Schedule, there are no actions or proceedings pending or, to the knowledge of
the Company, threatened against the Company.
(n) Compliance with Laws. The conduct by the Company of the Business is
and has been in compliance with (i) all statutes and laws, (ii) all regulations,
ordinances, and rules, and (iii) all judgments, orders or decrees to which the
Company is subject or is a party, except for violations or failures so to
comply, if any, that, individually or in the aggregate, could not reasonably be
expected to have a Company Material Adverse Effect or to give rise to material
fines or other material civil penalties or any criminal liabilities. Except as
set forth on Section 4.1(n) of the Disclosure Schedule, the Company has not
received any notice or other communications relating to any alleged violation of
any statute, law, regulation, ordinance, rule, judgment, order or decree from
any Governmental Entity, or of any investigation with respect thereto,
applicable to the Company.
<PAGE>
(o) Absence of Changes in Stock or Benefit Plans. Except as disclosed
in Section 4.1(o) of the Disclosure Schedule or as required under this
Agreement, since January 1, 1997, there has not been (i) any acceleration,
amendment or change of the period of exercisability or vesting of any Warrant,
NQSO, or Company Options under the Option Plan (including any discretionary
acceleration of the exercise periods or vesting by the Company's Board of
Directors or any committee thereof or any other persons administering the Option
Plan) or any authorization of cash payments in exchange for the Warrant, the
NQSO, or any Company Options under the Option Plan, (ii) any adoption or
material amendment by the Company of any collective bargaining agreement or any
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, stock appreciation
right, retirement, vacation, severance, disability, death benefit,
hospitalization, medical, worker's compensation, disability, supplementary
unemployment benefits, or other plan, arrangement or understanding (whether or
not legally binding) or any employment agreement providing compensation or
benefits to any current or former employee, officer, director or independent
contractor of the Company or any beneficiary thereof or entered into, maintained
or contributed to, as the case may be, by the Company (collectively, "Benefit
Plans"), or (iii) any adoption of, or amendment to, or change in employee
participation or coverage under, any Benefit Plans which would increase
materially the expense of maintaining such Benefit Plans above the level of the
expense incurred in respect thereof for the fiscal year ended on January 1,
1997.
(p) ERISA Compliance.
(i) Section 4.1(p) of the Disclosure Schedule contains a list
of all "employee pension benefit plans" (defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), "employee welfare
benefit plans" (defined in Section 3(1) of ERISA) and all other employee benefit
plans (collectively the "Benefit Plans"). With respect to each Benefit Plan, the
Company has delivered or made available to Parent a true, correct and complete
copy of: (A) each writing constituting a part of such Benefit Plan, including
without limitation all plan documents, benefit schedules, trust agreements, and
insurance contracts and other funding vehicles; (B) the most recent Annual
Report (Form 5500 Series) and accompanying schedule, if any; (C) the current
summary plan description, if any; (D) the most recent annual financial report,
if any; and (E) the most recent determination letter from the Internal Revenue
Service, if any.
(ii) Section 4.1(p) of the Disclosure Schedule identifies each
Benefit Plan that is intended to be a "qualified plan" within the meaning of
Section 401(a) of the Code ("Qualified Plans"). No request for a favorable
determination letter has been filed with the Internal Revenue Service with
respect to any such Qualified Plan, but the Company believes that each such
Qualified Plan is in fact so "qualified" within the meaning of Section 401(a) of
the Code, and there are no existing circumstances nor any events that have
occurred that could adversely affect the qualified status of any Qualified Plan
or the related trust.
(iii) The Company has complied, and is now in compliance, in
all material respects with all provisions of ERISA, the Code, and all laws and
regulations applicable to the Benefit Plans of which the failure to comply would
have a Company Material Adverse Effect. Except as set forth in Section 4.1(p) of
the Disclosure Schedule, no prohibited transaction has
<PAGE>
occurred with respect to any Benefit Plan. All contributions required to be made
to any Benefit Plan by applicable law or regulation or by any plan document or
other contractual undertaking, and all premiums due or payable with respect to
insurance policies funding any Benefit Plan, for any period through the date
hereof have been timely made or paid in full or, to the extent not required to
be made or paid on or before the date hereof, have been fully reflected in the
Company SEC Documents.
(iv) No Benefit Plan is subject to Title IV or Section 302 of
ERISA or Section 412 or 4971 of the Code. Neither the Company nor any of its
ERISA Affiliates (as defined below) has at any time since January 1, 1993,
contributed to or been obligated to contribute to any "multiemployer plan"
within the meaning of Section 4001(a)(3) of ERISA or any plan with two or more
contributing sponsors at least two of whom are not under common control, within
the meaning of Section 4063 of ERISA. There does not now exist, nor do any
circumstances exist that could result in, any Controlled Group Liability (as
defined below) that would be a liability of the Company following the Closing.
"ERISA Affiliate" means, with respect to any entity, trade or business, any
other entity, trade or business that is a member of a group described in Section
414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes
the first entity, trade or business, or that is a member of the same "controlled
group" as the first entity, trade or business pursuant to Section 4001(a)(14) of
ERISA. "Controlled Group Liability" means any and all liabilities under (i)
Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the
Code, (iv) the continuation coverage requirements of Section 601 et seq. of
ERISA and Section 4980B of the Code, and (v) corresponding or similar provisions
of foreign laws or regulations, other than such liabilities that arise solely
out of, or relate solely to, the Benefit Plans.
(v) Except as set forth in the Company SEC Documents or in
Section 4.1(p) of the Disclosure Schedule, the Company does not have any
liability for life, health, medical or other welfare benefits to former
employees or beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA
and at no expense to the Company.
(vi) Except as set forth in Section 4.1(p) of the Disclosure
Schedule, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (either alone or in
conjunction with any other event) result in, cause the accelerated vesting or
delivery of, or increase the amount or value of, any payment or benefit to any
employee of the Company. Without limiting the generality of the foregoing, no
amount paid or payable by the Company in connection with the transactions
contemplated hereby (either solely as a result thereof or as a result of such
transactions in conjunction with any other event) will be an "excess parachute
payment" within the meaning of Section 280G of the Code.
<PAGE>
(vii) No labor organization or group of employees of the
Company has made a pending demand for recognition or certification, and there
are no representation or arbitration proceedings or petitions seeking a
representation proceeding presently pending or threatened to be brought or
filed, with the National Labor Relations Board or any other labor relations
tribunal or authority. There are no organizing activities, strikes, work
stoppages, slowdowns, lockouts, material arbitrations or material grievances, or
other material labor disputes pending or, to the knowledge of the Company,
threatened against or involving the Company.
(viii) There are no pending or threatened claims, and the
fiduciaries of the Benefit Plans have not advised the Company that, with respect
to their duties to the Benefit Plans or the assets or any of the trusts under
any of the Benefit Plans, there are any pending or threatened claims (other than
claims for benefits in the ordinary course), lawsuits or arbitrations which have
been asserted or instituted against the Benefit Plans, which could reasonably be
expected to result in any material liability of the Company to the Pension
Benefit Guaranty Corporation, the Department of Treasury, the Department of
Labor or any multiemployer Benefit Plan.
(q) Taxes. For purposes of this Agreement, (A) the term "Returns" shall
mean all returns, declarations, reports, statements, and other documents
required to be filed with respect to federal, state, local and foreign Taxes (as
defined below) or for information purposes, and the term "Return" means any one
of the foregoing Returns, and (B) the term "Taxes" shall mean all federal,
state, local and foreign net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, and any and all other taxes,
together with any interest and any penalties, additions to tax, or additional
amounts with respect thereto, and the term "Tax" means any one of the foregoing
Taxes.
(i) Except as set forth in Section 4.1(q)(i) of the Disclosure
Schedule, the Company has duly prepared and timely filed all federal, state,
local and foreign Returns which were required to be filed by or in respect of
the Company, or any of its properties, income and/or operations. As of the time
they were filed, such Returns accurately reflected the material facts regarding
the income, business, assets, operations, activities, status of the entity on
whose behalf the Return was filed and any other information required to be shown
thereon. No extension of time within which the Company may file any Return is
currently in force.
(ii) With respect to all amounts in respect of Taxes,
including interest and penalties imposed on the Company or for which the Company
is or could be liable, whether to taxing authorities or to other persons, all
material amounts required to be paid by or on behalf of the Company to taxing
authorities or to other persons have been paid.
(iii) The Company has not been advised that there is any
review or audit in progress by any taxing authority of any Tax liability of the
Company currently in progress. Except as disclosed in Section 4.1(q)(iii) of the
Disclosure Schedule, the Company has not received any written notice of any
pending or threatened audit by the Internal Revenue Service or any state, local
or foreign agency of any Returns or Tax liability of the Company for any period.
The Company currently has no unpaid deficiencies assessed by the Internal
Revenue Service or any state, local or foreign taxing authority arising out of
any examination of any of the Returns of
<PAGE>
the Company nor, to the knowledge of the Company, is there reason to believe
that any material deficiency will be assessed.
(iv) No agreements are in force or are currently being
negotiated by or on behalf of the Company for any waiver or for the extension of
any statute of limitations governing the time of assessments or collection of
any Tax. No closing agreements or compromises concerning Taxes of the Company
are currently pending.
(v) The Company has withheld from each payment made to any of
its officers, directors and employees, the amount of all applicable Taxes,
including, but not limited to, income tax, social security contributions,
unemployment contributions, backup withholding and other deductions required to
be withheld therefrom by any Tax law and have paid the same to the proper Taxing
authorities within the time required under any applicable Tax law.
(vi) There are no tax Liens, whether imposed by any federal,
state, local or foreign taxing authority, outstanding against any assets owned
by the Company, except for Liens for Taxes that are not yet due and payable.
None of the assets owned by the Company is property that is required to be
treated as being owned by any other person pursuant to the safe harbor lease
provisions of former Section 168(f)(8) of the Code. None of the assets owned by
the Company directly or indirectly secures any debt, the interest on which is
tax-exempt under Section 103(a) of the Code. None of the assets owned by the
Company is "tax-exempt use property" within the meaning of Section 168(h) of the
Code. The Company is a "United States person" within the meaning of the Code.
(vii) Except as set forth in Section 4.1(q)(vii) of the
Disclosure Schedule, the Company is not a party to any agreement, contract, or
arrangement that, individually or collectively, could give rise to the payment
of any amount (whether in cash or property, including Shares or other equity
interests) that would not be deductible pursuant to the terms of Sections
162(a)(1), 162(m), 162(n) or 280G of the Code.
