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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1997
REGISTRATION STATEMENT NO. 333-17463
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 5812 33-0592148
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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450 NEWPORT CENTER DRIVE
NEWPORT BEACH, CALIFORNIA 92660
(714) 721-8000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
----------------------
WILLIAM J. MCCAFFREY, JR.
CHIEF FINANCIAL OFFICER
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
(714) 721-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy To:
Philip T. Ruegger III, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
----------------------
Approximate date of commencement of proposed sale to the public: As promptly as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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PROSPECTUS
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
OFFER TO EXCHANGE ITS 14% SENIOR DISCOUNT DEBENTURES DUE 2005, SERIES B, WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS
OUTSTANDING 14% SENIOR DISCOUNT DEBENTURES DUE 2005, SERIES A.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED.
American Restaurant Group Holdings, Inc. ("Holdings") hereby offers
upon the terms and subject to the conditions set forth in this Prospectus and in
the accompanying Letter of Transmittal to exchange (the "Exchange Offer") up to
$17,000,000 in aggregate principal amount of its 14% Senior Discount Debentures
due 2005, Series B (the "Exchange Debentures"), for up to $17,000,000 in
aggregate principal amount of its outstanding 14% Senior Discount Debentures due
2005, Series A (the "Debentures") issued pursuant to the First Supplemental
Indenture, dated as of March 13, 1996 (the "First Supplemental Indenture"), with
respect to the Indenture, dated as of December 1, 1993, between Holdings and
United States Trust Company of New York, as trustee. The Debentures constitute
Additional Series A Securities under and as defined in the First Supplemental
Indenture and the Exchange Debentures will constitute Additional Series B
Securities under and as defined in the First Supplemental Indenture.
HOLDINGS, WITH NO OPERATIONS OF ITS OWN, CONDUCTS BUSINESS THROUGH ITS
WHOLLY OWNED SUBSIDIARY, AMERICAN RESTAURANT GROUP, INC. ("ARG"). CONSEQUENTLY,
HOLDINGS RELIES ON THE CASH FLOW OF ARG IN ORDER TO MEET ITS DEBT-SERVICE
OBLIGATIONS. AS A RESULT OF THE RELATIONSHIP OF HOLDINGS AND ARG, THE EXCHANGE
DEBENTURES WILL EFFECTIVELY RANK JUNIOR TO ALL INDEBTEDNESS OF ARG,
NOTWITHSTANDING THAT THE EXCHANGE DEBENTURES WILL BE SENIOR OBLIGATIONS OF
HOLDINGS. AS OF JUNE 30, 1997, THE AGGREGATE AMOUNT OF INDEBTEDNESS AND OTHER
OBLIGATIONS OF ARG TO WHICH THE EXCHANGE DEBENTURES WOULD HAVE BEEN STRUCTURALLY
SUBORDINATED WAS APPROXIMATELY $216.5 MILLION. AS OF THE DATE OF THIS
PROSPECTUS, HOLDINGS HAS NOT ISSUED AND HAS NO CURRENT PLANS TO ISSUE ANY
SIGNIFICANT INDEBTEDNESS TO WHICH THE EXCHANGE DEBENTURES WOULD BE SENIOR. SEE
"RISK FACTORS--HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW;
EFFECTIVE SUBORDINATION OF EXCHANGE DEBENTURES." THE INDENTURE UNDER WHICH THE
EXCHANGE DEBENTURES WILL BE ISSUED LIMITS THE COMPANY'S ABILITY TO INCUR
ADDITIONAL INDEBTEDNESS. SEE "DESCRIPTION OF THE EXCHANGE DEBENTURES--CERTAIN
COVENANTS--LIMITATIONS ON INCURRENCE OF ADDITIONAL INDEBTEDNESS."
The debt instruments of ARG severely restrict, among other things, the
payment of dividends, the making of loans by ARG to Holdings and Holdings'
ability to make the mandatory repurchase of the Exchange Debentures upon a
Change of Control (as defined herein) required by the indenture under which the
Exchange Debentures will be issued. In addition, substantially all of the assets
of ARG and its subsidiaries are pledged to secure obligations under existing
debt agreements. If a Change of Control were to occur, it is unlikely that the
Company would be able to repay all of its obligations under the Debenture
Indenture (as defined herein) and other indebtedness that would become payable.
See "DESCRIPTION OF THE EXCHANGE DEBENTURES--Change of Control" and "DESCRIPTION
OF CERTAIN INDEBTEDNESS--Credit Facilities."
The terms of the Exchange Debentures are substantially identical in all
respects (including interest rate and maturity) to the terms of the Debentures
for which they may be exchanged pursuant to the Exchange Offer, except that the
Exchange Debentures are freely transferable by holders thereof, except as
provided in the next paragraph below. For a complete description of the terms of
the Exchange Debentures, see "Description of the Exchange Debentures." There
will be no proceeds to Holdings from the Exchange Offer.
The Debentures were originally issued and sold on March 13, 1996 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Act"), in reliance upon the exemption provided in Section 4(2) of the Act.
Accordingly, the Debentures may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Act is
available. The Exchange Debentures are being offered hereunder in order to
satisfy the obligations of Holdings under a registration rights agreement
relating to the Debentures. See "THE EXCHANGE OFFER--Purpose of
<PAGE> 3
the Exchange Offer." The Exchange Debentures issued pursuant to the Exchange
Offer may be offered for resale, resold and otherwise transferred by holders
thereof without compliance with the registration and prospectus delivery
provisions of the Act, provided that (i) such Exchange Debentures are acquired
in the ordinary course of business of such holders or any beneficial owner, (ii)
such holders have no arrangement or understanding with any person to participate
in the distribution of such Exchange Debentures and (iii) neither the holder nor
any such beneficial owner is an "affiliate" of Holdings within the meaning of
Rule 405 under the Act. Each holder of Debentures who wishes to exchange
Debentures for Exchange Debentures in the Exchange Offer will be required to
represent that (i) neither it nor any beneficial owner is an "affiliate" of
Holdings (within the meaning of Rule 405 under the Act), (ii) any Exchange
Debentures to be received by such holder or any beneficial owner are being
acquired in the ordinary course of business of such holder or such beneficial
owner, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Act) of such Exchange
Debentures, and (iv) if such holder is not a broker-dealer, such holder is not
engaged in, and does not intend to engage in, a distribution (within the meaning
of the Act) of such Exchange Debentures. Each broker-dealer that receives
Exchange Debentures for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Debentures. The Letter of Transmittal relating to the Exchange
Offer states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Debentures received in exchange for Debentures where such Debentures
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. Holdings will, for a period of 180 days after the
Exchange Date (as defined herein), make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "PLAN OF
DISTRIBUTION."
Holders of Debentures whose Debentures are not tendered and accepted in
the Exchange Offer will continue to hold such Debentures and will be entitled to
all the rights and preferences and will be subject to the limitations applicable
thereto under the indenture governing the Debentures and the Exchange
Debentures. Following consummation of the Exchange Offer, the holders of
Debentures will continue to be subject to the existing restrictions upon
transfer thereof and Holdings will have no further obligation to such holders to
provide for the registration under the Act of the Debentures held by them.
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Debentures being tendered for exchange. The Exchange Offer
will expire at 5:00 p.m., New York City time, on , 1997, unless extended (the
"Expiration Date"). Holdings' obligation to consummate the Exchange Offer is
subject to certain conditions. See "The Exchange Offer" and "Registration Rights
Agreement." Holdings reserves the right to terminate or amend the Exchange Offer
at any time prior to the Expiration Date upon the occurrence of any such
condition. The date of acceptance for exchange of the Debentures (the "Exchange
Date") will be the first business day following the Expiration Date. Debentures
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders will be irrevocable. Holdings will
pay all expenses incident to the Exchange Offer.
Interest on the Exchange Debentures which are issued in exchange for
Debentures will accrue commencing December 15, 1998.
The Exchange Debentures will be treated as issued with original
discount requiring holders of the Exchange Debentures to include amounts in
gross income for federal income tax purposes in advance of receipt of the cash
to which the income is attributable. Tax Counsel (as defined herein) has advised
Holdings that it is of the opinion that the exchange of the Debentures for the
Exchange Debentures will not be a taxable event to the holder, and the holder
will not recognize any taxable gain or loss or any interest income as a result
of such exchange. See "CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS--Original Issue Discount" and "CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS--Exchange of Debentures."
No assurance can be given that an active public or private market for
the Exchange Debentures will develop. Holdings does not intend to list the
Exchange Debentures on any securities exchange. To the extent that Debentures
are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Debentures could be adversely affected.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
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AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Exchange Debentures
offered hereby (together with all amendments and exhibits, referred to as the
"Registration Statement") under the Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed or incorporated by reference as
an exhibit to the Registration Statement, reference is made to such exhibit for
a more complete description thereof, and each such statement shall be deemed
qualified in its entirety by such reference.
Holdings is subject to the informational and reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Commission. The Registration Statement and the exhibits and schedules thereto,
as well as such reports and other information filed by Holdings with the
Commission, may be inspected without charge and copied at prescribed rates at
the Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Regional Offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports
and other documents may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. In addition, so long as any Debentures or any
Exchange Debentures are outstanding, Holdings will furnish to the holders
thereof the quarterly and annual financial reports that Holdings is required to
file with the Commission under the Exchange Act (or similar reports in the event
Holdings is not at the time required to file such reports with the Commission).
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY HOLDINGS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE DEBENTURES IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF HOLDINGS SINCE THE DATE HEREOF.
2
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TABLE OF CONTENTS
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Page
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Prospectus Summary........................................................................................... 4
Risk Factors................................................................................................. 12
The Company.................................................................................................. 15
Use of Proceeds.............................................................................................. 16
Capitalization............................................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 19
Business .................................................................................................... 24
Management................................................................................................... 29
Security Ownership of Certain Beneficial Owners and Management............................................... 32
Description of Certain Indebtedness.......................................................................... 33
The Exchange Offer........................................................................................... 37
Description of the Exchange Debentures....................................................................... 43
Description of the Debentures................................................................................ 61
Registration Rights Agreement................................................................................ 61
Certain United States Federal
Income Tax Considerations.................................................................................... 62
Plan of Distribution......................................................................................... 65
Legal Matters................................................................................................ 66
Experts .................................................................................................... 66
Index to Consolidated Financial Statements................................................................... F-1
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3
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PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
TERMS NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE HEREIN.
HOLDINGS IS A DELAWARE CORPORATION WHICH OWNS 100% OF THE OUTSTANDING
COMMON STOCK OF AMERICAN RESTAURANT GROUP, INC. ("ARG"). HOLDINGS CONDUCTS
BUSINESS THROUGH ARG AND HAS NO OPERATIONS OF ITS OWN. SEE "THE COMPANY." THE
PRIMARY ASSET OF HOLDINGS IS THE COMMON STOCK OF ARG, ITS WHOLLY OWNED
SUBSIDIARY. REFERENCES HEREIN TO THE "COMPANY" MEAN, COLLECTIVELY, HOLDINGS AND
ARG. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO "ARG" MEAN
AMERICAN RESTAURANT GROUP, INC. AND ITS SUBSIDIARIES.
THE COMPANY
The Company, through ARG, operates 239 restaurants primarily located in
the western and southwestern United States. The Company is comprised of two
principal concepts: Black Angus, a steakhouse chain serving the western United
States, and Grandy's, a chicken chain serving the southern United States. The
Company is principally positioned in the casual-dining segment of the restaurant
industry. For the twelve months ended December 30, 1996, the Company had
revenues of $445.4 million. See "THE COMPANY--General" and
"BUSINESS--Introduction."
The Company's principal executive offices are located at 450 Newport
Center Drive, Newport Beach, California 92660, and its telephone number is (714)
721-8000.
BLACK ANGUS
Founded in 1964, Black Angus is a steakhouse chain in the western
United States. The Company operates 104 Stuart Anderson's Black Angus and Stuart
Anderson's Cattle Company (collectively, "Black Angus") restaurants located
primarily in California, the Pacific Northwest and Arizona. Black Angus
restaurants feature steak and prime rib, but also serve chicken and seafood
entrees, and all restaurants include lounge areas. For the year ended December
30, 1996, Black Angus had revenues of $254.9 million. See "THE COMPANY--Black
Angus" and "BUSINESS--Black Angus."
GRANDY'S
Grandy's, founded in 1973, operates 93 restaurants located principally
in Texas, Oklahoma and Kansas. Grandy's is a family-oriented, quick-service
concept. Grandy's differentiates itself from other fast food restaurants by
offering comparable prices and speed, but with the quality and ambiance of a
full-service restaurant. The menu features fried chicken, grilled chicken and
country breakfasts. In addition to the company-operated restaurants, as of June
30, 1997, the Company franchised 60 restaurants in the southern United States.