(r) Contracts; Debt instruments.
(i) Except as otherwise disclosed in Section 4.1(r)(i) of the
Disclosure Schedule, the Company is not a party to or subject to:
(A) any collective bargaining or other agreements
with labor unions, trade unions, employee representatives,
work committees, guilds or associations representing employees
of the Company;
(B) any employment, consulting, severance,
termination, or indemnification agreement, contract, lease or
arrangement, including any oral agreement, contract, lease or
arrangement which requires the payment of over $5,000 per
annum, with any current or former officer, consultant, agent,
director or employee;
(C) any lease for real or personal property which
requires the Company to pay, or under which the Company is
expected to receive, on an annual basis, in excess of
$100,000;
<PAGE>
(D) any agreement, contract, instrument, arrangement
or commitment to repurchase assets previously sold or leased,
or to indemnify or otherwise compensate the purchaser in
respect thereof;
(E) any agreement, contract, policy, License,
document, instrument, arrangement or commitment that
materially limits the freedom of the Company to compete in any
line of business or with any person or in any geographic area
or which would so materially limit the freedom of the Parent
or any of their subsidiaries after the Effective Time;
(F) any agreement or contract relating to any
outstanding commitment for material capital expenditures, or
any partially or fully executory agreement or contract
relating to the acquisition or disposition of rights or assets
other than those entered into in the ordinary course
consistent with past practices;
(G) any sale-leaseback, conditional sale, exclusive
dealing, brokerage, finder's fee contract or agreement; or
(H) any other agreement, contract, policy, license,
document, instrument, arrangement or commitment not made in
the ordinary course of business which is material to the
Company or any one or more of the Restaurants and which is not
otherwise disclosed in the Disclosure Schedules.
(ii) The Company and, to the knowledge of the Company, none of
the other parties to any of the contracts and agreements identified in Section
4.1(r)(i) of the Disclosure Schedule or otherwise disclosed in the Company SEC
Documents, is in default under (or, with the giving of notice or passage of time
or both would be in default under) or has terminated any such contract or
agreement, or in any way expressed to the Company an intent to materially reduce
or terminate the amount of its business with the Company in the future.
(iii) Set forth in Section 4.1(r)(iii) of the Disclosure
Schedule is (A) a list of all sale-leaseback, loan or credit agreements, notes,
bonds, mortgages, indentures and other agreements and instruments pursuant to
which any indebtedness of the Company is outstanding or may be incurred, (B) the
respective principal amounts currently outstanding thereunder, and (C) any
interest rate swaps, caps, floors or option agreements or similar interest rate
risk management agreements. Except as set forth in Section 4.1(r)(iii) of the
Disclosure Schedule, all such indebtedness is prepayable at any time without
penalty, subject to the notice provisions of the agreements governing such
indebtedness (which, except as set forth in Section 4.1(r)(iii) of the
Disclosure Schedule, do not require a notice period of more than thirty days).
For purposes of this Section 4.1(r)(iii), "indebtedness" shall mean, with
respect to any person, without duplication, (A) all obligations of such person
for borrowed money, or with respect to deposits or advances of any kind to such
person, (B) all obligations of such person evidenced by bonds, debentures, notes
or similar instruments, (C) all obligations of such person upon which interest
charges are customarily paid, (D) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person, (E) all obligations of such person issued or assumed
as the deferred purchase price of property or services (excluding obligations of
such person to creditors for raw materials, inventory, services and supplies
incurred in the ordinary course of such person's business), (F) all capitalized
lease obligations of
<PAGE>
such person, (G) all indebtedness of others secured by any Lien on property or
assets owned or acquired by such person, whether or not the obligations secured
thereby have been assumed, (H) all obligations of such person under interest
rate or currency swap transactions (valued at the termination of value thereof),
(I) all letters of credit issued for the account of such person, (J) all
obligations of such person to purchase securities (or other property) which
arises out of or in connection with the sale of the same or substantially
similar securities or property, and (K) all guarantees and arrangements having
the economic effect of a guarantee of such person of any indebtedness of any
other person.
(s) Insurance. The Company is covered by valid and currently effective
insurance policies issued in favor of the Company as listed on the Disclosure
Schedule. To the best knowledge and belief of the Company, such insurance is
adequate to protect Company from all normal industry exposures. All such
policies are in full force and effect, all premiums due thereon have been paid
and the Company has complied with the provisions of such policies with respect
to which the failure to comply would result in a cancellation of, or increase in
premium in connection with, such policies. The Company has not received any
written notice from or on behalf of any insurance carrier issuing policies or
binders relating to or covering the Company that there will be a cancellation or
non-renewal of existing policies or binders, or that a material modification of
any of the methods of doing business will be required.
(t) Interests of Officers and Directors. Except as disclosed in the
Company SEC Documents, neither the Company's officers or directors, nor any
member of their respective immediate families, or any entity with respect to
which any such person is an affiliate, has any material interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of the Company, or any other business relationship with the Company.
(u) Approval by Board. The Board of Directors of the Company duly
authorized and approved the execution and delivery of this Agreement by the
Company and the transactions contemplated hereby prior to the execution by the
Company of this Agreement.
(v) Brokers. No broker, investment banker, financial advisor or other
person 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 based upon arrangements made by or on behalf of the Company.
(w) Fairness Opinion. Pauli & Company has been engaged to deliver its
opinion regarding the fairness, from a financial point of view, to the holders
of Shares of the consideration to be paid in the Merger, which opinion shall be
delivered in writing to the Company's Board of Directors immediately prior to
the date the Company mails the Prospectus/Proxy Statement to the Company's
stockholders, as provided in Section 7.2 below.
(x) Pooling of Interests. Since the execution of the letter of intent
dated December 11, 1997 between the Company and the Parent regarding the Merger
(the "Letter of Intent"), the Company has not taken or agreed to take any
action, or omitted or agreed to omit to take any action, which would disqualify
the Merger as a "pooling of interests" for accounting purposes.
(y) Disclosure. The representations and warranties of the Company
contained in this Agreement are true and correct in all material respects and do
not omit any material fact
<PAGE>
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. There is no fact known
to the Company which has not been disclosed to Parent in the Disclosure Schedule
which has had, or would reasonably be expected to have, a Company Material
Adverse Effect.
4.2 Representations and Warranties of Parent and Merger Subsidiary. Parent and
Merger Subsidiary represent and warrant to the Company, as of the date hereof
and as of the Closing Date, subject to the exceptions and qualifications set
forth in the disclosure schedule to be delivered by the Parent to the Company
pursuant to Section 4.3 of this Agreement (the "Parent Disclosure Schedule"):
(a) Organization Standing and Corporate Power. Each of Parent and
Merger Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its respective state of incorporation and has the
requisite corporate power and authority to carry on its business as now being
conducted. Each of the Parent and its subsidiaries 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) could
not reasonably be expected to be a "Parent Material Adverse Effect," which means
to (i) have a material adverse effect on the value, condition (financial or
otherwise), prospects, business, or results of operations of the Parent and its
subsidiaries as a whole, (ii) impair the ability of any party hereto to perform
its obligations under this Agreement or (iii) prevent or materially delay
consummation of any of the transactions contemplated by this Agreement. The
Parent has delivered to the Company complete and correct copies of its
Certificate of Incorporation and bylaws and of the Articles of Incorporation and
bylaws of Merger Subsidiary.
(b) Capital Structure. The authorized capital stock of the Parent
consists of 50,000,000 Shares par value $0.08 per share. As of December 31,
1997, (i) 6,570,984 Shares were issued and outstanding, (ii) no Shares were held
by the Parent, and (iii) there were outstanding options to purchase 998,012
shares and warrants to purchase 4,000,000 shares of Parent Common Stock. Except
as set forth above, no shares of capital stock or other equity or voting
securities of the Parent are issued, reserved for issuance or outstanding. All
outstanding shares of capital stock of the Parent are, and all shares of Parent
Common Stock to be issued in the Merger will, when issued, be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are not any bonds, debentures, notes or other indebtedness or
securities of the Parent having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of the Parent may vote. The authorized capital stock of Merger
Subsidiary consists of 1,500 shares, without par value. As of the date hereof,
100 such shares were issued and outstanding.
(c) Authority Noncontravention. Parent and Merger Subsidiary have all
requisite corporate power and authority to enter into this Agreement and,
subject to the Parent Common Stockholder Approval (as defined below), to
consummate the transactions contemplated by this Agreement. The affirmative vote
of the holders of a majority of the shares of Parent Common Stock represented
and voted on a proposal to approve the merger is required to complete the Merger
(the "Parent Common Stockholder Approval"), which approval is the only vote of
the
<PAGE>
holders of any class or series of the capital stock of Parent necessary to
approve the transactions contemplated hereby. Except for Parent Common
Stockholder Approval, the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Subsidiary. This Agreement has been duly executed and delivered by Parent and
Merger Subsidiary and, assuming this Agreement constitutes a valid and binding
agreement of the Company, constitutes a valid and binding obligation of such
party, enforceable against such party in accordance with its terms. 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, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation, modification or acceleration of any
obligation or to a loss of a material benefit under, or result in the creation
of any Lien upon any of the properties or assets of Parent or any of its
subsidiaries under, (i) the Certificate or Articles of Incorporation or bylaws
of Parent or Merger Subsidiary, (ii) except as to be disclosed in Section 4.2(c)
of the Parent's Disclosure Schedules, any loan or credit agreement, note, bond,
mortgage, indenture, leases or other contract, agreement, instrument, permit,
concession, franchise or license a pplicable to Parent or Merger Subsidiary or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Parent,
Merger Subsidiary or any other subsidiary of Parent or their respective
properties or assets, other than any such conflicts, violations or defaults
that, individually or in the aggregate, would not have a "Parent Material
Adverse Effect". Other than those Consents referred to in the Disclosure
Schedule on the part of the Company, no Consent of any Governmental Entity is
required by or with respect to Parent, Merger Subsidiary or any other subsidiary
of Parent in connection with the execution and delivery of this Agreement or the
consummation by Parent or Merger Subsidiary, as the case may be, of any of the
transactions contemplated by this Agreement, except for (i) the Consents
disclosed in Section 4.2(b) of the Parent Disclosure Schedule, (ii) the filing
of the Certificate of Merger in accordance with the MBCA and similar documents
with the relevant authorities of other states in which the Company is qualified
to do business, (iii) compliance with applicable requirements of the Exchange
Act and the Securities Act, and applicable state blue sky laws, with respect to
the Registration Statement and the Prospectus/Proxy Statement, and (iv) such
other Consent as to which the failure to obtain or make, individually or in the
aggregate, could not reasonably be expected to have a Parent Material Adverse
Effect.
(d) SEC Documents; Financial Statements: No Undisclosed Liabilities.
Parent has provided or made available to the Company true and correct copies of
all reports, schedules, forms, statements, exhibits and other documents filed
with the SEC by Parent under or pursuant to the Exchange Act since January 1,
1996 (the "Parent SEC Documents"), all of which were timely filed with the SEC.
As of their respective dates, or as subsequently amended prior to the date of
this Agreement, the Parent SEC Documents complied in all material respects with
the requirements of the Exchange Act applicable to such Parent SEC Documents,
and none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Parent included in the Parent SEC Documents comply in all
material respects with
<PAGE>
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP (except
as specified on the Parent Disclosure Schedule) and fairly present the
consolidated financial position of the Parent and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
(e) The Parent is engaged in the business of operating Mexican
quick-service restaurants under the trade name "The Green Burrito" at leased
facilities, and the sale and supervision of franchises to operate such
restaurants under that trade name. As of December 31, 1997, there were 7 Green
Burrito stores owned by the Parent, 40 standalone stores operated by franchisees
and 134 dual-concept (i.e., incorporated into existing quick-service
restaurants) stores operated by franchisees.
(f) Litigation. Except as reflected in the financial and other
information delivered to the Company by Parent as referred to above, or except
as otherwise described by Parent in writing to the Company, there is no judicial
or administrative action, suit, proceeding or investigation pending or, to the
knowledge of Parent, threatened, which would be required to be reported by
Parent in its annual report on Form 10-K (under the Exchange Act) if such 10-K
were filed with the SEC on the date hereof.
(g) Absence of Changes. Since September 10, 1997, there has not been
any material adverse change in the business, financial condition or operations
or prospects of Parent, or any event or condition (other than changes in legal,
economic or other conditions which are not specially applicable to Parent) which
has materially and adversely affected the business or financial condition of
Parent and its subsidiaries, taken as a whole.
(h) Exchange Act Reports. Parent has filed in a timely manner all
reports required to be filed by it under the Exchange Act during at least the
12-month period preceding the date of this Agreement, and agrees to give the
Company a copy of each such report filed between the date hereof and the Closing
Date.
(i) Brokers. No broker, investment banker, financial advisor or other
person 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 based upon arrangements made by or on behalf of the Parent or any
of its subsidiaries.
(j) Fairness Opinion. Piper Jaffray Inc. has been engaged to deliver
its opinion regarding the fairness, from a financial point of view, of the
consideration to be paid in the Merger to the holders of Parent Common Stock,
which opinion shall be delivered in writing to the Parent's Board of Directors
immediately prior to the date the Parent mails the Prospectus/Proxy Statement to
the Parent's stockholders.
(k) Pooling of Interests. Since the execution of the Letter of Intent
the Parent has not taken or agreed to take any action, or omitted or agreed to
omit to take any action, which would disqualify the Merger as a "pooling of
interests" for accounting purposes.
(l) Disclosure. The representations and warranties of the Parent
contained in this Agreement are true and correct in all material respects, and
do not omit any material fact
<PAGE>
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. There is no fact known
to the Parent which has not been disclosed to the Company in the Parent
Disclosure Schedule and the Parent SEC Documents, taken as a whole, which has
had, or would reasonably be expected to have, a Parent Material Adverse Effect.
4.3 Delivery of Disclosure Schedules. Each of Company and Parent agrees to
deliver its respective Disclosure Schedule to the other party within five
business days after the execution of this Agreement; any failure to so deliver
shall be a breach of this Agreement and shall permit the nonbreaching party to
terminate this Agreement in accordance with Article IX. Upon receipt of the
other party's Disclosure Schedule, either of Company or Parent (respectively)
may object to any matter disclosed therein and terminate this Agreement,
provided that such objection is made and termination effected not later than the
tenth business day after receipt of the Disclosure Schedule from the other party
or the fifteenth business day after the execution of this Agreement, whichever
is later.
ARTICLE V
COVENANTS OF THE COMPANY
The Company agrees that:
5.1 Conduct of Business. During the period from the date of this Agreement to
the Effective Time, the Company shall carry on the Business in the ordinary
course of business in substantially the same manner as heretofore conducted and,
to the extent consistent therewith, use all reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers (as a group) and employees, at reasonably required staffing
levels, and preserve its relationships with customers, suppliers, licensors,
licensees, distributors and others having business dealings with it. Without
limiting the generality of the foregoing, during the period from the date of
this Agreement to the Effective Time, except as contemplated by this Agreement
or as set forth in Section 5.1 of the Disclosure Schedule, the Company shall
not, without the prior written approval of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of its
capital stock; (ii) adjust, split, combine or reclassify any of its 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 capital stock or (iii) purchase,
redeem or otherwise acquire any shares of capital stock of the Company or any
other securities thereof, or any rights, warrants or options to acquire any such
shares or other securities;
(b) issue, deliver, sell, 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, including Company Options, to acquire,
any such shares, voting securities or convertible securities (other than the
issuance of Shares upon the exercise of the NQSOs, Company Options, or Warrants
outstanding as of the date hereof or as contemplated by Section 5.1(l) hereof);
(c) amend its Articles of Incorporation, bylaws or other comparable
charter or organizational documents;
<PAGE>
(d) amend, modify or waive any provision of any material contract or
agreement to which the Company is a party, including, without limitation, any
such agreements identified in the Disclosure Schedule;
(e) mortgage or otherwise encumber or subject to any Lien or sell,
lease, license, transfer or otherwise dispose of any material properties or
assets, except in the ordinary course of business consistent with past practice
or pursuant to existing contracts or commitments which were delivered to Parent
prior to its execution of this Agreement;
(f) amend, modify or waive any material term of any outstanding
security of the Company.
(g) incur, assume, guarantee or become obligated with respect to any
indebtedness (as defined in Section 4.1(r) hereof), other than drawings on
existing revolving credit facilities listed in Section 4.1(r) of the Disclosure
Schedule in the ordinary course of business, consistent with past practice and
in accordance with the terms thereof or incur, assume, guarantee or become
obligated with respect to any other material obligations other than in the
ordinary course of business and consistent with past practice;
(h) make or agree to make any new capital expenditures or acquisitions
of assets or property or other acquisitions or commitments in excess of $20,000
individually or $50,000 in the aggregate or otherwise acquire or agree to
acquire any material assets or property;
(i) make any material tax election or take any material tax position
(unless required by law and then only with prior or concurrent notice to Parent)
or change its fiscal year or accounting methods, policies or practices (except
as required by changes in GAAP and then only with prior or concurrent notice to
Parent) or settle or compromise any material income tax liability;
(j) enter into or commit to enter into, any lease, loan, advance or
capital contributions to or investment in any person other than in the ordinary
course of business consistent with past practices;
(k) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction thereof, in the ordinary course of
business consistent with past practice and in accordance with their terms, or
release or waive any material rights or claims, or waive the benefits of, or
agree to modify in any manner, any confidentiality, standstill or similar
agreement to which the Company is a party;
(l) except as described in the Disclosure Schedule, (i) grant to any
current or former director, officer or employee of the Company any increase in
compensation or benefits, except for employees who are not officers or directors
in the ordinary course of business consistent with past practice or any grant
pursuant to any existing contract or agreement, (ii) grant to any such director,
officer, or employee any increase in severance or termination pay (including the
grant of, or acceleration in the exercisability of, any stock options or
warrants (including the NQSOs, Company Options or Warrant) or in the vesting of
Shares or other property except for automatic acceleration in accordance with
the terms of the NQSOs, Option Plan, or Warrant), or (iii) enter
<PAGE>
into any employment, deferred compensation, severance or termination agreement
or arrangement with or for the benefit of any such current or former director,
officer, or employee;
(m) (i) take or agree or commit to take any action that would make any
representation or warranty of the Company hereunder inaccurate in any material
respect at, or as of any time prior to, the Effective Time or (ii) omit or agree
or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any material respect at any
such time; or
(n) authorize any of, or commit or agree to take any of, the foregoing
actions.
5.2 Affiliate Agreements. The Company will obtain and deliver to Parent, as
promptly as possible but not later than five business days prior to Closing, a
signed representation letter substantially in the form of Exhibit A hereto from
each executive officer and director of the Company and each stockholder of the
Company who may reasonably be deemed an "affiliate" of the Company within the
meaning of such term as used in Rule 145 under the Securities Act (all of such
persons are named in Section 5.2 of the Disclosure Schedule) and for purposes of
qualifying for pooling of interests accounting treatment for the Merger, and
shall obtain and deliver to Parent a signed representation letter substantially
in the form of Exhibit A from any person who becomes an executive officer or
director of the Company or any stockholder who becomes such an "affiliate" after
the date hereof as promptly as practicable after (and shall use its reasonable
best efforts to obtain and deliver within five days after) such person achieves
such status. Notwithstanding the foregoing, Parent shall not be permitted to
terminate the Agreement because of the Company's failure to obtain an Affiliate
Agreement from any shareholder other than a director or officer of Company,
unless, in the judgment of counsel to Parent, such failure results in material
adverse tax consequences to the Parent or (post-Closing) the Company or exposes
the Parent or (post-Closing) the Company to a material risk of liability
relating to improper disclosure in the Prospectus/Proxy Statement.
5.3 Access to Information. From the date hereof until the Effective Time, the
Company will (i) give Parent, its counsel, financial advisors, auditors and
other authorized representatives full access (during normal business hours and
upon reasonable notice) to the offices, properties, officers, employees,
accountants, auditors, counsel and other representatives, books and records of
the Company (including to perform any environmental studies), (ii) furnish to
Parent, its counsel, financial advisors, auditors and other authorized
representatives such financial operating and property related data and other
information as such persons may reasonably request, and (iii) instruct the
Company's employees, counsel and financial advisors to cooperate with Parent in
its investigations of the Business; provided that no investigation pursuant to
Section 5.3 shall affect any representation or warranty given by the Company
hereunder.