For the year ended December 30, 1996, Grandy's had revenues of $91.0 million.
See "THE COMPANY--Grandy's" and "BUSINESS--Grandy's."
OTHER CONCEPTS
The Company also operates three smaller concepts: Spoons, Spectrum and
National Sports Grill. Spoons, founded in 1978, operates 20 casual-dining
restaurants located throughout California and features fajitas, salads,
hamburgers, french fries, tacos and full bar service. Founded in 1970, Spectrum
operates 16 unique, upscale, specialty restaurants located throughout California
under such names as "Prego", "Tutto Mare" and "MacArthur Park". National Sports
Grill operates six sports-theme restaurants offering generous portions and
microbrewery beers and providing video telecasts of national and regional
sporting events. As of December 30, 1996, the Company operated one Velvet Turtle
restaurant which the Company closed in February 1997. For the year ended
December 30, 1996, these other concepts had revenues of $99.5 million. See "THE
COMPANY--Other Concepts" and "BUSINESS--Other Concepts."
4
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FORMATION
The Company was formed by Mr. Anwar S. Soliman, Chairman of the Board
and Chief Executive Officer of the Company, and other members of current senior
management, to acquire restaurant operations of Saga Corporation in February
1987. Mr. Soliman and other members of the Company's current senior management
average more than 20 years experience in the restaurant industry and own
approximately 61% of all outstanding shares of common stock, $.01 par value per
share, of Holdings (the "Common Stock") and rights to acquire such Common Stock.
See "THE COMPANY--Formation" and "BUSINESS--Introduction."
THE EXCHANGE OFFER
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Securities Offered.................. $17,000,000 aggregate principal amount of 14% Senior Discount Debentures due
2005, Series B (the "Exchange Debentures"). The Exchange Debentures will be issued
under the Indenture, dated as of December 1, 1993, as supplemented by the First
Supplemental Indenture thereto, dated as of March 13, 1996 (the "Debenture
Indenture"), between Holdings and United States Trust Company of New York, as
trustee, pursuant to which the Debentures were issued. The terms of the Exchange
Debentures are substantially identical in all respects (including interest rate and
maturity) to the terms of the Debentures that are to be exchanged therefor, except that
the Exchange Debentures are freely transferable by holders thereof (except as provided
herein), and are not issued subject to any covenant regarding registration under the
Act. See "DESCRIPTION OF THE EXCHANGE DEBENTURES."
Exchange Offer...................... The Exchange Debentures are being offered in exchange for a like principal amount
of the Debentures. Debentures may be exchanged only in integral multiples of $1,000.
Holdings has agreed to make the Exchange Offer in order to satisfy its obligations
under a registration rights agreement (the "Registration Rights Agreement"), dated as
of March 13, 1996, relating to the Debentures. For a description of the procedures for
tendering, see "THE EXCHANGE OFFER--Tender Procedure."
Expiration Date; Withdrawal......... The Exchange Offer will expire at 5:00 P.M., New York City time, on ,
1997 or such later date and time to which it may be extended in the sole discretion of
Holdings (the "Expiration Date"). The date of acceptance for exchange of the
Debentures (the "Exchange Date") will be the first business day following the
Expiration Date. Debentures tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date. Any Debentures not accepted for
exchange for any reason will be returned without expense to the tendering holders
thereof as promptly as practicable after the expiration or termination of the Exchange
Offer.
Conditions to the Exchange Offer.... The Exchange Offer is subject to certain conditions. See "THE EXCHANGE
OFFER--Conditions to the Exchange Offer." The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of Debentures being tendered for
exchange.
Certain Federal Income Tax
Considerations.................... Simpson Thacher & Bartlett (a partnership which includes professional corporations),
New York, New York, special tax counsel to Holdings ("Tax Counsel"), is of the
opinion that the exchange of the Debentures for the Exchange Debentures will not be
a taxable event to the holder, and the holder will not recognize any taxable gain or
loss or any interest income as a result of such exchange. Tax Counsel has also advised
Holdings that the holding period of the Exchange Debentures will include the holding
period of the Debentures and that the basis of the Exchange Debentures will be the
same as the basis of the Debentures immediately before the exchange. See "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS--Exchange of Debentures."
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Untendered Debentures............... Upon consummation of the Exchange Offer, the holders of Debentures, if any, will
have no further registration or other rights under the Registration Rights Agreement.
Holders of Debentures who do not tender their Debentures in the Exchange Offer or
whose Debentures are not accepted for exchange will continue to hold such
Debentures and will be entitled to all the rights and preferences and will be subject to
the limitations applicable thereto under the Debenture Indenture, except for any such
rights or limitations which, by their terms, terminate or cease to be effective as a result
of this Exchange Offer. All untendered and tendered but unaccepted Debentures will
continue to be subject to the restrictions on transfer provided therein. To the extent
that Debentures are tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Debentures could be adversely affected.
Resales............................. Based on an interpretation by the staff of the Commission set forth in no-action letters
issued to third parties, Holdings believes that Exchange Debentures issued pursuant to
the Exchange Offer in exchange for Debentures may be offered for resale, resold and
otherwise transferred by holders thereof without compliance with the registration and
prospectus delivery provisions of the Act, provided that (i) such Exchange Debentures
are acquired in the ordinary course of business of such holder or any beneficial owner,
(ii) such holders have no arrangement or understanding with any person to participate
in the distribution of such Exchange Debentures and (iii) neither the holder nor any
such beneficial owner is an "affiliate" of Holdings within the meaning of Rule 405
under the Act. See "Morgan Stanley & Co. Inc.," SEC No-Action Letter (available
June 5, 1991) and "Exxon Capital Holdings Corporation," SEC No-Action Letter
(available May 13, 1988). Each holder of Debentures who wishes to exchange
Debentures for Exchange Debentures in the Exchange Offer will be required to
represent that (i) it is not an "affiliate" of Holdings (within the meaning of Rule 405
under the Act), (ii) any Exchange Debentures to be received by it are being acquired
in the ordinary course of its business, (iii) it has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the Act) of such
Exchange Debentures, and (iv) if such holder is not a broker-dealer, such holder is not
engaged in, and does not intend to engage in, a distribution (within the meaning of the
Act) of such Exchange Debentures. Each broker or dealer that receives Exchange
Debentures for its own account in exchange for Debentures, where such Debentures
were acquired by such broker or dealer as a result of market-making or other
activities, must acknowledge that it will deliver a Prospectus in connection with any
sale of such Exchange Debentures. See "PLAN OF DISTRIBUTION."
TERMS OF THE EXCHANGE DEBENTURES
Maturity Date....................... December 15, 2005.
Interest Rate and Payment Dates..... Commencing December 15, 1998, interest will accrue until maturity at the rate of 14%
per annum and will be payable semi-annually on each June 15 and December 15,
commencing June 15, 1999.
Original Issue Discount............. The Exchange Debentures will be treated as issued with original discount requiring
holders of the Exchange Debentures to include amounts in gross income for federal
income tax purposes in advance of receipt of the cash to which the income is
attributable. See "CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS--Original Issue Discount."
Optional Redemption................. The Exchange Debentures are redeemable at the option of Holdings, in whole or in
part, at any time on or after December 15, 1998 at the redemption prices set forth
herein, plus accrued interest, if any, to the date of redemption.
Ranking............................. The Exchange Debentures will rank pari passu in right of payment with all senior
indebtedness of Holdings and senior in right of payment to all subordinated
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indebtedness of Holdings. As of the date of this Prospectus, Holdings has not issued
and has no current plans to issue any significant indebtedness to which the Exchange
Debentures would be senior. Holdings conducts business through its wholly owned
subsidiary, ARG, and has no operations of its own. The primary asset of Holdings is
the common stock of ARG. Consequently, Holdings relies on the cash flow of ARG
in order to meet its debt service obligations. As a result of the relationship of
Holdings and ARG, the Exchange Debentures will effectively rank subordinate to all
indebtedness of ARG, notwithstanding that the Exchange Debentures will be senior
unsecured obligations of Holdings. At June 30, 1997, the aggregate amount of
indebtedness and other obligations of ARG (including trade payables) that effectively
ranked senior to the Debentures (and the Exchange Debentures) was approximately
$216.5 million. See "RISK FACTORS--High Leverage and Impact on Ability
to Service Debt" and "--Holding Company Structure; Limitations on Access to Cash
Flow; Effective Subordination of Exchange Debentures."
Change of Control................... Pursuant to the provisions of the Debenture Indenture, in the event of a Change of
Control (as defined herein), Holdings is obligated to make an offer to purchase all
outstanding Exchange Debentures at a redemption price of 101% of the Accreted
Value thereof to the repurchase date (if prior to December 15, 1998) or 101% of the
principal amount thereof plus accrued and unpaid interest, if any, thereon to the
repurchase date (if on or after December 15, 1998). See "DESCRIPTION OF THE
EXCHANGE DEBENTURES--Change of Control" and "--Certain Covenants."
However, the debt instruments of ARG severely restrict, among other things,
Holdings' ability to make the mandatory repurchase of the Exchange Debentures upon
a Change of Control (as defined herein) required by the Debenture Indenture. In
addition, substantially all of the assets of ARG and its subsidiaries are pledged to
secure obligations under existing debt agreements. If a Change of Control were to
occur, it is unlikely that the Company would be able to repay all of its obligations
under the Debenture Indenture and other indebtedness that would become payable. See
"DESCRIPTION OF THE EXCHANGE DEBENTURES--Change of Control" and
"DESCRIPTION OF CERTAIN INDEBTEDNESS--Credit Facilities." The Debenture
Indenture contains covenants relating to, among other things, the incurrence of
additional indebtedness, the payment of dividends, the repurchase of stock and the
making of certain other Restricted Payments (as defined herein), the creation of certain
liens, transactions with affiliates, mergers and certain consolidations, and the transfer
of certain assets. The covenants contained in the Debenture Indenture would not
necessarily afford holders of the Exchange Debentures protection in the event of a
highly leveraged transaction or a takeover, recapitalization or similar restructuring
involving the Company which may adversely affect holders of the Exchange
Debentures.
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USE OF PROCEEDS
There will be no cash proceeds to Holdings for the exchange pursuant to the
Exchange Offer. Holdings received net proceeds of approximately $7.1 million
from the issuance and sale of the Debentures. Substantially all of such net
proceeds were contributed to ARG. ARG used such net proceeds to make interest
payments on its outstanding indebtedness.
RISK FACTORS
Holders of the Debentures should consider carefully the information set forth
under "RISK FACTORS," as well as the other information set forth in this
Prospectus before tendering Debentures in exchange for the Exchange Debentures.
<TABLE>
<S> <C>
High Leverage and Impact on
Ability to Service Debt............. Holdings and ARG are substantially leveraged companies. The degree to which
Holdings and ARG are leveraged could affect ARG's ability to make distributions to
</TABLE>
7
<PAGE> 11
<TABLE>
<S> <C>
Holdings to permit Holdings to make payments with respect to the Exchange
Debentures by, among other things, (i) making ARG vulnerable to changes in general
economic conditions or (ii) impairing ARG's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate purposes or other
purposes. Any failure by ARG to make distributions to Holdings could result in
non-payment of the Notes. See "RISK FACTORS--High Leverage and Impact on Ability to Service
Debt."
In addition, the Company is pursuing the sale of its Black Angus division, which must be
consummated in order to enable ARG to repay a required sinking fund payment of $40.9 million
due September 15, 1997 on the Senior Secured Notes (as defined below). If ARG is unable to
generate sufficient cash flow from operations and asset sales in the future to service its
debt and to make payments to Holdings, it may be required to refinance all or a portion of
its existing debt or to obtain additional financing. There can be no assurance that any such
refinancing would be available, particularly in view of ARG's current high level of debt and
the fact that substantially all of the assets of ARG and its subsidiaries are pledged to
secure obligations under existing debt agreements. See "RISK FACTORS--High Leverage and
Impact on Ability to Service Debt," "CAPITALIZATION" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The discretion of the Company's management with respect to the business of the
Company is also limited by financial and operating covenants contained in the
indentures governing ARG's existing debt. See "RISK FACTORS--High Leverage
and Impact on Ability to Service Debt," "DESCRIPTION OF CERTAIN
INDEBTEDNESS--Credit Facilities," "DESCRIPTION OF CERTAIN
INDEBTEDNESS--Senior Secured Notes," and "DESCRIPTION OF CERTAIN
INDEBTEDNESS--Subordinated Loan Agreement." From time to time, ARG has
solicited and received waivers of existing or anticipated defaults under such debt
instruments. See "DESCRIPTION OF CERTAIN INDEBTEDNESS--Senior Secured
Notes--Maintenance of Consolidated EBITDA". ARG failed to meet EBITDA
covenants under its Senior Secured Notes for the twelve months ended May 31, 1997
and for the four quarters ended June 30, 1997. While ARG's lenders have not moved
to accelerate the repayment of this debt, the Company has, however, included its
Senior Secured Notes and its subordinated debt in the current portion of long-term
debt. Of these amounts, $40.9 million is due on September 15, 1997 under the sinking
fund provisions of the Senior Secured Notes. The Company is pursuing the sale of its
Black Angus division in order to repay in full its Senior Secured Notes. There can be
no assurance that this sale will be completed on acceptable terms or that ARG will be
able to comply with such covenants, as amended, in the future or obtain waivers of any
current or future defaults thereunder. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
Holding Company Structure;
Limitations on Access to Cash Flow;
Effective Subordination of
Exchange Debentures................. Holdings conducts business through ARG and has no operations of its own.
Consequently, Holdings relies on the cash flow of ARG in order to meet its debt
service obligations. The debt instruments of ARG severely restrict, among other things,
the payment of dividends, the making of loans by ARG to Holdings and Holdings'
ability to make the mandatory repurchase of the Exchange Debentures required by the
Debenture Indenture upon a Change of Control (as defined herein). See "DESCRIPTION OF
CERTAIN INDEBTEDNESS."
As a result of the relationship of Holdings and ARG, the creditors of Holdings,
including the holders of the Exchange Debentures, effectively rank junior to all
</TABLE>
8
<PAGE> 12
<TABLE>
<S> <C>
creditors of ARG, notwithstanding that the Exchange Debentures will be senior
obligations of Holdings. Accordingly, in the event of the dissolution, bankruptcy,
liquidation or reorganization of Holdings and ARG, the holders of the Exchange
Debentures may not receive any amounts with respect to the Exchange Debentures
until after the payment in full of the claims of creditors of ARG. See "RISK
FACTORS--Holding Company Structure; Limitations on Access to Cash Flow;
Effective Subordination of Exchange Debentures."
Recent Losses and
Accountants' Report................. ARG experienced net losses after extraordinary items of $12.1 million in 1994, $39.7
million in 1995 and $38.5 million in 1996. If ARG continues to have net losses there
could be a material adverse effect on the business of ARG which could affect ARG's
ability to make distributions to Holdings for the payment of its obligations under the
Exchange Debentures. See "RISK FACTORS--Holding Company Structure; Limitations on Access
to Cash Flow; Effective Subordination of Exchange Debentures," "RISK FACTORS--High Leverage
and Impact on Ability to Service Debt," "DESCRIPTION OF CERTAIN INDEBTEDNESS--Subordinated
Loan Agreement" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS." In addition, Arthur Andersen LLP, independent public accountants, have
issued a report, a copy of which is included herein, which states that the fact that the
Company (i) has suffered recurring losses from operations, (ii) has a net capital deficit,
(iii) has a sinking fund payment of $40.9 million due September 15, 1997, and (iv) may be
required to renegotiate its senior debt if it cannot meet amended covenants, raises
substantial doubt about its ability to continue as a going concern. See "REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS".
Competition and Markets............. All aspects of the restaurant business are highly competitive. Competition from other
restaurant chains typically represents the more important competitive influence,
principally because of their significant marketing and financial resources. There can
be no assurance that the Company will be able to compete successfully against
competitors in the future or that competition will not have a material adverse effect
on the Company's results of operations. See "RISK FACTORS--Competition and
Markets."
Concentration of Ownership and
Control of the Company.............. Holdings owns 100% of ARG's outstanding Common Stock. All of Holdings'
management stockholders have entered into a voting trust agreement (the "Voting
Trust Agreement") in accordance with which Anwar S. Soliman, Chairman and Chief
Executive Officer of ARG and Holdings, exercises all voting rights to which such
shareholders would otherwise be entitled. As a result, Mr. Soliman is considered the
beneficial owner of approximately 82% of the outstanding shares of Holdings'
common stock (approximately 61% on a fully diluted basis). See "RISK
FACTORS--Concentration of Ownership and Control of the Company."
Likelihood of Repurchase of
the Exchange Debentures Upon
a Change of Control................. Upon the occurrence of a Change of Control (as defined herein), the holders of the
Exchange Debentures will have the right to require Holdings to repurchase their
Exchange Debentures at 101% of the Accreted Value thereof to the repurchase date
(if prior to December 15, 1998) or 101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of repurchase (if on or after December 15,
1998). If a Change of Control were to occur, it is unlikely that the Company would
be able to repay all of its obligations under the Debenture Indenture and other
indebtedness that would become payable. In addition, the covenants contained in the
Debenture Indenture would not necessarily afford holders of the Exchange Debentures
protection in the event of a highly leveraged transaction or a takeover, recapitalization
or similar restructuring involving the Company which may adversely affect holders
</TABLE>
9
<PAGE> 13
<TABLE>
<S> <C>
of the Exchange Debentures. See "DESCRIPTION OF THE EXCHANGE
DEBENTURES--Change of Control."
Original Issue Discount
Consequences........................ The Exchange Debentures will be treated as issued at a substantial discount from their
principal amount. Consequently, holders of the Exchange Debentures generally will
be required to include amounts in gross income for federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
If a bankruptcy case is commenced by or against Holdings or ARG under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the Exchange
Debentures, the claim of a holder of Exchange Debentures with respect to the principal
amount thereof may be limited. See "RISK FACTORS--Original Issue Discount
Consequences."
Absence of Public Market for
the Exchange Debentures............. The Exchange Debentures are being offered to the holders of the Debentures. The
Debentures were offered and sold in March 1996 to an institutional investor and are
eligible for trading in the Private Offerings, Resale and Trading through Automatic
Linkages (PORTAL) Market. Prior to the Exchange Offer, there has been no market
for the Exchange Debentures. Holdings does not currently intend to list the Exchange
Debentures on any securities exchange. Accordingly, no assurance can be given that
any market for the Exchange Debentures will develop, or, if any such market
develops, as to the liquidity of such market.
Exchange Offer Procedures;
Effects of Failure to Tender
or Properly Tender.................. Issuance of the Exchange Debentures in exchange for Debentures pursuant to the
Exchange Offer will be made only after a timely receipt by Holdings of such
Debentures, a properly completed and duly executed Letter of Transmittal and all
other required documents. Holdings is under no duty to give notification of defects or
irregularities with respect to the tenders of Debentures for exchange. Debentures that
are not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon transfer
thereof and Holdings will have no further obligation to provide for the registration
under the Act of such Debentures. To the extent that Debentures are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Debentures could be adversely affected. See "RISK FACTORS--Exchange
Offer Procedures; Effects of Failure to Tender or Properly Tender" and "THE
EXCHANGE OFFER."
</TABLE>
10
<PAGE> 14
SUMMARY HISTORICAL
CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for each
of the last five years ended December 30, 1996 has been derived from the
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent accountants. The financial data for the
twenty-six weeks ended June 24, 1996 and June 30, 1997 has been derived from the
Company's unaudited financial statements, which in the opinion of management
include all adjustments necessary for a fair presentation of the data for
interim periods. The results of operations for the twenty-six weeks ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the full fiscal year. This Selected Historical Financial Data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
---------------------------------------------------------------------------------------
DEC. 28, DEC. 27, DEC. 26, DEC. 25, DEC. 30, JUNE 24, JUNE 30,
1992 1993 1994 1995 1996(1) 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Black Angus ...................... $ 225,796 $ 235,345 $ 253,634 $ 243,624 $ 254,946 $ 131,254 $ 137,716
Grandy's ......................... 106,701 111,166 109,301 101,839 90,962 45,533 40,355
Other concepts ................... 92,520 91,398 97,471 100,503 99,516 48,882 48,874
--------- --------- --------- --------- --------- --------- ---------
Total revenues ................ 425,017 437,909 460,406 445,966 445,424 225,669 226,945
RESTAURANT COSTS:
Food and beverage ................ 132,767 136,255 142,828 138,270 141,032 71,671 71,958
Payroll .......................... 131,016 132,292 136,151 134,532 137,104 67,508 67,598
Direct operating ................ 95,419 109,462 108,382 110,399 114,589 55,166 57,301
Depreciation and Amortization .... 26,330 25,682 26,723 23,171 20,791 10,307 10,082
--------- --------- --------- --------- --------- --------- ---------
Total restaurant costs ........ 385,532 403,691 414,084 406,372 413,516 204,652 206,939
General and administrative
expenses ........................ 28,429 29,895 31,063 31,387 28,110 13,266 16,494
Non-cash charge for impairment
of long-lived assets ............ -- -- -- 20,178 13,205 -- --
Operating profit (loss) ........... 11,056 4,323 15,259 (11,971) (9,407) 7,751 3,512
Interest expense, net ............. 23,185 23,982 34,190 35,450 37,954 18,788 17,233
Net loss before extraordinary
loss ............................ (12,228) (19,457) (18,995) (47,496) (47,455) (11,097) (13,762)
Extraordinary loss on
extinguishment of debt .......... (17,775) (10,790) -- -- (1,688) -- --
Net loss .......................... $ (30,003) $ (30,247) $ (18,995) $ (47,496) $ (49,143) $ (11,097) $ (13,762)
Ratio of earnings to fixed
charges--(deficiency)(2) ........ $ (12,129) $ (19,659) $ (18,931) $ (47,421) $ (47,361) $ (11,037) $ (13,721)
BALANCE SHEET DATA:
Plant and equipment, net .......... $ 190,017 $ 181,889 $ 181,496 $ 171,030 $ 101,169 $ 168,300 $ 96,621
Total assets ...................... 298,494 299,068 288,228 254,491 177,205 241,519 165,770
Long-term obligations,
including current portion ....... 215,627 273,355 277,820 291,987 258,566 300,633 264,115
Redeemable cumulative preferred
stock ........................... 73,291 -- -- -- -- -- --
Common stockholders' equity
(deficit) ....................... (60,735) (47,140) (66,135) (113,681) (162,824) (124,778) (176,586)
</TABLE>
(1) The year ended December 30, 1996 included 53 weeks.
(2) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary loss, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issue costs and that portion of operating rental
expense representative of the interest factor.
11
<PAGE> 15
RISK FACTORS
Each holder of Debentures should consider carefully the following
specific risk factors, as well as the other information set forth in this
Prospectus before tendering Debentures in exchange for Exchange Debentures
offered hereby. The risk factors set forth below are generally applicable to the
Debentures as well as the Exchange Debentures.
HIGH LEVERAGE AND IMPACT ON ABILITY TO SERVICE DEBT
Holdings and ARG are substantially leveraged companies. At June 30,
1997, Holdings' total consolidated long-term indebtedness was approximately
$264.1 million. For 1996, Holdings' earnings before extraordinary loss, income
taxes and fixed charges were insufficient to cover fixed charges in the amount
of $47.4 million. The degree to which Holdings and ARG are leveraged could have
important consequences to holders of the Exchange Debentures, including the
following, any of which could affect ARG's ability to make distributions to
Holdings to permit Holdings to make payments with respect to the Exchange
Debentures: (i) ARG's significant degree of leverage could make it vulnerable to
changes in general economic conditions; and (ii) ARG's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired. Any failure by
ARG to make distributions to Holdings could result in non-payment of the Notes.
As of the date of this Prospectus, ARG did not have a working capital facility.
ARG's ability to make payments to Holdings to permit Holdings to pay
cash interest on the Exchange Debentures and to repay the Exchange Debentures at
maturity will be dependent on ARG's future operating performance, which is
itself dependent on a number of factors including general economic conditions
and financial, business and other factors affecting the operations of ARG, many
of which are beyond its control. In addition, the Company is pursuing the sale
of its Black Angus division which must be consummated in order to enable ARG to
repay a required sinking fund payment of $40.9 million due September 15, 1997 on
the Senior Secured Notes (as defined below). After the completion of the Black
Angus sale, the Company will pursue additional asset sales. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources." Any such material sale of assets would require
the consent of the holders of the Company's indebtedness which would remain
outstanding after the application of the proceeds thereof. See "DESCRIPTION OF
CERTAIN INDEBTEDNESS - Credit Facilities," "DESCRIPTION OF CERTAIN INDEBTEDNESS
- - Senior Secured Notes," and "DESCRIPTION OF CERTAIN INDEBTEDNESS - Subordinated
Loan Agreement." If ARG is unable to generate sufficient cash flow from
operations and asset sales in the future to service its debt and to make
payments to Holdings, it may be required to refinance all or a portion of its
existing debt or to obtain additional financing. There can be no assurance that
any such refinancing would be available, particularly in view of ARG's current
high level of debt and the fact that substantially all of the assets of ARG and
its subsidiaries are pledged to secure obligations under existing debt
agreements. See "CAPITALIZATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The discretion of the Company's management with respect to the business
of the Company is also limited by financial and operating covenants contained in
the indentures governing ARG's existing Senior Secured Notes due 1998 as amended
(the "Senior Secured Notes"), the amended and restated subordinated loan
agreement dated as of March 20, 1992 (the "Subordinated Loan Agreement")
governing ARG's 10 1/4% Subordinated Notes (the "Subordinated Notes") and ARG's
letter of credit facility (the "Credit Facilities"). Such covenants include,
among other things, (i) restrictions on the ability of the Company to dispose of
assets, incur debt, create liens, make capital expenditures above stated amounts
and make certain investments and (ii) requirements that the Company meet certain
financial performance tests and consummate certain asset sales. See "DESCRIPTION
OF CERTAIN INDEBTEDNESS--Credit Facilities," "DESCRIPTION OF CERTAIN
INDEBTEDNESS--Senior Secured Notes," and "DESCRIPTION OF CERTAIN
INDEBTEDNESS--Subordinated Loan Agreement." The ability of ARG and its
subsidiaries to incur additional debt is severely limited by such covenants.