5.4 No Solicitation. The Company agrees that neither the Company nor any of its
officers and directors shall, and the Company shall direct and use its best
efforts to cause its employees, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by the
Company) not to, initiate, continue, solicit, or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to stockholders of the Company) with
respect to a merger, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of the Company (any such proposal or offer being hereinafter referred
to as an
<PAGE>
"Acquisition Proposal") or, subject to the fiduciary duties of the Board of
Directors of the Company under the MBCA, engage in any negotiations concerning,
or provide any confidential information or data to, or have any discussions
with, any person relating to an Acquisition Proposal or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal or, enter into
any agreement or understanding with any other person or entity with the intent
to effect any Acquisition Proposal. The Company will take all necessary steps to
inform the individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this Section 5.4. The Company will notify Parent
immediately, orally and in writing (including the names of any party making and
the principal terms of any such proposal), if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with the
Company. Immediately following the execution of this Agreement, the Company will
request each person which has heretofore executed a confidentiality agreement in
connection with its consideration of acquiring the Company or any portion
thereof (the "Confidentiality Agreements") to return all confidential
information heretofore furnished to such person by or on behalf of the Company.
Subject to the fiduciary duties of the Board of Directors of the Company under
the MBCA, the Company will keep Parent fully informed of the status and details
(including amendments or proposed amendments) of any such request, proposal or
inquiry.
5.5 Pooling of Interests: Tax Treatment. The Company shall not take any action
which would disqualify the Merger as a "pooling of interests" for accounting
purposes or as a "reorganization" that would be tax free to the stockholders of
the Company pursuant to Section 368(a) of the Code.
ARTICLE VI
COVENANTS OF PARENT
Parent and Merger Subsidiary agree that:
6.1 Conduct of Business. During the period from the date of this Agreement to
the Effective Time, the Parent shall carry on the business in which it is
presently engaged in the ordinary course of business in substantially the same
manner as heretofore conducted and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organization, keep
available the services of its current officers (as a group) and employees, at
reasonably required staffing levels, and preserve its relationships with
customers, suppliers, licensors, licensees, distributors and others having
business dealings with it.
6.2 Affiliate Agreements. The Parent has obtained or will promptly hereafter
obtain a signed representation letter substantially in the form of Exhibit B
hereto from each executive officer and director of the Parent and each
stockholder of the Parent who may reasonably be deemed an "affiliate" of the
Parent within the meaning of such term as used in Rule 145 under the Securities
Act (all of such persons are named in Section 6.2 of the Disclosure Schedule)
and for purposes of qualifying for pooling of interests accounting treatment for
the Merger, and shall obtain a signed representation letter substantially in the
form of Exhibit B from any person who becomes an executive officer or director
of the Parent or any stockholder who becomes such an "affiliate" after the date
hereof as promptly as practicable after (and shall use its reasonable best
efforts to obtain and deliver within five days after) such person achieves such
status.
<PAGE>
6.3 Confidentiality. Prior to the Effective Time and after any termination of
this Agreement, Parent will hold, and will use its reasonable best efforts to
cause its officers, directors, employees, accountants, counsel, consultants,
advisors and agents to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
documents and information concerning the Company furnished to Parent in
connection with the transactions contemplated by this Agreement except to the
extent that such information can be shown to have been (i) previously known on a
nonconfidential basis by Parent, (ii) in the public domain through no fault of
Parent or (iii) later lawfully acquired by Parent from sources other than the
Company, provided that Parent may disclose such information to its officers,
directories, employees, accountants counsel, consultants, advisors and agents in
connection with the transactions contemplated by this Agreement so long as such
persons have a need to know such information, are informed by Parent of the
confidential nature of such information and are directed by Parent to treat such
information confidentially. Parent's obligation to hold any such information in
confidence shall be satisfied if it exercises the same care with respect to such
information as it would take to preserve the confidentiality of its own similar
information. If this Agreement is terminated, Parent will, and will use its best
efforts to cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to, deliver to the Company, upon request, or,
at the election of Parent, destroy, all documents and other materials and all
copies thereof, obtained by Parent or on its behalf from the Company in
connection with this Agreement that are subject to such confidentiality.
6.4 Obligations of Merger Subsidiary. Parent will take all action necessary to
cause Merger Subsidiary to perform its obligations under this Agreement and to
consummate the Merger on terms and conditions set forth in this Agreement.
6.5 Employee Benefit Plans. Parent shall have the right to continue, amend or
terminate any of the Benefit Plans in accordance with the terms thereof and
subject to any limitation arising under applicable law.
6.6 Indemnification and Insurance.
(a) From and after the Effective Time, the Parent shall cause the
Company to indemnify, defend and hold harmless each person who is now, or who
becomes, prior to the Effective Time, an officer, director, employee or agent of
the Company (the "Indemnified Parties") against losses, claims, damages, costs,
expenses (including attorneys' fees), liabilities or judgments or amounts that
are paid in settlement (which settlement shall require the prior written consent
of Parent which shall not be unreasonably withheld) of or in connection with any
claim, action, suit, proceeding or investigation (a "Claim") at least to the
same extent as the officers, directors, employees and agents of the Parent are
indemnified pursuant to the Parent's Articles of Incorporation, Bylaws and any
standing shareholder and director resolutions. As long as any person who is now
or has ever been a director of the Company is a director of the Surviving
Corporation, the Parent will cause the Surviving Corporation to maintain a
provision in its Articles of Incorporation excluding director liability for good
faith actions to the extent and as permitted by Section 302A.25 1 subd(4) of the
MBCA.
(b) The contractual obligation provided under paragraph (a) of this
Section 6.4 is intended to benefit, and be enforceable directly by, the
Indemnified Parties, and shall be binding on all respective successors of Parent
and the Company.
<PAGE>
6.7 Nasdaq Listing. Parent shall use its best efforts to list for quotation on
the Nasdaq Small Cap Market, subject to official notice of issuance, the shares
of Parent Common Stock to be issued in the Merger.
6.8 Publication of Combined Financial Results. Provided that the merger can be
accounted for as a "pooling of interests," Parent shall use reasonable efforts
to publish as soon as practicable after the end of its first fiscal quarter
which includes at least 30 days of post-Merger combined operations, combined
sales and net income figures and any other financial information necessary as
contemplated by and in accordance with the terms of SEC Accounting Series
Release No. 135 and any related accounting rules.
6.9 Registration Relating to Company Options. Parent shall register the shares
of Parent Common Stock issuable upon exercise of the Company Options after the
Effective Time in either the Registration Statement or in a registration
statement on Form S-8 to be filed as soon as practicable following the Effective
Time, and shall cause the shares of Parent Common Stock issuable upon exercise
thereof from and after the Effective Time, when issued, to be listed for
quotation on the Nasdaq Small Cap Market.
6.10 Access to Information. From the date hereof until the Effective Time, the
Parent will give the Company, its counsel, financial advisors, auditors and
other authorized representatives full access (during normal business hours and
upon reasonable advance notice) to the offices, properties, officers, employees,
accountants, auditors, counsel and other representatives, books and records of
the Parent and its subsidiaries, will furnish to the Company, its counsel,
financial advisors, auditors and other authorized representatives such
financial, operating and property related data and other information as such
persons may reasonably request and will instruct the Parent's and its
subsidiaries' employees, counsel and financial advisors to cooperate with the
Company in its investigation of the business of the Parent and its subsidiaries;
provided that no investigation pursuant to this Section 6.8 shall affect any
representation or warranty given by the Parent hereunder.
6.11 Pooling of Interests; Tax Treatment. The Parent shall not take any action
which would disqualify the Merger as a "pooling of interests" for accounting
purposes or as a "reorganization" that would be tax free to the stockholders of
the Company pursuant to Section 368(a) of the Code.
6.12 Board of Directors Approval. The Parent shall use its best efforts to
obtain the Board of Directors' authorization and approval of the execution and
delivery of this Agreement by the Parent and the transactions contemplated
hereby.
ARTICLE VII
COVENANTS OF PARENT AND THE COMPANY
The parties hereto agree that:
7.1 Reasonable Efforts; Notification.
(a) Subject to the fiduciary duties of their respective Boards of
Directors, each of the parties agrees to use all reasonable 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,
<PAGE>
proper or advisable to consummate and make effective, in the most expeditious
manner practicable the Merger and the other transactions contemplated by this
Agreement, including (i) the obtaining of all necessary actions or nonactions,
waivers, consents and approvals from Governmental Entities and the making of all
other necessary registrations and filings (including other filings with
Governmental Entities, if any), (ii) the obtaining of all necessary consents,
approvals or waivers from third parties, (iii) the preparation, filing and
dissemination of the Registration Statement and the Prospectus/Proxy Statement,
and (iv) the execution and delivery of any additional instruments necessary to
consummate the transactions contemplated by, and to fully carry out the purposes
of, this Agreement.
(b) Notwithstanding anything to the contrary in Section 7.1(a)(i)
neither Parent nor any of its subsidiaries shall be required to divest, or cause
or permit the Company or its affiliates to divest, any of their respective
businesses, product lines or assets, or to make or agree to take any other
action or agree to any limitation that could reasonably be expected to have a
material adverse effect on the value, condition (financial or otherwise),
prospects, business or results of operations of Parent and its subsidiaries
taken as a whole or of the Company or all such entities taken together, and
neither Parent or Merger Subsidiary shall be required to waive any of the
conditions to the Merger set forth in Article VIII.
(c) Each party shall give prompt notice to the other party of (i) any
representation or warranty made by it contained in this Agreement becoming
untrue or inaccurate in any respect or (ii) the failure by it to comply with or
satisfy in any respect any covenant, condition or agreement to be compiled with
or ratified by it under this Agreement; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
(d) The Company shall give prompt notice to Parent, and Parent or
Merger Subsidiary shall give prompt notice to the Company, of:
(i) any notice or other communication from any person alleging
that the consent of such person is or may be required in connection with the
transactions contemplated by this Agreement;
(ii) any notice or other communication from any in connection
with the transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or
proceedings commenced or, to the best of its knowledge threatened against,
relating to or involving or otherwise affecting it which, if pending on the date
of this Agreement would have been required to have been disclosed pursuant to
Section 4.1(m) or Section 4.2(f) or which relate to the consummation of the
transactions contemplated by this Agreement.