ARG was two weeks late in paying the quarterly interest of $1.2 million
on its Subordinated Notes which was due December 15, 1996, was four weeks late
in the quarterly payment which was due March 15, 1997 and was four weeks late in
the quarterly payment which was due June 15, 1997. The Subordinated Notes
provides for a 30-day grace period for interest payments. In addition, ARG was
in default under a covenant under its Senior Secured Notes that required certain
sales or sale/leaseback transactions by December 31, 1996. On March 13, 1997,
ARG's Senior Secured Note holders consented to an amendment which replaced the
EBITDA covenants for
12
<PAGE> 16
the year ended December 30, 1996 and for the four quarters ended March 31, 1997
with an EBITDA covenant for the twelve months ended May 31, 1997 (tested at the
same level as would have been required for the four quarters ended March 31,
1997), reduced the amount of net cash proceeds from asset sales or
sale/leaseback transactions required by December 31, 1996 to $15.0 million
(which was accomplished) and waived any related existing defaults or events of
default. ARG failed to meet the amended EBITDA test under its Senior Secured
Notes for the twelve-month period ended May 31, 1997 and for the four quarters
ended June 30, 1997. While the holders of the Senior Secured Notes have not
moved to accelerate the repayment of this debt, the Company has, however,
included its Senior Secured Notes and its subordinated debt in the current
portion of long-term debt. Of these amounts, $40.9 million is due on September
15, 1997 under the sinking fund provisions of the Senior Secured Notes. The
Company is pursuing the sale of its Black Angus division in order to repay in
full its Senior Secured Notes. There can be no assurance that this sale will be
completed on acceptable terms. While ARG has from time to time solicited and
received waivers of existing or anticipated defaults under its debt instruments,
there can be no assurance that ARG will be able to comply with its covenants in
the future or obtain waivers of any current or future defaults thereunder. See
"DESCRIPTION OF CERTAIN INDEBTEDNESS--Senior Secured Notes--Maintenance of
Consolidated EBITDA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW; EFFECTIVE
SUBORDINATION OF EXCHANGE DEBENTURES
Holdings conducts business through ARG and has no operations of its
own. The primary asset of Holdings is the common stock of ARG. Consequently,
Holdings relies on the cash flow of ARG in order to meet its debt service
obligations. The debt instruments of ARG severely restrict, among other things,
the payment of dividends, the making of loans by ARG to Holdings and Holdings'
ability to make the mandatory repurchase of the Exchange Debentures required by
the Debenture Indenture upon a Change of Control (as defined herein). For a
further description of these restrictions, see "DESCRIPTION OF CERTAIN
INDEBTEDNESS."
As a result of the relationship of Holdings and ARG, the creditors of
Holdings, including the holders of the Exchange Debentures, effectively rank
junior to all creditors of ARG, including the bank lenders under the Credit
Facilities, the holders of the Senior Secured Notes, the holders of the
Subordinated Notes and the trade creditors of ARG, notwithstanding that the
Exchange Debentures will be senior obligations of Holdings. Accordingly, in the
event of the dissolution, bankruptcy, liquidation or reorganization of Holdings
and ARG, the holders of the Exchange Debentures may not receive any amounts with
respect to the Exchange Debentures until after the payment in full of the claims
of creditors of ARG. As of June 30, 1997, the aggregate amount of indebtedness
and other obligations of ARG to which the holders of the Exchange Debentures
would have been structurally subordinated was approximately $216.5 million.
RECENT LOSSES AND ACCOUNTANTS' REPORT
ARG experienced net losses after extraordinary items of $12.1 million
in 1994, $39.7 million in 1995 and $38.5 million in 1996. If ARG continues to
have net losses there could be a material adverse effect on the business of ARG
which could affect ARG's ability to make distributions to Holdings for the
payment of its obligations under the Exchange Debentures. See "-- Holding
Company Structure; Limitations on Access to Cash Flow; Effective Subordination
of Exchange Debentures," "-- High Leverage and Impact on Ability to Service
Debt," "DESCRIPTION OF CERTAIN INDEBTEDNESS--Subordinated Loan Agreement" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." In addition, Arthur Andersen LLP, independent public accountants,
have issued a report, a copy of which is included herein, which states that the
fact that the Company (i) has suffered recurring losses from operations, (ii)
has a net capital deficit, (iii) has a sinking fund payment of $40.9 million due
September 15, 1997, and (iv) may be required to renegotiate its senior debt if
it cannot meet amended covenants, raise substantial doubt about its ability to
continue as a going concern. See "REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS".
COMPETITION AND MARKETS
13
<PAGE> 17
All aspects of the restaurant business are highly competitive. Price,
restaurant location, food quality, service and attractiveness of facilities are
important aspects of competition, and the competitive environment is often
affected by factors beyond a particular restaurant management's control,
including changes in the public's taste and eating habits, population and
traffic patterns and economic conditions. The Company's restaurants compete with
a wide variety of restaurants, ranging from national and regional restaurant
chains to locally owned restaurants. Competition from other restaurant chains
typically represents the more important competitive influence, principally
because of their significant marketing and financial resources. In addition,
competition is not limited to a particular segment of the restaurant industry as
fast-food eateries, steakhouses and casual-dining restaurants are all competing
for the same consumer's dining dollars. There can be no assurance that the
Company will be able to compete successfully against its current or future
competitors in the future. In addition, there can be no assurance that
competition will not have a material adverse effect on the Company's results of
operations.
CONCENTRATION OF OWNERSHIP AND CONTROL OF THE COMPANY
Holdings owns 100% of ARG's outstanding Common Stock. All of Holdings'
management stockholders have entered into the Voting Trust Agreement in
accordance with which Anwar S. Soliman, Chairman and Chief Executive Officer of
ARG and Holdings, exercises, as voting trustee, all voting and substantially all
other rights to which such shareholders would otherwise be entitled until the
earlier of December 31, 2001 or the earlier termination of the Voting Trust
Agreement. As a result, Mr. Soliman is considered the beneficial owner of
approximately 82% of the outstanding shares of Holdings' common stock
(approximately 61% on a fully diluted basis).
LIKELIHOOD OF REPURCHASE OF THE EXCHANGE DEBENTURES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the holders of the Exchange
Debentures will have the right, in accordance with certain procedures, to
require Holdings to repurchase their Exchange Debentures at 101% of the Accreted
Value thereof to the repurchase date (if prior to December 15, 1998) or 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase (if on or after December 15, 1998). If a Change of Control
were to occur, it is unlikely that the Company would be able to repay all of its
obligations under the Debenture Indenture and other indebtedness that would
become payable. In addition, the covenants contained in the Debenture Indenture
would not necessarily afford holders of the Exchange Debentures protection in
the event of a highly leveraged transaction or a takeover, recapitalization or
similar restructuring involving the Company which may adversely affect holders
of the Exchange Debentures. See "DESCRIPTION OF THE EXCHANGE DEBENTURES--Change
of Control."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Exchange Debentures will be treated as issued at a substantial
discount from their principal amount. Consequently, under original issue
discount rules, holders of the Exchange Debentures generally will be required to
include amounts in gross income for federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. For a more
detailed discussion of the federal income tax consequences to the holders of the
Exchange Debentures of the purchase, ownership and disposition of the Exchange
Debentures, see "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
If a bankruptcy case is commenced by or against Holdings or ARG under
the United States Bankruptcy Code (the "Bankruptcy Code") after the issuance of
the Exchange Debentures, the claim of a holder of Exchange Debentures with
respect to the principal amount thereof may be limited to an amount equal to the
sum of (i) the initial offering price of the Exchange Debentures and (ii) that
portion of the original issue discount which is not deemed to constitute
"unmatured interest" for purposes of the Bankruptcy Code. An original issue
discount that was not amortized as of any such bankruptcy filing would
constitute "unmatured interest."
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE DEBENTURES
The Exchange Debentures are being offered to the holders of the
Debentures. The Debentures were offered and sold in March 1996 to an
institutional investor and are eligible for trading in the Private Offerings,
Resale and
14
<PAGE> 18
Trading through Automatic Linkages (PORTAL) Market. Prior to the Exchange Offer,
there has been no market for the Exchange Debentures. Holdings does not
currently intend to list the Exchange Debentures on any securities exchange.
Accordingly, no assurance can be given that any market for the Exchange
Debentures will develop, or, if any such market develops, as to the liquidity of
such market.
EXCHANGE OFFER PROCEDURES; EFFECTS OF FAILURE TO TENDER OR PROPERLY TENDER
Issuance of the Exchange Debentures in exchange for Debentures pursuant
to the Exchange Offer will be made only after a timely receipt by Holdings of
such Debentures, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of Debentures desiring to
tender such Debentures in exchange for Exchange Debentures should allow
sufficient time to ensure timely delivery. Holdings is under no duty to give
notification of defects or irregularities with respect to the tenders of
Debentures for exchange. Debentures that are not tendered or are tendered but
not accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof and Holdings will
have no further obligation to provide for the registration under the Act of such
Debentures. In addition, any holder of Debentures who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange
Debentures may be deemed to have received restricted securities and, if so, will
be required to comply with the registration and prospectus delivery requirements
of the Act in connection with any resale transaction. To the extent that
Debentures are tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Debentures could be adversely
affected. See "THE EXCHANGE OFFER." Each broker-dealer that receives Exchange
Debentures for its own account in exchange for Debentures, where such Debentures
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Debentures. See "PLAN OF
DISTRIBUTION".
THE COMPANY
GENERAL
The Company operates 239 restaurants primarily located in the western
and southwestern United States. The Company is comprised of two principal
concepts: Black Angus, a steakhouse chain serving the western United States, and
Grandy's, a chicken chain serving the southern United States. The Company is
principally positioned in the casual dining segment of the restaurant industry.
For the year ended December 30, 1996, the Company had revenues of $445.4
million.
The principal executive offices of the Company are located at 450
Newport Center Drive, Newport Beach, California 92660, and its telephone number
is (714) 721-8000.
BLACK ANGUS
Founded in 1964, Black Angus is a steakhouse chain in the western
United States. The Company operates 104 Stuart Anderson's Black Angus and Stuart
Anderson's Cattle Company restaurants located primarily in California, the
Pacific Northwest and Arizona. Black Angus restaurants feature steak and prime
rib, but also serve chicken and seafood entrees, and all restaurants include
lounge areas. For the year ended December 30, 1996, Black Angus had revenues of
$254.9 million.
GRANDY'S
Grandy's, founded in 1973, operates 93 restaurants located principally
in Texas, Oklahoma and Kansas. Grandy's is a family-oriented, quick-service
concept. Grandy's differentiates itself from other fast food restaurants by
offering comparable prices and speed, but with the quality and ambiance of a
full-service restaurant. The menu features fried chicken, grilled chicken and
country breakfasts. In addition to the company-operated restaurants, as of June
30, 1997, the Company franchised 60 restaurants in the southern United States.
For the year ended December 30, 1996, Grandy's had revenues of $91.0 million.
15
<PAGE> 19
OTHER CONCEPTS
The Company also operates three smaller concepts: Spoons, Spectrum and
National Sports Grill. Spoons, founded in 1978, operates 20 casual-dining
restaurants located throughout California and features fajitas, salads,
hamburgers, french fries, tacos and full bar service. Founded in 1970, Spectrum
operates 16 unique, upscale, specialty restaurants located throughout California
under such names as "Prego", "Tutto Mare" and "MacArthur Park". National Sports
Grill operates six sports-theme restaurants offering generous portions and
microbrewery beers and providing video telecasts of national and regional
sporting events. As of December 30, 1996, the Company operated one Velvet Turtle
restaurant which the Company closed in February 1997. For the year ended
December 30, 1996, these other concepts had revenues of $99.5 million.
FORMATION
The Company was formed by Mr. Anwar S. Soliman, Chairman of the Board
and Chief Executive Officer of the Company, and other members of current senior
management (Ralph S. Roberts, President and Chief Operating Officer, William J.
McCaffrey Jr., Chief Financial Officer and Wilfred H. Partridge, Vice
President-Purchasing) to acquire restaurant operations of Saga Corporation in
February 1987. Mr. Soliman and other members of the Company's current senior
management average more than 20 years experience in the restaurant industry.
USE OF PROCEEDS
There will be no cash proceeds to Holdings for the exchange pursuant to
the Exchange Offer. Holdings received net proceeds of approximately $7.1 million
from the issuance and sale of the Debentures. Substantially all of such net
proceeds were contributed to ARG. ARG used such net proceeds to make interest
payments on its outstanding indebtedness.
CAPITALIZATION
The following table sets forth the consolidated capitalization of
Holdings as of June 30, 1997. The table should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
16
<PAGE> 20
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997(1)
----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C>
Short-term debt:
Working capital facility .............................. $ --
Current portion of capitalized lease obligations ...... 931
Current portion of other debt ......................... 265
Current portion of senior secured notes ............... 126,665
Current portion of subordinated term loan ............. 45,000
---------
Total short-term debt ............................... 172,861
Long-term debt:
Capitalized lease obligations ......................... 7,973
Other debt ............................................ 1,271
Existing 14% senior discount debentures ............... 72,731
New 14% senior discount debentures .................... 9,279
---------
Total long-term debt ................................ 91,254
Preferred stock ........................................ --
Common stockholders' equity:
Common stock .......................................... 2
Paid-in capital(2) .................................... 17,539
Accumulated deficit ................................... (194,077)
Treasury stock (9,126 shares) ......................... (50)
---------
Total common stockholders' deficit .................. (176,586)
---------
Total capitalization ................................ 87,529
=========
</TABLE>
(1) All indebtedness, other than that shown for the 14% Senior Discount
Debentures, represents indebtedness of ARG. See "RISK FACTORS--High
Leverage and Impact on Ability to Service Debt" and "--Holding Company
Structure; Limitations on Access to Cash Flow; Effective Subordination
of Exchange Debentures."
(2) Does not include shares of Common Stock reserved for issuance upon the
exercise of stock options which may be granted to certain management
employees. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "MANAGEMENT--Stock Option Plan."
17
<PAGE> 21
SUMMARY HISTORICAL
CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for each
of the last five years ended December 30, 1996 has been derived from the
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent accountants. The financial data for the
twenty-six weeks ended June 24, 1996 and June 30, 1997 has been derived from the
Company's unaudited financial statements, which in the opinion of management
include all adjustments necessary for a fair presentation of the data for
interim periods. The results of operations for the twenty-six weeks ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the full fiscal year. This Selected Historical Financial Data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------------------------------- ----------------------
DEC. 28, DEC. 27, DEC. 26, DEC. 25, DEC. 30, JUNE 24, JUNE 30,
1992 1993 1994 1995 1996 (1) 1996 1997
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Black Angus ............................. $ 225,796 $ 235,345 $ 253,634 $ 243,624 $ 254,946 $ 131,254 $ 137,716
Grandy's ................................ 106,701 111,166 109,301 101,839 90,962 45,533 40,355
Other concepts .......................... 92,520 91,398 97,471 100,503 99,516 48,882 48,874
--------- --------- --------- --------- --------- --------- ---------
Total revenues ........................ 425,017 437,909 460,406 445,966 445,424 225,669 226,945
RESTAURANT COSTS:
Food and beverage ....................... 132,767 136,255 142,828 138,270 141,032 71,671 71,958
Payroll ................................. 131,016 132,292 136,151 134,532 137,104 67,508 67,598
Direct operating ........................ 95,419 109,462 108,382 110,399 114,589 55,166 57,301
Depreciation and Amortization ........... 26,330 25,682 26,723 23,171 20,791 10,307 10,082
--------- --------- --------- --------- --------- --------- ---------
Total restaurant costs ................ 385,532 403,691 414,084 406,372 413,516 204,652 206,939
General and administrative expenses ....... 28,429 29,895 31,063 31,387 28,110 13,266 16,494
Non-cash charge for impairment of
long-lived assets ......................... -- -- -- 20,178 13,205 -- --
Operating profit (loss) ................... 11,056 4,323 15,259 (11,971) (9,407) 7,751 3,512
Interest expense, net ..................... 23,185 23,982 34,190 35,450 37,954 18,788 17,233
Net loss before extraordinary loss ........ (12,228) (19,457) (18,995) (47,496) (47,455) (11,097) (13,762)
Extraordinary loss on extinguishment
of debt ................................. (17,775) (10,790) -- -- (1,688) -- --
Net loss .................................. $ (30,003) $ (30,247) $ (18,995) $ (47,496) $ (49,143) $ (11,097) $ (13,762)
Ratio of earnings to fixed charges
--(deficiency) (2) ...................... $ (12,129) $ (19,659) $ (18,931) $ (47,421) $ (47,361) $ (11,037) $ (13,721)
BALANCE SHEET DATA:
Plant and equipment, net .................. $ 190,017 $ 181,889 $ 181,496 $ 171,030 $ 101,169 $ 168,300 $ 96,621
Total assets .............................. 298,494 299,068 288,228 254,491 177,205 241,519 165,770
Long-term obligations, including current
portion ................................. 215,627 273,355 277,820 291,987 258,566 300,633 264,115
Redeemable cumulative preferred stock ..... 73,291 -- -- -- -- -- --
Common stockholders' equity (deficit) ..... (60,735) (47,140) (66,135) (113,681) (162,824) (124,778) (176,586)
</TABLE>
----------
(1) The year ended December 30, 1996 included 53 weeks.
(2) For the purpose of determining the ratio of earnings to fixed
charges, earnings consist of earnings before extraordinary
loss, income taxes and fixed charges. Fixed charges consist of
interest on indebtedness, the amortization of debt issue costs
and that portion of operating rental expense representative of
the interest factor.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Holdings, a holding company with no operations of its own, conducts its
business through ARG, the common stock of which is the primary asset of
Holdings. Consequently, Holdings relies on ARG's cash flow in order to meet its
liquidity needs, including its debt-service obligations. As of December 30, 1996
and as of the date of this Prospectus, the payment of loans (in excess of
immaterial amount), advances or dividends by ARG to Holdings is prohibited by
ARG's material debt instruments. See "DESCRIPTION OF CERTAIN INDEBTEDNESS."
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and notes included elsewhere in this Prospectus. The
following discussion should also be read in conjunction with the "SELECTED
HISTORICAL FINANCIAL DATA," "THE COMPANY" and "BUSINESS" discussions included
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Twenty-six weeks ended June 24, 1996 and June 30, 1997:
Revenues. Total revenues increased 0.6% from $225.7 million in the
twenty-six weeks ended June 24, 1996 to $226.9 million in the twenty-six weeks
ended June 30, 1997. Comparable restaurant revenues decreased 3.8%. There were
247 restaurants operating as of June 24, 1996 and 239 operating as of June 30,
1997.
Black Angus revenues increased 4.9% to $137.7 million in 1997 as
compared to the same period in 1996. The increase was due to the addition of
nine new restaurants. Comparable restaurant revenues decreased 4.6%.
Grandy's revenues decreased 11.4% from $45.5 million in 1996 to $40.4
million in 1997. Comparable restaurant revenues were 6.5% lower than the prior
year. Franchise revenues were $1.0 million and $0.9 million in 1996 and 1997,
respectively.
Revenues from other concepts (Spoons, Spectrum and National Sports
Grill) remained approximately the same at $48.9 million in 1996 and 1997.
Comparable restaurant revenues increased 0.8%.
Food and Beverage Costs. Food and beverage costs as a percentage of
revenues remained approximately the same at 31.8% in 1996 and 31.7% in 1997.
Payroll Costs. As a percentage of revenues, labor costs decreased 0.1%
from 29.9% in 1996 to 29.8% in 1997. The decrease was due primarily to lower
worker's compensation expense.
Direct Operating Costs. As a percentage of revenues, total direct
operating costs increased 0.8% from 24.4% in 1996 to 25.2% in 1997. The increase
was due primarily to higher occupancy expenses.
Depreciation and Amortization. As a percentage of revenues,
depreciation and amortization decreased from 4.6% in 1996 to 4.4% in 1997. The
decrease was due primarily to the non-cash reduction of the historical cost of
certain long-lived assets in December 1996.
General and Administrative Expenses. General and administrative
expenses increased from $13.3 million in 1996 to $16.5 million in 1997. The
increase was due primarily to a non-cash charge of $4.1 million for costs
associated with closed restaurants, primarily in the Grandy's Division, in the
second quarter of 1997. General and administrative expenses as a percentage of
revenues were 5.9% and 7.3% (5.4% before the non-cash charge for closed
restaurants) for 1996 and 1997, respectively.
19
<PAGE> 23
Operating Profit. Due to the items mentioned above, operating profit
decreased from $7.8 million in 1996 to $3.5 million in 1997. As a percentage of
revenues, operating profit decreased from 3.4% to 1.5%. Before the non-cash
charge mentioned above there was an operating profit of $7.6 million in 1997.
Interest Expense. Interest expense decreased from $18.8 million in 1996
to $17.2 million in 1997. The Company's average stated interest rate increased
from 12.0% in 1996 to 12.8% in 1997. Average borrowings (excluding capitalized
lease obligations) decreased from $287.7 million in 1996 to $251.0 million in
1997.
Years ended December 26, 1994, December 25, 1995 and December 30, 1996:
Revenues. Total revenues decreased 3.1% from $460.4 million in 1994 to
$446.0 million in 1995 followed by a slight decrease to $445.4 million in 1996.
The year ended December 30, 1996 includes a 53rd week which added $6.9 million
to total revenues. Comparable restaurant revenues excluding the 53rd week
decreased 2.9% from 1995. Six new restaurants were opened during 1996 offset by
the closure of seven poor performing restaurants. There were 246, 248 and 247
restaurants operating at the end of 1994, 1995 and 1996, respectively.
Black Angus revenues decreased 3.9% from $253.6 million in 1994 to
$243.6 million in 1995 then increased 4.6% to $254.9 million in 1996. The
increase in 1996 revenues was the result of the 53rd week which added $4.2
million in revenues and the addition of six new restaurants. Total comparable
restaurant revenues increased 0.2% in 1996. Comparable restaurant food sales
increased 1.5% compared to 1995 while beverage sales decreased 3.9% as a result
of de-emphasizing the late-night lounge business. The greatest competition to
Black Angus came from similarly priced national steakhouse chains. Black Angus
has its strongest position in its major West Coast markets, however, where unit
penetration of other steakhouse chains remains low. There were six new
restaurants opened in 1996, two in Arizona, two in Nevada, one in Washington and
one in Utah.
Grandy's revenues decreased 6.8% from $109.3 million in 1994 to $101.8
million in 1995 followed by a 10.7% decrease to $91.0 million in 1996. The
decrease in 1996 was the net result of the 53rd week which added $1.3 million in
revenues, an 11.3% decrease in comparable restaurant revenues and the closure of
seven poor performing restaurants. Grandy's faced significant competition in all
of its markets, with both casual-dining and fast-food restaurant chains
continuing to build additional units. In addition to new unit expansion, there
was an increase in media advertising by competitors. Franchise revenues were
$2.5 million, $2.2 million and $2.0 million in 1994, 1995 and 1996,
respectively.
Revenues from other concepts (Spoons, Spectrum and National Sports
Grill) increased 3.1% from $97.5 million in 1994 to $100.5 million in 1995 then
decreased 1.0% to $99.5 million in 1996. The decrease in 1996 was the net result
of the 53rd week which added $1.4 million in revenues and a 1.9% decrease in
comparable restaurant revenues in 1996. Increased advertising from other
restaurant chains adversely affected sales in the Company's other concepts which
do relatively little media advertising.
Food and Beverage Costs. As a percentage of revenues, food and beverage
costs increased from 31.0% in 1994 and 1995 to 31.7% in 1996. The increase in
1996 was primarily a result of higher grocery expenses.
Payroll Costs. As a percentage of revenues, labor costs increased from
29.6% in 1994 to 30.2% in 1995 and then increased to 30.8% in 1996. The increase
in 1996 was primarily a result of higher restaurant management costs.
Direct Operating Costs. Direct operating costs consist of occupancy,
advertising and other expenses incurred by individual restaurants. As a
percentage of revenues, these costs increased from 23.5% in 1994 to 24.8% in
1995 and then increased to 25.7% in 1996. The increase was a result of increased
advertising expenses and higher occupancy costs.