7.2 Stockholder Meeting: Proxy Material.
(a) For the purpose (i) of holding meetings of stockholders of Parent
and Company to approve this Agreement, the Merger and, with respect to Parent,
the issuance of shares of Parent Common Stock in the Merger, and (ii) of
registering under the Securities Act the Parent Common Stock to be issued as
contemplated by this Agreement, the parties hereto shall cooperate in the
preparation of an appropriate registration statement (such registration
statement,
<PAGE>
together with all and any amendments and supplements thereto, being herein
referred to as the "Registration Statement"), which shall include a
prospectus/joint proxy statement satisfying all applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder (such
prospectus/joint proxy statement, together with any and all amendments or
supplements thereto, being herein referred to as the "Prospectus/Proxy
Statement"). At the time the Registration Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company and Parent, at
all time subsequent to such mailing (including, without limitation, the time
such stockholders vote upon a proposal to approve and adopt this Agreement and
the Merger), and at the Effective Time, the Registration Statement and the
Prospectus/Proxy Statement, as supplemented or amended, if applicable, will (i)
comply in all material respects with applicable provisions of the Securities Act
and the Exchange Act, and (ii) 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.
(b) Parent shall furnish such information concerning Parent and Merger
Subsidiary as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to Parent and Parent Common Stock or the Merger
Subsidiary, to be prepared in accordance with Section 7.2(a). Parent agrees
promptly to advise the Company if at any time prior to the Parent or Company
stockholders' meetings held to consider and vote on the Merger any information
provided by Parent or the Merger Subsidiary in the Prospectus/Proxy Statement
becomes incorrect or incomplete in any material respect.
(c) The Company shall furnish Parent with such information concerning
the Company as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to the Company to be prepared in accordance with Section
7.2(a). Parent agrees to provide the Company with reasonable opportunity to
review and comment on the Prospectus/Proxy Statement. The Company agrees
promptly to advise Parent if at any time prior to the Parent or Company
stockholders' meetings any information provided by the Company in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect, and to provide Parent with the information needed to correct such
inaccuracy or omission.
(d) Parent shall promptly file the Registration Statement with the SEC.
Parent shall use reasonable efforts to cause the Registration Statement to
become effective under the Securities Act at the earliest practicable date. The
Company authorizes Parent to utilize in the Registration Statement the
information concerning the Company provided to Parent for the purpose of
inclusion in the Prospectus/Proxy Statement, provided that the Company and its
counsel shall have an opportunity to review the Registration Statement prior to
filing with the SEC and shall otherwise participate in responding to the
comments of the SEC and the process of achieving the effectiveness of the
Registration Statement. Parent shall promptly furnish copies of all written
communications from the SEC, and written summaries of all oral communications
with the SEC, to the Company and its counsel. Parent shall advise the Company
promptly when the Registration Statement has become effective and of any
supplements or amendments thereto, and Parent shall furnish the Company with
copies of all such documents. Prior to the Effective Time or the termination of
this Agreement, each party shall consult with the other with respect to any
material (other than the Prospectus/Proxy Statement) that might constitute a
"prospectus" relating to the Merger within the meaning of the Securities Act
prior to using or disseminating
<PAGE>
such prospectus. Parent shall also take all steps necessary to comply with any
applicable state securities laws ("Blue Sky Laws"), for which an exemption is
not available, with respect to the Parent Common Stock to be issued in the
merger.
(e) Parent shall use reasonable efforts to cause to be delivered to the
Company a letter relating to the Registration Statement from Grant Thornton LLC,
Parent's independent auditors, dated a date within two business days before the
date on which the Registration Statement shall become effective and addressed to
the Company, in form and substance reasonably satisfactory to the Company and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
(f) The Company shall use reasonable efforts to cause to be delivered
to Parent a letter relating to the Registration Statement from Ernst & Young
LLP, the Company's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective and
addressed to Parent, in form and substance reasonably satisfactory to Parent and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
(g) Parent and the Company shall each bear 50% of all SEC and state
Blue Sky Laws filing fees with respect to the Registration Statement and all
printing and mailing costs in connection with the preparation of the Prospectus
Proxy Statement. Each party shall bear the expenses of mailing of the
Prospectus/Proxy Statement to its respective stockholders (including multiple
copies to brokers and other nominees). Parent and the Company shall bear their
own legal and accounting expenses in connection with the Registration Statement.
7.3 Press Releases. Parent and the Company shall agree with each other as to the
form and substance of any press release related to this Agreement or the
transactions contemplated hereby, and shall consult with each other as to the
form and substance of other public disclosures which may relate to the
transactions contemplated by this Agreement, provided, however, that nothing
contained herein shall prohibit either party, following notification to the
other party and reasonable opportunity to comment from making any disclosure
which is required by law, regulation or stock exchange requirements.
7.4 Securities Reports. Each of Parent and Company agrees to timely file all
reports required to be filed by it pursuant to the Exchange Act between the date
of this Agreement and the Effective Time. Each of Parent and the Company agree
to provide the other party with copies of all reports and other documents filed
under the Securities Act or Exchange Act with the SEC by it between the date
hereof and the Effective Time within five days after the date such reports or
other documents are filed with the SEC.
7.5 Stockholder Approvals. Each of Parent and the Company shall call a meeting
of its stockholders for the purposes of voting upon this Agreement and the
Merger, and shall schedule such meeting based on consultation with the other
party.
<PAGE>
ARTICLE VIII
CONDITIONS TO THE MERGER
8.1 Conditions to the Obligations of Each Party. The obligations of the Company,
Parent and Merger Subsidiary to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) the Registration Statement shall have been declared effective and
shall not be subject to any stop orders of the SEC;
(b) no provision of any applicable law or regulation and no judgment,
injunction, order, decree or other legal restraint shall prohibit the
consummation of the Merger.
(c) the Parent Common Stock to be issued to holders of Shares in the
Merger shall have been filed for listing and quotation on the Nasdaq Small Cap
Market, subject to official notice of issuance; and
(d) Fidelity National Financial, Inc. shall have exercised currently
outstanding warrants to purchase shares of Parent Common Stock for a cash
purchase price aggregating not less than $5,000,000.
8.2 Conditions to the Obligations of Parent and Merger Subsidiary. The
obligations of Parent and Merger Subsidiary to consummate the Merger are further
subject to the satisfaction of the following conditions:
(a) there shall not be instituted or pending any action by any
Governmental Entity (i) challenging or seeking to make illegal, to delay
materially or otherwise directly or indirectly to restrain or prohibit the
consummation by Parent or Merger Subsidiary of the Merger, seeking to obtain
material damages or imposing any material adverse conditions in connection
therewith or otherwise directly or indirectly relating to the transactions
contemplated by this Agreement or the Merger, (ii) seeking to restrain or
prohibit Parent's or Merger Subsidiary's ownership or operation (or that of
their respective subsidiaries or affiliates) of all or any portion of the
business or assets of the Company, or of Parent and its subsidiaries or
affiliates, or to compel Parent or any of its subsidiaries or affiliates to
dispose of or hold separate all or any material portion of the business or
assets of the Company, or of Parent and its subsidiaries and affiliates, (iii)
seeking to impose limitations on the ability of Parent and its subsidiaries or
affiliates effectively to exercise full rights of ownership of the Shares,
including, without limitation, the right to vote any Shares acquired or owned by
Parent or any of its subsidiaries or affiliates on all matters properly
presented to the Company's stockholders, (iv) seeking to require divestiture by
Parent or any of its subsidiaries or affiliates of any Shares, or (v) that
otherwise, in the reasonable judgment of Parent, is likely to have a Company
Material Adverse Effect or a Parent Material Adverse Effect;
(b) the Company shall have performed in all material respects its
covenants and agreements under this Agreement, and the representations and
warranties of the Company set forth in this Agreement shall be true in all
material respects when made and at and as of the Effective Time as if made at
and as of such time; and Parent and Merger Subsidiary shall have received a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Company to that effect;
<PAGE>
(c) no change shall have occurred or been threatened (and no
development shall have occurred or been threatened involving a prospective
change) that, in the reasonable judgment of Parent, has or is likely to have a
Company Material Adverse Effect.
(d) each of the persons described in Section 5.2 of the Disclosure
Schedule shall have executed and delivered an Affiliate Agreement;
(e) Parent shall have been furnished with (i) copies of the text of the
resolutions by which the corporate action on the part of the Company necessary
to approve this Agreement, the Affiliates Agreements and the transactions
contemplated hereby and thereby were taken, together with a certificate dated as
of the Effective Time executed on behalf of the Company by its corporate
secretary certifying to Parent that such copies are true, correct and complete
copies of such resolutions and that such resolutions were duly adopted and have
not been amended or rescinded;
(f) the Parent Common Stockholder Approval shall have been obtained;
(g) shareholders (if any) of the Company who have objected to the
merger and taken steps necessary to exercise their dissenting stockholders'
rights of appraisal shall hold in the aggregate no more than 4% of the
outstanding Stock of the Company;
(h) Parent shall have received from Piper Jaffray Inc. the "fairness"
opinion contemplated by Section 4.2(k) hereof;
(i) the Company shall have completed the acquisition of the JB's
restaurants described on Schedule 8.2;
(j) the Company shall have entered into a written lease for its home
office facilities at 4021 Vernon Avenue South, St. Louis Park, Minnesota, on
terms and conditions reasonably acceptable to Parent;
(k) Peter Bedzyk shall have entered into a written employment agreement
with Company on terms and conditions, including length of time and compensation,
reasonably satisfactory to Parent and Mr. Bedzyk;
(l) the Board of Directors of the Parent shall have duly authorized and
approved the execution and delivery of this Agreement by the Parent and the
transactions contemplated;
(m) nothing shall have come to the attention of the Parent in the
course of its due diligence investigation of the Company which could reasonably
be expected to have a Company Material Adverse Effect; and
(n) Parent shall have received an opinion of counsel from Larkin,
Hoffman, Daly & Lindgren, Ltd., counsel to the Company, in form and substance
reasonably satisfactory to Parent and its counsel, and dated the Closing Date,
to the effect that:
(i) The Company is duly organized and existing under the laws
of the State of Minnesota and has the power and authority to engage in its
business as presently conducted, and is a corporation in good standing under the
laws of the State of Minnesota and is qualified as a foreign corporation in good
standing under the laws of any state or jurisdiction where the ownership or the
conduct of its business receive such qualification.
<PAGE>
(ii) The Company has the corporate power and authority to
execute and deliver, and perform its obligations under, this Agreement.