Depreciation and Amortization. Depreciation and amortization consists
of depreciation of fixed assets used by individual restaurants, division and
corporate offices, as well as amortization of intangible assets. As a percentage
of revenues, depreciation and amortization decreased from 5.8% in 1994 to 5.2%
in 1995 and then decreased to 4.7%
20
<PAGE> 24
in 1996. The decrease was primarily due to the non-cash reduction of the
historical costs of certain long-lived assets in December 1995.
General and Administrative Expenses. General and administrative
expenses as a percentage of revenues were 6.7% in 1994, 7.0% in 1995 and 6.3% in
1996. The decrease in 1996 was due primarily to decreased division overhead
payroll expenses.
Non-Cash Charge for Impairment of Long-Lived Assets. In December 1996
certain assets, including fixed assets and certain related intangible assets,
were valued at less than their historic costs and resulted in a non-cash charge
of $13.2 million. This non-cash charge was 3.0% of revenues. A similar non-cash
charge of $20.2 million was recorded in 1995. There were no charges for
impairment of long-lived assets in 1994. See Note 2 to the "Notes to the
Consolidated Financial Statements" included herein.
Operating Profit. As a result of the items discussed above, operating
profit decreased from $15.3 million in 1994 to an operating loss of $12.0
million in 1995 and then improved to an operating loss of $9.4 million in 1996
(an operating profit of $8.2 million in 1995 and $3.8 million in 1996 before the
non-cash charge for impairment of long-lived assets). As noted in the discussion
of revenues, the Company's divisions are not uniform in size or profitability.
For example, for the fiscal year ended 1996, Black Angus had an operating profit
of $19.1 million while Grandy's had an operating loss of $1.0 million.
Interest Expense - Net. Interest expense increased from $34.2 million
in 1994 to $35.5 million in 1995 and then to $38.0 million in 1996. The average
interest rate on Company borrowings was 11.8%, 11.9% and 12.2% for 1994, 1995
and 1996, respectively. Average borrowings (excluding capitalized lease
obligations) increased from $263.7 million in 1994 to $273.5 million in 1995 and
then to $281.6 million in 1996.
Income Taxes. Income taxes increased from a provision of $64,000 in
1994 to $75,000 in 1995 and then to $94,000 in 1996. The provisions represent
amounts provided for certain minimum state income taxes.
Extraordinary Loss. An extraordinary loss of $1.7 million occurred in
1996 with the extinguishment of a prior term loan. This extraordinary loss
resulted from a non-cash charge to expense for capitalized debt costs associated
with the debt repaid. There were no extraordinary losses in 1994 or 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
The Company requires capital principally for the acquisition and construction of
new restaurants, the remodeling of existing restaurants and the purchase of new
equipment and leasehold improvements. As of June 30, 1997, the Company had cash
of approximately $4.4 million and has essentially no debt amortization until
September 1997. The Company also had $11.0 million outstanding under its letter
of credit facility. See "DESCRIPTION OF CERTAIN INDEBTEDNESS--Credit
Facilities."
In general, restaurant businesses do not have significant accounts
receivable because sales are made for cash or by credit card vouchers which are
ordinarily paid within a few days, and do not maintain substantial inventory as
a result of the relatively brief shelf life and frequent turnover of food
products. Additionally, restaurants generally are able to obtain trade credit in
purchasing food and restaurant supplies. As a result, restaurants are frequently
able to operate with working capital deficits, i.e., current liabilities exceed
current assets. At June 30, 1997, the Company had a working capital deficit of
$224.8 million which included $171.9 million in current portion of long-term
debt.
The Company estimates that capital expenditures of $6.0 million to
$10.0 million are required annually to maintain and refurbish its existing
restaurants. In addition, the Company spends approximately $10.0 million to
$13.0 million annually for repairs and maintenance which are expensed as
incurred. Other capital expenditures, which are generally discretionary, are
primarily for the construction of new restaurants and for expanding,
reformatting and extending the capabilities of existing restaurants and for
general corporate purposes. Total capital expenditures
21
<PAGE> 25
were $4.5 million for the twenty-six weeks ended June 24, 1996 and $2.3 million
for the twenty-six weeks ended June 30, 1997. Higher capital expenditures in
1994 resulted from the addition of five National Sports Grill restaurants, three
Black Angus restaurants, two Grandy's restaurants, one Spoons restaurant and one
Spectrum restaurant. The Company's credit agreement contains limitations on the
amount of capital expenditures that the Company may incur. See "DESCRIPTION OF
CERTAIN INDEBTEDNESS--Credit Facilities."
On March 13, 1996, Holdings completed a private placement of its 14%
Senior Discount Debentures due 2005 with a face value of $17.0 million producing
aggregate proceeds of approximately $7.1 million. Substantially all of the net
proceeds of the offering were contributed by Holdings to ARG. The net proceeds
were used by ARG for general corporate purposes.
On August 28, 1996, ARG's Senior Secured Note holders consented to an
amendment which increased the interest rate on substantially all of the Senior
Secured Notes from 12% to 13% and changed interest payment dates from
semi-annual to quarterly beginning December 15, 1996. The amendment also
replaced a net worth covenant with an EBITDA (earnings before interest, taxes,
depreciation and amortization) covenant and required ARG to consummate asset
sales or sale/leaseback transactions prior to December 31, 1996.
On September 13, 1996, ARG completed a sale/leaseback transaction under
which it sold the real property relating to 24 Stuart Anderson's Black Angus and
Stuart Anderson's Cattle Company restaurants for an aggregate sales price of
$48.1 million and simultaneously executed long-term leases under which it will
continue to operate the restaurants. The leases call for aggregate annual rent
payments of $5.8 million which will increase every five years by the lesser of
the increase in the consumer price index or 10%. With the exception of one
property, the leases are for initial terms of 25 years with three, five-year
renewal options. One of the leases is for a maximum term of three years, during
which ARG intends to seek and develop an alternate location in the same market.
The proceeds of the transaction have been applied in accordance with the
requirements of ARG's debt instruments, as follows: to redeem at par principal
and interest thereon of its Senior Secured Notes in the amount of $34.3 million;
to repay bank debt and to partially cash collateralize outstanding letters of
credit in a combined amount of $4.8 million; for fees and expenses of this
transaction as well as ARG's above-noted consent solicitation relating to the
Senior Secured Notes in a total amount of $4.6 million; and $4.4 million
retained by ARG to be invested in productive assets within six months. ARG
recorded an extraordinary loss on extinguishment of debt relating to the
write-off of capitalized debt costs in the amount of $1.1 million. In addition,
a $5.9 million gain related to this sale/leaseback was deferred and will be
amortized over the life of the underlying leases.
On December 13, 1996, ARG completed a sale/leaseback transaction under
which it sold the real property relating to 30 Grandy's restaurants for an
aggregate sales price of $12.5 million and simultaneously executed a long-term
lease under which it will continue to operate the restaurants. The proceeds of
this transaction were applied in accordance with the requirements of ARG's debt
instruments as follows: to redeem at par principal and interest thereon of its
Senior Secured Notes in the amount of $9.9 million; to partially cash
collateralize outstanding letters of credit in the amount of $1.1 million; for
fees and expenses of this transaction in the amount of $0.9 million; and $0.6
million retained by ARG to be invested in productive assets within six months.
ARG recorded a loss of $1.5 million on the sale of this property and an
extraordinary loss of $0.6 million on extinguishment of debt relating to the
write-off of capitalized debt costs.
During 1996, ARG also completed the sale of three additional Grandy's
restaurants and the sale/leaseback of two Spoons restaurants for a combined
aggregate sales price of $3.9 million. The proceeds of these transactions were
applied in accordance with the requirements of ARG's debt instruments as
follows: to redeem at par principal and interest thereon of its Senior Secured
Notes in the amount of $2.0 million; to partially cash collateralize outstanding
letters of credit in the amount of $1.6 million; for fees and expenses of these
transactions in the amount of $0.1 million, and $0.2 million retained by ARG to
be invested in productive assets within six months.
ARG was two weeks late in paying the quarterly interest of $1.2 million
on its Subordinated Notes which was due December 15, 1996, was four weeks late
in the quarterly payment which was due March 15, 1997 and was four weeks late in
the quarterly payment which was due June 15, 1997. The Subordinated Notes
provides for
22
<PAGE> 26
a 30-day grace period for interest payments. While ARG has from time to time
solicited and received waivers of existing or anticipated defaults under its
debt instruments, there can be no assurance that ARG will be able to comply with
its covenants in the future or obtain waivers of any current or future defaults
thereunder.
In 1997, ARG was in default under a covenant that required certain
sales or sale/leaseback transactions by December 31, 1996. On March 13, 1997,
ARG's Senior Secured Note holders consented to an amendment which replaced the
EBITDA covenants for the year ended December 30, 1996 and for the four quarters
ended March 31, 1997 with an EBITDA covenant for the twelve months ended May 31,
1997 (tested at the same level as would have been required for the four quarters
ended March 31, 1997), reduced the amount of net cash proceeds from asset sales
or sale/leaseback transactions required by December 31, 1996 to $15.0 million
(which was accomplished) and waived any related existing defaults or events of
default. The amendment provided for an increase of $10 in the stated principal
amount for each $1,000 in stated principal amount of consenting noteholders.
This resulted in an increase of approximately $1.6 million in the stated
principal amount of the Senior Secured Notes and $1.2 million in the actual
outstanding principal amount of the Senior Secured Notes. The annual interest
expense associated with this additional outstanding principal amount is $0.2
million. While from time to time ARG has solicited and received waivers of
existing or anticipated defaults under its debt instruments, there can be no
assurance that ARG will be able to comply with such covenants in the future or
to obtain waivers of any future defaults thereunder. See "DESCRIPTION OF CERTAIN
INDEBTEDNESS -- Senior Secured Notes -- Maintenance of Consolidated EBITDA".
ARG failed to meet EBITDA covenants under its Senior Secured Notes for
the twelve months ended May 31, 1997 and for the four quarters ended June 30,
1997. While ARG's lenders have not moved to accelerate the repayment of this
debt, the Company has, however, included its Senior Secured Notes and its
subordinated debt in the current portion of long-term debt. Of these amounts,
$40.9 million is due on September 15, 1997 under the sinking fund provisions of
the Senior Secured Notes. The Company is pursuing the sale of its Black Angus
division in order to repay in full its Senior Secured Notes. There can be no
assurance that this sale will be completed on acceptable terms.
Substantially all assets of ARG are pledged to its senior lenders. In
addition, the subsidiaries have guaranteed the indebtedness owed by ARG and such
guarantee is secured by substantially all of the assets of the subsidiaries. In
connection with such indebtedness, contingent and mandatory prepayments may be
required under certain specified conditions and events.
At year end 1995 and 1996, ARG had outstanding letters of credit
primarily related to its self-insurance programs of approximately $14.4 million
and $12.4 million, respectively. ARG's senior credit facilities currently
provide for a letter of credit facility of $11.0 million until October 15, 1997.
This letter of credit facility was fully utilized as of August 4, 1997. A
quarterly commitment fee of 0.5% per annum is payable on the letter of credit
facility and a quarterly fee of 3.75% per annum is payable on outstanding
letters of credit. See "DESCRIPTION OF CERTAIN INDEBTEDNESS--Credit Facilities."
Having repaid the outstanding bank loan in September 1996, ARG does not have a
working capital facility.
Arthur Andersen LLP, independent public accountants, have issued a
report, a copy of which is included herein, which states that the fact that the
Company (i) has suffered recurring losses from operations, (ii) has a net
capital deficit, (iii) has a sinking fund payment of $40.9 million due
September 15, 1997, and (iv) may be required to renegotiate its senior debt if
it cannot meet amended covenants, raises substantial doubt about its ability to
continue as a going concern. See "REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS".
The Company is highly leveraged and is pursuing the sale of its Black
Angus division which must be consummated in order to enable ARG to repay the
required sinking fund payment of $40.9 million due September 15, 1997 on the
Senior Secured Notes. After the completion of the Black Angus sale, the Company
will pursue additional asset sales. Any additional asset sale proceeds in excess
of the amount required to repay the Senior Secured Notes in full, together with
any proceeds from additional refinancing, will be used to repay ARG's
Subordinated Notes. Any such material sale of assets would require the consent
of the holders of the Company's indebtedness which would remain outstanding
after the application of the proceeds thereof. See "DESCRIPTION OF CERTAIN
INDEBTEDNESS - Credit Facilities," "DESCRIPTION OF CERTAIN INDEBTEDNESS - Senior
Secured Notes," and "DESCRIPTION OF CERTAIN INDEBTEDNESS - Subordinated Loan
Agreement." In addition, the Company expects to obtain a replacement letter of
credit facility. However, there can be no assurance that any such asset sales or
refinancing will be completed on acceptable terms.