(iii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company, has been duly executed and
delivered by the Company and is a valid and binding obligation of the Company
enforceable against it in accordance with its terms.
(iv) The execution, delivery and performance of this Agreement
by the Company, and the consummation of the Merger by the Company, will not
violate the articles of incorporation and by-laws of the Company and, to such
counsel's knowledge after due inquiry, will not violate any agreement to which
the Company is a party or by which the Company's assets are bound;
(v) Except as may be specified by such counsel or set forth on
the Disclosure Schedule, such counsel knows of no litigation, proceeding or
governmental investigation pending or threatened against or relating to the
Company, or any of its respective assets and businesses, or the Company Stock;
and
(vi) The authorized and outstanding capital stock of the
Company is as specified in Section 4.1(b) hereof, of which all such outstanding
shares are validly issued and outstanding, fully paid and nonassessable.
In rendering the foregoing opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, as to matters of fact,
upon certificates of government officials or of any officer or officers of the
Company, copies of which shall be expressly referred to in such opinion and
shall accompany such opinion. In addition, such counsel, in rendering such
opinion, shall be permitted to assume the authenticity of the Company's stock
book or records of its stock transfer agent and, if found in the Company's
minute book and otherwise proper in form and appearance, the authenticity of the
minutes of any directors' meetings and shareholders' meetings.
8.3 Conditions to the Obligations of the Company. The obligations of the Company
to consummate the Merger are subject to the further satisfaction of the
following conditions:
(a) there shall not be instituted or pending any action by any
Governmental Entity (i) challenging or seeking to make illegal, to delay
materially or otherwise directly or indirectly to restrain or prohibit the
consummation by the Company of the Merger, seeking to obtain material damages or
imposing any material adverse conditions in connection therewith or otherwise
directly or indirectly relating to the transactions contemplated by this
Agreement or the Merger, (ii) that otherwise, in the reasonable judgment of
Company, is likely to have a Company Material Adverse Effect or a Parent
Material Adverse Effect;
(b) Parent and Merger Subsidiary shall have performed in all material
respects their covenants and agreements under this Agreement, and the
representations and warranties of Parent and Merger Subsidiary set forth in this
Agreement that are qualified as to materiality shall be true in all material
respects when made at and as of the Effective Time as if made and at and as of
such
<PAGE>
time; and the representations and warranties set forth in this Agreement that
are not so qualified shall be true when made and at and as of the Effective Time
as if made at and as of such time; and the Company shall have received a
certificate of the Chief Executive Officer of Parent and Merger Subsidiary to
that effect;
(c) the Company Stockholder Approval shall have been obtained;
(d) no change shall have occurred or been threatened (and no
development shall have occurred or been threatened involving a prospective
change), other than changes resulting from changes in interest rates, that, in
the reasonable judgment of the Company, has or is likely to have a Parent
Material Adverse Effect.
(e) each of the persons described in Section 6.2 of the Parent
Disclosure Schedule shall have executed and delivered an Affiliate Agreement;
(f) the Company shall have been furnished with (i) copies of the text
of the resolutions by which the corporate action on the part of the Company and
Merger Subsidiary necessary to approve this Agreement and the transactions
contemplated hereby were taken, together with a certificate dated as of the
Effective Time executed on behalf of the Company and Merger Subsidiary by the
respective corporate secretaries certifying to the Company that such copies are
true, correct and complete copies of such resolutions and that such resolutions
were duly adopted and have not been amended or rescinded.
(g) the Company shall have received from Pauli & Company the "fairness"
opinion contemplated by Section 4.1(w) hereof; and
(h) the Company shall have received an opinion of The Stolar
Partnership, dated the Closing Date to the effect that:
(i) Each of Parent and Merger Subsidiary is a corporation
organized and existing and in good standing under the laws of its State of
incorporation.
(ii) Each of Parent and Merger Subsidiary has the corporate
power and authority to execute and deliver, and perform its obligations under,
this Agreement.
(iii) This Agreement has been duly authorized by all necessary
corporate action on the part of Parent and Merger Subsidiary, has been executed
and delivered by Parent and Merger Subsidiary, and is the valid and binding
obligation of Parent and Merger Subsidiary, and this Agreement is enforceable
against Parent and Merger Subsidiary, as the case may be, in accordance with its
terms.
(iv) The execution, delivery and performance of this Agreement
by the Parent do not violate the Certificate of Incorporation or By-Laws of
Parent, and, to such counsel's knowledge, will not violate any agreement or
instrument to which Parent is a party or by which it or its property is bound.
The execution, delivery and performance of this Agreement by Merger Subsidiary
will not violate the Articles of Incorporation or By-Laws of Merger Subsidiary,
and, to such counsel's knowledge, will not violate any agreement or instrument
to which Merger Subsidiary is a party or by which it or its property is bound.
(v) Except as may be specified by such counsel or set forth on
the Disclosure Schedule, such counsel knows of no litigation, proceeding or
governmental
<PAGE>
investigation pending or threatened against or relating to the Parent or Merger
Subsidiary, or any of their respective assets and businesses, or the Parent
Common Stock; and
(vi) Based solely on such counsel's review of the minute books
and stock transfer records of Parent and Parent's filings with the Secretary of
State of Delaware, the issuance of the Parent Common Stock in the Merger has
been duly authorized by all necessary corporate action on the part of Parent.
The Parent Common Stock has been duly issued in accordance with the Certificate
of Incorporation and By-Laws of Parent and with applicable law, and upon
delivery of such in accordance with this Agreement, such Parent Common Stock is
or will be outstanding, fully-paid and non-assessable.
In rendering the foregoing opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, as to matters of fact,
upon certificates of government officials and of any officer or officers of
Parent and Merger Subsidiary, which shall be expressly referred to in such
opinion and copies of which shall accompany such opinion. In addition, such
counsel, in rendering such opinions, shall be permitted to assume the
authenticity of Parent's stock book or records of its stock transfer agent and,
if found in Parent's minute book and otherwise proper in form and appearance,
the authenticity of the minutes of any directors' meetings and shareholders'
meetings.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time (notwithstanding the Company
Stockholder Approval or the Parent Common Stockholder Approval):
(i) by mutual written consent of the Company and Parent;
(ii) by either Parent or the Company, if at the meeting, or at
any adjournment thereof, at which the Company Stockholder Approval or the Parent
Common Stockholder Approval is proposed and voted upon, the Company Stockholder
Approval or the Parent Common Stockholder Approval shall have not have been
obtained;
(iii) by either the Company or Parent, if the Merger has not
been consummated by May 31, 1998 (provided that the party seeking to terminate
the Agreement shall not have breached its obligations under this Agreement in
any material respect);
(iv) by Parent, at any time prior to the Effective Time, by
action of the Board of Directors of Parent, if (x) there has been a breach by
the Company of any of the representations, warranties, covenants or agreements
contained in this Agreement, or if any representation or warranty of the Company
shall have become untrue, in either case which has or could reasonably be
expected to have a Company Material Adverse Effect, or (y) the Board of
Directors of the Company shall have withdrawn or modified in a manner adverse to
Parent or Merger Subsidiary its approval of recommendation of this Agreement or
the Merger, or shall have resolved to do any of the foregoing;
<PAGE>
(v) by the Company, at any time prior to the Effective Time,
by action of the Board of Directors of the Company, if (A) there has been a
breach by the Parent or Merger Subsidiary of any of the representations,
warranties, covenants or agreements contained in this Agreement or if any
representation or warranty of the Parent or Merger Subsidiary shall have become
untrue, in either case which has or could reasonably be expected to have a
Parent Material Adverse Effect, or (B) the Company receives an Acquisition
Proposal on terms the Company's Board of Directors (after consultation with its
independent financial advisors) determines in good faith to be more favorable to
the Company's stockholders than the terms of the Merger, and the Company's Board
of Directors determines, upon the written advice of its legal counsel, that to
continue to recommend that holders of Shares vote in favor of the Merger,
notwithstanding the receipt of such offer with respect to an Acquisition
Proposal, or to fail to recommend or accept the Acquisition Proposal, would
violate the fiduciary duties of the Company's Board of Directors; provided,
however, that the Company shall not be permitted to terminate this Agreement
pursuant to this Section 9.1(v)(B) unless it has provided Parent and Merger
Subsidiary with three (3) business days prior written notice of its intent to so
terminate this Agreement together with a detailed summary of the terms and
conditions (including proposed financing, if any) of such Acquisition Proposal;
provided, further, that Parent shall receive the fees set forth in Section
10.4(b) immediately prior to or concurrently with any termination pursuant to
this Section 9.1(v)(B); or
(vi) by either the Parent or the Company, by written notice to
the other, if the Average Parent Common Stock Price (as defined below) is less
than $7.50 per share, unless by written notice to the Company given not later
than three (3) business days after receipt of a termination notice from the
Company, the Parent agrees to increase the Exchange Ratio as permitted by
Section 2.1(c)(i). For purposes of this Agreement, the "Average Parent Common
Stock Price" shall be the average of the daily closing sales price of the Parent
Common Stock in the over-the-counter market (as reported by The Wall Street
Journal or, if not reported thereby, as reported by another authoritative source
as mutually agreed by Parent and the Company) for the 10 consecutive full
trading days ending on the second business day prior to the Effective Time.
9.2 Effect of Termination. If this Agreement is terminated pursuant to Section
9.1, this Agreement shall become void and of no effect with no liability on the
part of any party hereto or their respective officers and directors, except that
the agreements contained in Sections 6.1, 7.2(g) and 10.4 shall survive the
termination hereof. Specifically, and without limiting the generality of the
foregoing, Parent and Merger Subsidiary agree that, except as expressly provided
in this Section 9.2 or Section 10.4(b), termination of this Agreement shall be
their sole and exclusive remedy for any nonwillful breach by the Company of its
representations, warranties and covenants under this Agreement and the Company
agrees that except as provided in this Section 9.2 termination of this Agreement
shall be its sole and exclusive remedy for any nonwillful breach by Parent or
Merger Subsidiary of their representations, warranties and covenants under this
Agreement. If this Agreement is terminated by reason of a willful breach by a
party, then the breaching party shall be liable to the non-breaching party for
all actual, consequential and incidental damages suffered by the non-breaching
party (including, but not limited to, reasonable attorneys', accountants' and
investment brokers' fees, costs and expenses) arising from such willful breach.