NET OPERATING LOSSES
The Company's net operating loss carryforwards may be subject to
significant limitations on use or elimination under applicable provisions of the
Internal Revenue Code of 1986, as amended, as a result of changes in ownership
of the Company. Accordingly, should the Company have taxable income in the
future, there can be
23
<PAGE> 27
no assurance that previous net operating losses could be applied to reduce such
taxable income. As a result, investors should not rely on the availability to
the Company of a material amount of net operating losses in the future.
IMPACT OF INFLATION
Although inflationary increases in food, labor or operating costs could
adversely affect operations, the Company has generally been able to offset
increases in cost through price increases, labor scheduling and other management
actions.
BUSINESS
INTRODUCTION
ARG, through its subsidiaries competes predominantly in the midscale
segment of the United States restaurant industry. ARG was formed on August 13,
1986 by Anwar S. Soliman, Chairman of the Board and Chief Executive Officer of
ARG and other members of current senior management (Ralph S. Roberts, President
and Chief Operating Officer, William J. McCaffrey, Jr., Chief Financial Officer
and Wilfred H. Partridge, Vice President--Purchasing) to acquire certain
operations of Saga Corporation, a wholly owned subsidiary of Marriott
Corporation (the "Acquisition"). The Acquisition was completed in February 1987.
(Prior to the completion of the Acquisition, ARG had no significant operations.)
ARG is a wholly owned subsidiary of Holdings.
As of June 30, 1997, ARG operated 239 restaurants located in 17 states,
principally California and Texas. ARG operates five restaurant divisions: Black
Angus (western-style steak houses specializing in steak and prime rib), Grandy's
(family-oriented, quick-service restaurants specializing in fried and grilled
chicken, country-fried steak and country breakfasts), Spoons (casual-style
restaurants featuring fajitas, salads and hamburgers), Spectrum (upscale
Northern Italian, American and Mexican specialty restaurants) and National
Sports Grill (sports-theme restaurants featuring generous portions and
micro-brewery beers). The Company operated one Velvet Turtle restaurant as of
December 30, 1996 which the Company closed in February 1997. In addition, as of
June 30, 1997, Grandy's franchised 60 restaurants in the southern United States.
BLACK ANGUS
General. Black Angus is a steakhouse chain serving the western United
States. Founded in 1964, Black Angus operates 104 Stuart Anderson's Black Angus
and Stuart Anderson's Cattle Company steakhouse restaurants located primarily in
California, the Pacific Northwest and Arizona. During the year ended December
30, 1996, the Company expanded the Black Angus restaurants into two new markets,
Las Vegas, Nevada and Salt Lake City, Utah. Black Angus restaurants are
typically located in highly visible and heavily traveled areas in or near retail
and commercial businesses. The restaurants are generally freestanding and
generally range in size from 6,600 to 12,000 square feet, seating 300 to 435
customers. Black Angus restaurants are distinctively western in their interior
and exterior design and feature booth seating for dining, lounge areas with
audio and video entertainment, parking facilities and, in some cases, dance
floors. They are generally open for lunch from 11:30 a.m. to 4:00 p.m. and for
dinner from 4:00 p.m. to 10:00 p.m.
Menu Strategy. Black Angus restaurants are targeted to appeal to
middle-income couples and families, emphasizing quality and value, by offering
moderately priced entrees. The menu emphasizes beef with selections that include
prime rib and steak, and, in response to increased customer demand, chicken and
fish as well as lighter accompanying items. Currently, 28% of the menu's entrees
are nonbeef. In order to capitalize on consumer desires for lighter, quicker
meals, Black Angus has introduced a lunch menu with most items guaranteed to be
served within ten minutes.
In 1996, the average check per person was $8.46 at lunch and $14.47 at
dinner. Dinner, excluding beverages, accounted for approximately 66% of revenues
while lunch accounted for approximately 11% of revenues. Beverage sales, which
include the concept's late-night entertainment, accounted for approximately 23%
of total revenues.
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<PAGE> 28
Advertising and Promotion. The Company concentrates on television as
the most effective medium for reaching its highly concentrated markets. The
television advertisements feature price points which convey the Company's
high-value image and emphasize the concept's excellent food quality.
GRANDY'S
General. Founded in 1973, Grandy's operates 93 restaurants located
principally in Texas, Oklahoma and Kansas. Grandy's is a family-oriented,
quick-service concept. Grandy's differentiates itself from other fast food
restaurants by offering comparable prices and speed, but with the quality and
ambiance of a full-service restaurant. In addition to its company-operated
restaurants, as of June 30, 1997 the Company franchised 60 restaurants in the
southern United States. Grandy's restaurants are generally freestanding and are
located near shopping malls or other highly visible, heavily traveled areas. The
restaurants range in size from 3,800 to 5,200 square feet and have dining areas
which generally seat 130 to 220 customers. All restaurants offer self-service
and free drink refills, and all but two restaurants have drive-thru service.
Grandy's restaurants are generally open from 6:00 a.m. to 10:00 p.m. and serve
breakfast, lunch and dinner. Grandy's differentiates itself from its competitors
by offering complete home-style meals with limited service.
Menu Strategy. The menu features fried and grilled chicken,
grilled-chicken sandwiches, chicken nuggets and country-fried steak, served with
a choice of vegetable plus mashed potatoes, gravy and rolls. Grandy's has also
introduced pre-packaged salads for both drive-thru and in-store customers.
Breakfast is an important part of the Grandy's concept and includes scrambled
eggs with cheese, bacon, sausage, hot cakes, freshly baked cinnamon rolls and
biscuits, coffee and juice. Most restaurants have breakfast bars either daily or
on weekends. Grandy's does not serve alcoholic beverages. Unlike most other
restaurant chains, Grandy's is strong during each of the three dining periods
that it serves daily. In 1996, breakfast, lunch and dinner accounted for 22%,
42% and 36% of revenues, respectively, and the average check per person was
$3.93. Approximately 51% of Grandy's 1996 revenues were for consumption in the
dining room as opposed to take out.
Advertising and Promotion. The Company concentrates on television as
the most effective medium for reaching its highly concentrated markets. Grandy's
also relies on print advertising in its smaller markets and, to a lesser extent,
in its principal markets.
Franchising. As of June 30, 1997, the Company franchised 60 Grandy's
restaurants in the southern United States and the Company intends to continue
its franchising activities.
The Company's domestic franchise agreements generally require initial
fees of $15,000 to $25,000 per restaurant and ongoing royalties of approximately
4% of sales (3% for some older franchises). The Company provides certain support
functions for franchisees, including initial training and ongoing monitoring and
consultations. The Company does not provide financing for franchisees.
The Company has reduced the number of franchised Grandy's restaurants
from 95 in 1991 to 60 as of June 30, 1997, as a result of the acquisition by
Grandy's of nine franchised restaurants and the termination of underperforming
franchises.
OTHER CONCEPTS
SPOONS
General. Spoons, founded in 1978, operates 20 casual-style restaurants
located throughout California. Spoons restaurants are generally freestanding,
located in heavily traveled areas, ranging in size from 5,500 to 7,800 square
feet and seating approximately 200 customers. These full-service restaurants
average a 40-minute table turnover and offer booth and table seating in a
casual, highly energetic atmosphere. In addition, each restaurant has a lounge
area which also serves food. Spoons provides the customer with a fresh,
value-oriented alternative to traditional quick-service restaurants. Spoons
restaurants are generally open from 11:00 a.m. to 12:00 midnight and feature the
same menu all day.
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<PAGE> 29
Menu Strategy. Spoons restaurants offer full service with a menu
featuring baby back ribs; hamburgers; french fries; fajitas (steak, chicken and
tuna); marinated tuna and steak sandwiches; soft tacos; pasta platters; salads;
and "Tex-Mex" appetizers such as nachos, "buffalo" wings and quesadillas.
Although the typical Spoons customer is in the 18-49 age group, the Company
believes that the Spoons California grill concept and menu have a wide appeal
encompassing couples, families and senior citizens. The average time from
placing to serving an order is under ten minutes. In 1996, the average food
check per person was $7.35. Lunch and dinner accounted for 35% and 49% of
revenues, respectively, in 1996, with beverages accounting for 16% of revenues.
Advertising and Promotion. The Company concentrates on freestanding
newspaper inserts as the most effective medium for reaching its highly
concentrated markets.
SPECTRUM
General. As of June 30, 1997, Spectrum, founded in 1970, operated 16
unique, upscale, specialty restaurants located throughout California. All
restaurants focus on "authentic" Northern Italian, contemporary American or
Mexican cuisine. The division includes four "Prego", three "Tutto Mare", two
"MacArthur Park" and seven other restaurants which, although operated under
different names, generally concentrate on Northern Italian food. Spectrum
restaurants vary in size and physical type but are primarily located proximate
to concentrations of young professionals and other upper-income customers. The
restaurants are generally open from 11:00 a.m. to 12:00 midnight.
Menu Strategy. Each Spectrum restaurant focuses on preparing
"authentic" cuisine of the featured country, with daily specials depending on
the restaurant. The restaurants are usually built with an open kitchen and all
food is prepared fresh with an emphasis on quality and service. In 1996,
excluding beverages, dinner accounted for approximately 47% of revenues with an
average food check of $18.06 per person, while lunch accounted for approximately
23% of revenues with an average food check of $14.45 per person. Beverages,
primarily wine by the bottle or the glass and served with meals, accounted for
approximately 30% of revenues in 1996. Beverage revenues as a percentage of
total revenues have remained stable over the past three years.
Advertising and Promotion. Due to the unique cuisine and atmosphere of
each of its restaurants, Spectrum does relatively little advertising, relying
instead on word-of-mouth. A modest amount of advertising for individual
restaurants is done in magazines and several of the restaurants conduct
promotional events. Spectrum has developed a successful "frequency building"
program called "Table One" with 15,000 members who earn gift certificates or
other prizes based on expenditures in the restaurants.
NATIONAL SPORTS GRILL
National Sports Grill, founded in 1993, operated six sports-theme
restaurants as of June 30, 1997. This concept offers a menu featuring generous
portions and microbrewery beers and provides multiple video telecasts of
national and regional sporting events as well as interactive video games and
other sporting related games.
National Sports Grill restaurants are freestanding and generally range
in size form 10,000 to 17,000 square feet, seating approximately 200 to 300
customers. The restaurants feature a bar, a dining area, a billiards area and
multiple video screens throughout. National Sports Grill restaurants are
typically open from 11:00 a.m. to 2:00 a.m.
RESTAURANT OPERATIONS
The Company is operated as five separate divisions. The Black Angus and
Grandy's divisions are each organized functionally with separate operations,
marketing, finance, real estate and human resources departments. The three
smaller divisions share among them certain support functions such as marketing,
finance, administration and human resources. The Company provides strategic
direction and approves major capital expenditures, annual budgets and all
salaries above a specified level. In addition, the Company provides purchasing,
cash management, insurance and other treasury functions, and accounting and
legal expertise, all on a centralized basis.
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<PAGE> 30
The Company's cash management system is highly sophisticated with
controls down to the server level. The Company uses a centralized cash
concentration system which sweeps all of its cash accounts on a daily basis.
There is a central payable and check writing system with roughly 9,000 vendors
profiled on the system.
The Company uses a combination of in-house and outside-contracted
services for its management information system needs. In-house systems include a
point-of-sale system for each restaurant and stand-alone computing at the
restaurant, division and corporate levels. The Company currently contracts for
payroll services and for mainframe-based data processing.
Each restaurant is staffed with a general manager who is directly
responsible for the operation of the restaurant, including product quality,
cleanliness, service, inventory, cash control and the appearance and conduct of
store employees. Except for Grandy's, most restaurants also have one or two
Assistant Managers and a Chef. Managers and supervisory personnel train other
restaurant employees in accordance with detailed procedures and guidelines
prescribed by each division.
General managers are supervised by district managers, each of whom is
responsible for approximately seven restaurants. District managers, general
managers, assistant managers and chefs are eligible for bonuses under each
division's extra compensation program, for which goals and objectives are
established based on the profitability, sales and other factors relating to the
restaurants.
PURCHASING AND DISTRIBUTION
To ensure standards of quality and to maximize pricing efficiencies, a
central Purchasing Department coordinates the supply of almost all restaurant
items. The Company purchases products throughout the United States and abroad
through agreements with various food-service vendors. None of the Company's
vendors supply the Company exclusively and no material agreements exist. The
Company routinely uses public, cold-storage facilities and makes forward
commitments in order to establish the availability and price of key food items
such as beef and seafood. In order to achieve more favorable terms, the Company
has recently chosen to concentrate its distribution among certain of its vendors
but believes that it could replace any of these distributors, if necessary, on a
timely basis.