<PAGE>
ARTICLE X
MISCELLANEOUS
10.1 Notices. All notices, requests and other communications to any party
hereunder shall be in writing (including telecopy or similar writing) and shall
be given,
if to Parent or Merger Subsidiary, to:
GB Foods Corporation
1200 N. Harbor Blvd.
Anaheim, CA 92803-61093
Telecopy: (714) 491-6415
Attn: Andrew F. Puzder, Chief Executive Officer
with a copy to:
The Stolar Partnership
911 Washington Avenue
St. Louis, Missouri 63101
Telecopy: (314) 436-8400
Attn: Thomas E. Lowther, Esq.
if to the Company, to:
Timber Lodge Steakhouse, Inc.
4021 Vernon Avenue South
St. Louis Park, MN 55416
Telecopy: (612) 929-5658
Attn: Mr. Dermot F. Rowland
Chief Executive Officer
with a copy to:
Larkin, Hoffman, Daly & Lindgren, Ltd.
1500 Norwest Financial Center
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
Telecopy: (612) 896-3333
Attn: Michael W. Schley, Esq.
or such other address or telecopy number as such party may hereafter specify for
the purpose of notice to the other parties. Each such notice, request or other
communication shall be effective when delivered at the address specified in this
Section 10.1.
10.2 Survival of Representations and Warranties. The representations and
warranties and agreements contained herein and in any certificate or other
writing delivered pursuant hereto shall
<PAGE>
not survive the Effective Time except for the representations, warranties and
agreements set forth in Sections 6.3, 6.6, 6.7, 6.8, 6.9, 10.2, 10.4, 10.5,
10.6, 10.7, 10.8 and 10.9.
10.3 Amendments: No Waivers.
(a) Any provision of this Agreement may be amended or waived prior to
the Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company, Parent and Merger
Subsidiary or in the case of a waiver, by the party against whom the waiver is
to be effective, provided, that after the adoption of this Agreement by the
stockholders of the Company or the Parent, no such amendment or waiver shall,
without the further approval of such stockholders, alter or change (i) the
amount or kind of consideration to be received in exchange for any Shares, or
(ii) any of the terms of the Merger which are material to the stockholders of
the Company (as a group) or the Parent.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
10.4 Fees and Expenses.
(a) Except as otherwise provided in Sections 7.2(g) and 10.4(b) of this
Agreement, all costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such cost or expense.
(b) If (w)(1) any person or group (as contemplated by Section 13(d)(3)
of the Exchange Act) other than Parent or Merger Subsidiary or any of their
respective subsidiaries or affiliates (collectively, an "Acquiring Person")
shall have become the beneficial owner of a majority of the outstanding Shares,
and (2) either the Company shall fail to obtain the Company Stockholder Approval
or the Company's Board of Directors shall have withdrawn or changed its
recommendation or refused to make a recommendation in favor of this Agreement
and the Merger, or (x) Parent shall have terminated this Agreement pursuant to
Section 9.1(iv)(y), or (y) the Company shall have terminated this Agreement
pursuant to Section 9.1(v)(B), then the Company shall promptly, but in no event
later than five (5) days after the date of any request therefor, issue to the
Parent options to purchase such number of shares of the Company's voting common
stock as shall, after exercise of all such options, equal 19.9% of all such
voting common stock then outstanding, at an exercise price (subject to customary
adjustments for stock split, stock dividends and similar reclassifications or
adjustments) of $4.625 per share. Such options shall be immediately exercisable
without condition (other than payment of the exercise price), shall expire ten
years after their date of issue, shall be fully vested and nonforfeitable, shall
have customary anti-dilution provisions acceptable to Parent, shall be
transferable by their holder (subject to customary restrictions relating to
compliance with the Securities Act) in whole or part, and shall provide
customary piggyback registration rights so that the holder may sell the shares
received upon exercise in the public markets. The Company acknowledges that the
agreements contained in this Section 10.4(b) are an integral part of the
transactions contemplated in this Agreement, and that, without these agreements,
Parent and Merger Subsidiary would not enter into this Agreement; accordingly,
if the Company fails to promptly issue the options as described
<PAGE>
above or otherwise perform its obligations pursuant to this Section 10.4(b),
and, in order to obtain such performance, Parent or Merger Subsidiary Commences
a suit against the Company for the options set forth this paragraph (b), the
prevailing party shall pay to the other party or parties their costs and
expenses (including reasonable attorneys' fees and expenses) in connection with
such suit, together with interest on the amount thereof at the prime rate of the
Citibank, N.A. on the date such payment was required to be made.
10.5 Successors and Assigns: Parties in Interest. The provisions of this
Agreement shall be binding, upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided, that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto except that Merger
Subsidiary may transfer or assign, in whole or, from time to time, in part, to
one or more of Parent or any of its wholly-owned subsidiaries, any or all of its
rights or obligations, but any such transfer or assignment will not relieve
Merger Subsidiary of its obligations under this Agreement. Except as expressly
set forth herein, nothing in this Agreement, express or implied, is intended to
or shall confer upon any person not a party hereto any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, including to
confer third party beneficiary rights.
10.6 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties shall negotiate
in good faith to modify this Agreement and to preserve each party's anticipated
benefits under this Agreement.
10.7 Governing Law. This Agreement shall be construed in accordance with and
governed by the internal laws of the State of Minnesota, without giving effect
to the principles of conflicts of laws thereof, except that the consummation and
effectiveness of the Merger shall be governed by, and construed in accordance
with, the MBCA.
10.8 Entire Agreement. This Agreement, including Exhibits and Schedules hereto,
constitutes the entire agreement, and supersedes all other prior agreements,
written and oral among the parties, with respect to the subject matter hereof.
10.9 Counterparts: Effectiveness; Interpretation. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the
<PAGE>
signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by all of the other parties hereto. When a reference is made in
this Agreement to an Article or Section, such reference shall be to an Article
or section of 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".
The parties hereto have caused this Agreement to be duly executed by
their respective authorized officers as of the day and year first above written.
GB FOODS CORPORATION
By: /s/ Andrew F. Puzder
------------------------------------
Name: Andrew F. Puzder
Title: Chief Executive Officer
TLS ACQUISITION CORP.
By: /s/ Andrew F. Puzder
------------------------------------
Name: Andrew F. Puzder
Title: Executive Vice President
TIMBER LODGE STEAKHOUSE, INC.
BY: /s/ Dermot F. Kowland
------------------------------------
Name: Dermot F. Kowland
Title: Chief Executive Officer
Fidelity National Financial, Inc. is executing this Agreement solely
for the purposes of agreeing that, if the Company's stockholders approve the
Merger at the meeting held for that purpose, it will exercise currently
outstanding warrants to acquire Parent Common Stock as contemplated by Section
8.1(d).
FIDELITY NATIONAL FINANCIAL, INC.
By: /s/ Andrew F. Puzder
------------------------------------
Name: Andrew F. Puzder
Title: Executive Vice President
<PAGE>
The undersigned is executing this Agreement solely for the purposes of
acknowledging its agreement to negotiate in good faith lo sell JB Restautants to
the Company as contemplated by Section 8.2(g).
CKE ENTERPRISES, INC.
By: /s/ Andrew F. Puzder
------------------------------------
Name: Andrew F. Puzder
Title: Executive Vice President
<PAGE>
EXHIBIT A
FORM OF
AFFILIATE AGREEMENT
FOR STOCKHOLDERS OF
TIMBER LODGE STEAKHOUSE, INC.
THIS AFFIFIATE AGREEMENT (this "Agreement") is made and entered into as
of ______________, 1998, by and between GB FOODS CORPORATION, a Delaware
corporation ("Parent") and the stockholder of TIMBER LODGE STEAKHOUSE, INC. a
Minnesota corporation (the "Company"), identified on the signature page hereto
(the "Affiliate").
RECITALS:
A. Parent and the Company are parties to that certain Agreement and
Plan of Merger, dated as of ____________, 1998 (the "Merger Agreement"), which
provides for the acquisition of the Company by Parent by means of a merger (the
"Merger") of a wholly-owned subsidiary of Parent ("Merger Sub") with and into
the Company (unless otherwise defined herein as the context otherwise requires,
capitalized terms shall have the respective meanings set forth in the Merger
Agreement);
B. Affiliate is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of and has the right to vote and dispose of the number of shares of the
outstanding capital stock of the Company on the signature page of this Agreement
(the "Company Shares"), which Shares will be converted upon the Effective Time
of the Merger into the right to receive shares of Parent Common Stock (the
"Parent Shares"); and
C. Affiliate understands that, since the Merger will be accounted for
using the "pooling of interests" method and the Affiliate is an "affiliate" of
the Company (within the meaning of Rule 145 under the Securities Act of 1933, as
amended (the "Securities Act"), the Parent Shares may only be disposed of in
conformity with the limitations described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. Affiliate agrees not to
transfer, sell, exchange, pledge or otherwise dispose of or encumber the Parent
Shares or any New Shares (as defined in Section 1.2 below) or to make any offer
or agreement relating thereto, at any time prior to the Expiration Date. As used
herein, the term " Expiration Date" shall mean the date Parent shall have
publicly released a report including the combined financial results of Parent
and the Company for a period of at least 30 days of combined operations of
Parent and the Company.
<PAGE>
1.2 New Shares. Affiliate agrees that any shares of capital
stock of the Company or Parent that Affiliate purchases or with respect to which
Affiliate otherwise acquires beneficial ownership after the date of this
Agreement and prior to the Expiration Date ("New Shares") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. Tax Treatment; Rule 145. Affiliate understands and agrees that it is
intended that the Merger will be treated as a "reorganization" for federal
income tax purposes. Affiliate further understands and agrees that Affiliate may
be deemed to be an "affiliate" of the Company within the meaning of Rule 145
promulgated by the Securities and Exchange Commission (the "SEC") under the
Securities Act, although nothing contained herein should be construed as an
admission of such fact.
3. Reliance Upon Representations, Warranties and Covenants. Affiliate
has been informed that the treatment of the Merger as a reorganization for
federal income tax purposes requires that a sufficient number of stockholders of
the Company maintain a meaningful continuing equity ownership interest in Parent
after the Merger. Affiliate understands that the representations, warranties and
covenants of Affiliate set forth herein will be relied upon by Parent, the
Company and their respective counsel and accounting firms.
4. Representations. Warranties and Covenants of Affiliate. Affiliate
represents, warrants and covenants as follows:
(a) Affiliate has full power and authority to execute this
Agreement, to make the representations, warranties and covenants herein
contained and to perform Affiliate's obligations hereunder.
(b) Set forth below the signatures below is the number of
Company Shares owned by Affiliate, including all Company Shares as to which
Affiliate has sole or shared voting or investment power to acquire the shares of
capital stock of the Company owned or held by Affiliate.
(c) Affiliate will not sell, transfer, exchange, pledge or
otherwise dispose of, or make any offer or agreement relating to any of the
foregoing with respect to, any Parent Shares that Affiliate may acquire in
connection with the Merger, or any securities that may be paid as a dividend or
otherwise distributed thereon or with respect thereto issued or delivered in
exchange or substitution therefor (all such shares and other securities of
Parent are sometimes collectively referred to as "Restricted Securities"), or
any option, right or other interest with respect to any Restricted Securities,
unless: (i) such transactions is permitted pursuant to Rule 145(c) and 145(d)
under the Securities Act, (ii) counsel representing Affiliate, which counsel is
reasonably satisfactory to Parent, shall have advised Parent in a written
opinion letter satisfactory to Parent and Parent's legal counsel, and upon which
Parent and its legal counsel may rely, that no registration under the Securities
Act would be required in connection with the proposed sale, transfer or other
disposition; (iii) a registration statement under the Securities Act covering
the Parent Shares proposed to be sold, transferred or otherwise disposed of,
describing the manner and terms of the proposed sale, transfer or other
dispositions, and containing a current prospectus, shall have been filed with
the SEC and made effective under the Securities Act; or
<PAGE>
(iv) an authorized representative of the SEC shall have rendered written advice
to Affiliate (sought by Affiliate or counsel to Affiliate, with a copy thereof
and all other related communications delivered to Parent) to the effect that the
SEC would take no action, or that the staff of the SEC would not recommend that
the SEC take any action, with respect to the proposed disposition if
consummated.
(d) Affiliate is not aware of, or participating in, any present plan or
intention (a "Plan") on the part of the Company's stockholders to sell,
transfer, exchange, pledge or otherwise dispose of, including a distribution by
a partnership to its partners, or a corporation to its stockholders, or any
other transaction which results in a reduction in the risk of ownership (any of
the foregoing, a "Sale") of Parent Shares to be issued in the Merger such that
the aggregate fair market value, as of the Effective Time of the Merger, of the
Parent Shares subject to such Sales would exceed fifty percent (50%) of the
aggregate fair market value of all shares of outstanding shares of the Company
immediately prior to the Merger. For purposes of the preceding sentence, Parent
Shares (i) which are exchanged for cash in lieu of fractional Parent Shares or
(ii) with respect to which a pre-Merger Sale occurs in a Related Transaction (as
defined below), shall be considered to be Company Shares that are exchanged for
Parent Shares in the Merger and then disposed of pursuant to a Plan. A sale of
Parent Shares shall be considered to have occurred pursuant to a Plan if, among
other things, such Sale occurs in a Related Transaction. For purposes of this
Section 4(d), a "Related Transaction" shall mean a transaction that is in
contemplation of, or related or pursuant to, the Merger or the Merger Agreement.
If any of Affiliate's representations in this subsection (d) cease to be true at
any time prior to the Effective Time of the Merger, Affiliate will deliver to
each of the Company and Parent, prior to the Effective Time of the Merger, a
written statement to that effect, signed by Affiliate.
5. Rules 144 and 145. From and after the Effective Time of the Merger
and for so long as is necessary in order to permit Affiliate to sell the Parent
Shares held by Affiliate pursuant to Rule 145 and, to the extent applicable,
Rule 144 under the Securities Act, Parent will use its reasonable efforts to
file on a timely basis all reports required to be filed by it pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended, referred to in
paragraph (c)(l) of Rule 144 under the Securities Act, in order to permit
Affiliate to sell the Parent Shares held by it pursuant to the terms and
conditions of Rule 145 and the applicable provisions of Rule 144.
6. Limited Resales. Affiliate understands that, in addition to the
restrictions imposed under Section 4 of this Agreement, the provisions of Rule
145 limit Affiliate's public resales of Restricted Securities.
7. Legends. Affiliate also understands and agrees that stop transfer
instructions will be given to Parent's transfer agent with respect to
certificates evidencing the Restricted Securities and that there will be placed
on the certificate evidencing the Restricted Securities legends stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE
<PAGE>
REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE OTHER CONDITIONS SPECIFIED IN THAT CERTAIN AFFILIATE
AGREEMENT DATED AS OF ____________, 1998 BETWEEN THE ISSUE AND
THE STOCKHOLDER, A COPY OF WHICH AFFILIATE AGREEMENT MAY BE
INSPECTED BY THE HOLDER OF THIS CERTIFICATE AT THE PRINCIPAL
OFFICES OF THE ISSUER."
After the Expiration Date, Parent agrees to remove the above legend,
and replace such legend the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE
SECURITIES ACT OF 1933, AS AMENDED."
Parent agrees to remove promptly such stop transfer instructions and
legend upon full compliance with this Agreement by the undersigned, including,
without limitation, a sale or transfer of Parent Shares permitted under Section
4(c) above.
8. Termination. This Agreement shall be terminated and shall be of no
further force and effect if the Merger Agreement should be terminated in
accordance with the terms thereof prior to the time the Merger becomes
effective.
9. Counterparts. This Agreement shall be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one instrument.
10. Binding Agreement. This Agreement will inure to the benefit of and
be binding upon and enforceable against the parties and their successors and
assigns, including administrators, executors, representatives, heirs, legatees
and devisees of Affiliate and pledgees holding Restricted Securities as
collateral.
11. Waiver. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement shall be effective unless in writing
and signed by each party hereto.
12. Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of Delaware.
13. Attorney's Fees. In the event of any legal actions or proceeding to
enforce or interpret provisions hereof, the prevailing party shall be entitled
to reasonable attorney's fees, whether or not the proceeding results in a final
judgment.
14. Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
GB FOODS CORPORATION
By:
--------------------------------------
Name:
Title:
-----------------------------------------
Name of Affiliate:
Affiliate's Address for Notice:
Company Shares beneficially owned:
Shares of Common Stock:
Shares subject to:
Options:
Warrants:
Other Rights:
<PAGE>
EXHIBIT B
FORM OF
AFFILIATE AGREEMENT
FOR STOCKHOLDERS OP
GB FOODS CORPORATION
THIS AFFILIATE AGREEMENT (this "Agreement") is made and entered into as
of _____________, 1998, by and between GB FOODS CORPORATION, a Delaware
corporation ("Parent") and the stockholder of Parent identified on the signature
page hereto (the "Affiliate").
RECITALS:
A. Parent and Timber Lodge Steakhouse, Inc., a Minnesota corporation
(the "Company") are parties to that certain Agreement and Plan of Merger, dated
as of _______________, 1998 (the "Merger Agreement"), which provides for the
acquisition of the Company by Parent by means of a merger (the "Merger") of a
wholly-owned subsidiary of Parent ("Merger Sub") with and into the Company (as
otherwise defined herein as the context otherwise requires, capitalized terms
shall have the respective meanings set forth in the Merger Agreement);
B. Affiliate is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of and has the right to vote and dispose of the number of shares of the
outstanding capital stock of the Parent indicated on the signature page of this
Agreement (the "Parent Shares"); and
C. Affiliate understands that, since the Merger will be accounted for
using the "pooling of interests" method, the Parent Shares may only be disposed
of in conformity with the limitations described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. Affiliate agrees not to
transfer, sell, exchange, pledge or otherwise dispose of or encumber the Parent
Shares or any New Shares (as defined in Section 1.2 below) or to make any offer
or agreement relating thereto, at any time prior to the Expiration Date. As used
herein, the term "Expiration Date" shall mean the date Parent shall have
publicly released a report including the combined financial results of Parent
and the Company for a period of at least 30 days of combined operations of
Parent and the Company.
1.2 New Shares. Affiliate agrees that any shares of capital
stock of Parent that Affiliate purchases or with respect to which Affiliate
otherwise acquires beneficial ownership
<PAGE>
after the date of this Agreement and prior to the Expiration Date ("New Shares")
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Parent Shares.
2. Tax Treatment: Rule 145. Affiliate understands and that it is
intended that the Merger will be treated as a "reorganization" for federal
income tax purposes.
3. Termination. This Agreement shall be terminated and shall be of no
further force and effect upon the termination of the Merger Agreement in
accordance with the terms thereof.
4. Counterparts. This Agreement shall be executed in one or more
counterparts, each of which shall be an original, and all of which together
shall constitute one instrument.
5. Binding Agreement. This Agreement will inure to the benefit of and
be binding upon and enforceable against the parties and their successors and
assigns, including administrators, executors, representatives, heirs, legatees
and devisees of Affiliate and pledgees holding Restricted Securities as
collateral.
6. Waiver. No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement shall be effective unless in writing
and signed by each party hereto.
7. Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of Delaware.
8. Attorneys'' Fees. In the event of any Legal actions or proceeding to
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorney's fees, whether or not the proceeding results in
a final judgment.
9. Effect of Headings. The Section headings herein are for convenience
only and shall not effect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
GB FOODS CORPORATION
By:
--------------------------------------
Name:
Title:
-----------------------------------------
Name of Affiliate:
Affiliate's Address for Notice:
Company Shares beneficially owned:
Shares of Common Stock:
Shares subject to:
Options:
Warrants:
Other Rights:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TIMBER LODGE
STEAKHOUSE'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000912287
<NAME> TIMBER LODGE STEAKHOUSE INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-02-1997
<PERIOD-END> DEC-31-1997
<CASH> 482,598
<SECURITIES> 0
<RECEIVABLES> 227,473
<ALLOWANCES> 0
<INVENTORY> 352,289
<CURRENT-ASSETS> 2,054,399
<PP&E> 12,463,740
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,218,178
<CURRENT-LIABILITIES> 3,088,444
<BONDS> 0
0
0
<COMMON> 36,257
<OTHER-SE> 8,883,701
<TOTAL-LIABILITY-AND-EQUITY> 15,218,178
<SALES> 26,535,788
<TOTAL-REVENUES> 26,535,788
<CGS> 23,150,309
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,068
<INCOME-PRETAX> 1,393,919
<INCOME-TAX> 411,706
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982,213
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