COMPETITION AND MARKETS
All aspects of the restaurant business are highly competitive. Price,
restaurant location, food quality, service and attractiveness of facilities are
important aspects of competition, and the competitive environment is often
affected by factors beyond a particular restaurant management's control,
including changes in the public's taste and eating habits, population and
traffic patterns and economic conditions. The Company's restaurants compete with
a wide variety of restaurants, ranging from national and regional restaurant
chains to locally owned restaurants. Competition from other restaurant chains
typically represents the more important competitive influence, principally
because of their significant marketing and financial resources. In addition,
competition is not limited to a particular segment of the restaurant industry
because fast-food eateries, steakhouses and casual-dining restaurants are all
competing for the same consumer's dining dollars. The Company believes that its
principal competitive strengths lie in the distinctive atmosphere and food
presentation offered; the value, variety and quality of food products served;
the quality and training of its employees; the experience and ability of its
management; and the economies of scale enjoyed by the Company because of its
size and geographic concentration. The Company continually monitors consumer
tastes and adjusts and updates its menus accordingly. The Company operates a
research facility near its headquarters which develops new menu items for each
of the Company's concepts.
EMPLOYEES
At December 30, 1996, the Company employed approximately 14,800
persons, of whom approximately 13,800 were hourly employees in restaurants,
approximately 800 were salaried employees in restaurants (managers and chefs)
and approximately 200 were hourly and salaried employees in divisional and
corporate management and administration. Approximately 70% of the hourly
restaurant employees work on a part-time basis (25 or fewer hours
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<PAGE> 31
per week). None of the Company's facilities is unionized. The Company believes
it provides competitive compensation and benefits to its employees and that its
employee relations are good.
REGULATION
Each restaurant is subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire and
other departments. In addition, each restaurant (except for Grandy's) is subject
to licensing with respect to the sale of alcoholic beverages. The loss of
licenses or permits by the Company's restaurants to sell alcohol would interrupt
or terminate the Company's ability to serve alcoholic beverages at those
restaurants and, if a significant number of restaurants were affected, could
have a material adverse effect on the Company. The Company believes it has good
relations with the various alcoholic beverage authorities.
The Company is subject to the Fair Labor Standards Act and various
state laws governing such matters as minimum wages, overtime and other working
conditions. Substantially all of the Company's restaurant employees are paid at
rates related to the federal and state minimum wage, and, accordingly, increases
in the minimum wage increase the Company's labor costs.
LEGAL PROCEEDINGS
The Company is involved in various litigation incidental to its
business, including claims arising out of personal injuries, employment
practices, worker's compensation cases and contract lawsuits, the claims for
which sometimes involve substantial damages. Based on information presently
available, management does not believe that the outcome of such litigation will
have a material adverse effect on the Company's financial position, business or
results of operations.
SERVICE MARKS
The Company regards its service marks and trademarks as important to
the identification of its restaurants and believes they have significant value
in the conduct of its business. The Company has registered various service marks
and trademarks with the United States Patent and Trademark Office. In addition,
certain service marks have been registered in the State of California, in
various other states and in certain foreign countries.
SEASONALITY
Except with respect to Grandy's, the Company's restaurant revenues and
profitability are not subject to significant seasonal fluctuations. Grandy's
revenues and profits are traditionally higher during the spring and summer
months because of factors such as increased travel and improved weather
conditions affecting the public's dining habits.
PROPERTIES
Of the 239 restaurants operated by the Company on June 30, 1997, the
Company owns the land and building for 6, owns the building and leases the land
for 91, and leases both land and building for the remaining 142 restaurants.
Most of the Company's restaurants are freestanding and range from approximately
4,000 square feet for a Grandy's restaurant to as much as 17,000 square feet for
a National Sports Grill restaurant. Most of the Company's leases provide for the
payment of the greater of a set base rental or a percentage rental of up to 6%
of gross revenues, plus real estate taxes, insurance and other expenses. When
the Company has so desired, it generally has been able to renew its restaurant
leases as they expire. However, there can be no assurance that it will be able
to do so in the future.
In addition, the Company owns the land and building for the Grandy's
headquarters in Lewisville, Texas, and leases office space for its other
divisions and corporate headquarters in Los Altos and Newport Beach, California.
The Company also leases a facility in Newport Beach, California, which it uses
for centralized research and development.
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<PAGE> 32
The following table sets forth, as of June 30, 1997, the number of
Company-operated restaurants by division and state of operation:
NUMBER OF COMPANY-OPERATED RESTAURANTS BY STATE AND DIVISION
<TABLE>
<CAPTION>
NATIONAL TOTAL
SPORTS NUMBER
STATE BLACK ANGUS GRANDY'S SPOONS SPECTRUM GRILL OF RESTAURANTS
- ---------- ----------- -------- ------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
California 57 0 20 16 6 99
Texas -- 67 -- -- - 67
--- --- --- --- --- ---
Oklahoma -- 16 -- -- - 16
Washington 11 -- -- -- - 11
Arizona 9 -- -- -- - 9
Minnesota 6 -- -- -- - 6
Colorado 5 -- -- -- - 5
Kansas -- 5 -- -- - 5
Oregon 5 -- -- -- - 5
Florida -- 4 -- -- - 4
--- --- --- --- --- ---
Indiana 3 -- -- -- - 3
Hawaii 2 -- -- -- - 2
Nevada 2 -- -- -- - 2
New Mexico 1 1 -- -- - 2
Alaska 1 -- -- -- - 1
Idaho 1 -- -- -- - 1
Utah 1 -- -- -- - 1
--- --- --- --- --- ---
Total 104 93 20 16 6 239
=== === === === === ===
</TABLE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about the Company's directors
and each of its executive officers and key management personnel. Unless
otherwise specified, each person holds the same position with both Holdings and
ARG.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Anwar S. Soliman 59 Chairman, Chief Executive Officer, Director
Ralph S. Roberts 55 President and Chief Operating Officer, Director
William J. McCaffrey, Jr. 51 Chief Financial Officer, Vice President, Treasurer, Assistant
Secretary, Director
Wilfred H. Partridge 68 Vice President-- Purchasing-- ARG
Patrick J. Kelvie, Esq. 45 Secretary and General Counsel
</TABLE>
Officers are elected by the Board of Directors and serve at the
discretion of the Board.
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<PAGE> 33
Anwar S. Soliman. Mr. Soliman is Chairman, Chief Executive Officer and
a Director of Holdings. He has served as Chairman, Chief Executive Officer and a
Director of ARG since its organization in 1986. Prior to joining the Company,
Mr. Soliman was Executive Vice President of W.R. Grace & Co. ("Grace") and Group
Executive of the Grace Restaurant Group, which he started in 1977. Mr. Soliman
spent 22 years with Grace in various executive positions. He is also a trustee
of the Orange County Museum of Art and a member of the Board Council of Boys
Hope of California. Mr. Soliman received both a B. Commerce and an M.B.A. from
Alexandria University and a Ph.D. from New York University.
Ralph S. Roberts. Mr. Roberts is President, Chief Operating Officer and
a Director of Holdings. He has served as a Director of ARG since 1991 and has
served as the President and Chief Operating Officer of ARG since 1986. Mr.
Roberts has more than 25 years of experience in the restaurant industry and
before joining the Company was Deputy Group Executive of Operations of the Grace
Restaurant Group and Vice President of Grace. Prior to joining Grace in 1980, he
was Vice President of the Stouffer Restaurant Division and President and
co-founder of the Rusty Scupper restaurants. Mr. Roberts received a B.A. from
Princeton University.
William J. McCaffrey, Jr. Mr. McCaffrey is Chief Financial Officer,
Vice President, Treasurer, Assistant Secretary and a Director of Holdings. He
has served as a Director of ARG since 1991 and has served as the Chief Financial
Officer, Vice President, Treasurer and Assistant Secretary of ARG since 1986.
Prior thereto he was Chief Financial Officer of the Grace Restaurant Group,
having spent 12 years with Grace. For eight years, Mr. McCaffrey was assistant
to the Chief Executive Officer of Grace. He received a B.S., M.E. from the
University of Notre Dame and an M.B.A. from Harvard University.
Wilfred H. Partridge. Mr. Partridge has served as Vice President
responsible for purchasing and distribution for ARG since 1986. Mr. Partridge
has more than 30 years of experience in the restaurant industry, encompassing
purchasing, production and distribution, as well as restaurant operations, and
was President of Grace Restaurant Services before joining the Company. Mr.
Partridge served as Vice President of Purchasing, Production and Distribution
with Marriott Corporation (Bob's Big Boy Division) for 19 years. He served as
Director of Manufacturing and Distribution for Foodmaker Company
(Jack-in-the-Box) and also operated his own restaurants in the San Diego area.
He received a B.A. in Commercial Science from Benjamin Franklin University.
Patrick J. Kelvie. Mr. Kelvie is Secretary and General Counsel of
Holdings. He has served as General Counsel of ARG since 1987 and Secretary of
ARG since 1989. From 1987 to 1989, Mr. Kelvie was an Assistant Secretary of ARG.
Between 1978 and 1987, Mr. Kelvie held various legal counsel positions for Saga
Corporation. Mr. Kelvie received a B.A. from the University of California at
Berkeley and a J.D. from Harvard Law School.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation for services
rendered in all capacities which ARG paid to or accrued for the Chief Executive
Officer and each of the other four most highly compensated executive officers:
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<PAGE> 34
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------------- --------------------------------------------
OTHER ALL
ANNUAL RESTRICTED NO. OF OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION(b) AWARD(S) SARS PAYOUTS SATION(c)
- -------------------------------- ---- ---------- ------- --------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Anwar S. Soliman 1996 $1,233,640 $ 0 $96,125 -- -- -- $24,303
(Chairman and CEO) 1995 1,233,640 0 62,660 -- -- -- 18,002
1994 1,189,580 0 92,635 -- -- -- 17,552
Ralph S. Roberts 1996 704,935 0 48,295 -- -- -- 8,351
(President and CEO) 1995 704,935 0 28,230 -- -- -- 8,351
1994 659,907 0 43,400 -- -- -- 5,759
William J. McCaffrey, Jr. 1996 325,000 0(a) 5,680 -- -- -- 14,846
(Chief Financial Officer) 1995 311,539 30,000 0 -- -- -- 9,571
1994 287,115 35,000 5,425 -- -- -- 9,093
Wilfred H. Partridge 1996 290,000 0(a) 7,610 -- -- -- 5,754
(Vice President-Purchasing) 1995 279,231 30,000 0 -- -- -- 5,884
1994 259,692 35,000 7,325 -- -- -- 26,982
Patrick J. Kelvie 1996 175,000 0(a) 0 -- -- -- 1,312
(Secretary and General Counsel) 1995 175,000 0 0 -- -- -- 1,262
1994 167,731 0 0 -- -- -- 1,849
</TABLE>
(a) Discretionary bonus amounts for Messrs. McCaffrey, Partridge
and Kelvie were not determined as of August 4, 1997.
(b) Amounts shown are for reimbursement during the fiscal year for
the payment of premiums and income taxes thereon relating to
executive life and disability plans. In addition, the Company
maintains key man life insurance policies for the benefit of
the Company on Messrs. Soliman and Roberts.
(c) Amounts shown in this column for the last fiscal year include
the following: group term life insurance premiums of $24,303,
$8,351, $12,471 and $3,510 for Messrs. Soliman, Roberts,
McCaffrey and Partridge, respectively; and Company matching
contributions to a 401(k) plan of $2,375, $2,244 and $1,312
for Messrs. McCaffrey, Partridge and Kelvie, respectively.
EMPLOYMENT AGREEMENTS
The following table sets forth, with respect to each executive officer
who has entered into an employment agreement with the Company, the base salary
for such officer provided for therein together with the termination date of such
agreement:
<TABLE>
<CAPTION>
Name of Individual Position(s) Held Salary Termination Date
- ------------------ ---------------- ------ ----------------
<S> <C> <C> <C>
Anwar S. Soliman Chairman and Chief Executive Officer 740,184 12/31/97
Ralph S. Roberts President and Chief Operating Officer 422,961 12/31/97
Wilfred H. Partridge Vice President-- Purchasing 174,000 12/31/97
</TABLE>
Each of the employment agreements entered into between the Company and such
executive officers provides, among other things, for adjustments to the base
salaries and automatic extensions of the termination date. The agreements also
provide for certain other benefits, including, in the case of Mr. Soliman, one
year's severance pay equal to his then annual salary in the event of disability
or death; in the case of Mr. Roberts, one year's severance pay in the event of
death and salary for the remainder of the calendar year in the event of
disability; and, in the case of Mr. Partridge, six months' severance pay in the
event of death and salary for the remainder of the calendar year in the event of
disability. The employment agreements of Mr. Soliman and Mr. Roberts each
provide for six months' severance pay if either executive terminates his
employment for cause. None of ARG's employment agreements provide for any
continuing salary obligations in the event of a termination by ARG for cause.
STOCK OPTION PLAN
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<PAGE> 35
Holdings has adopted a Stock Option Plan for Key Employees (the "Plan")
providing for the grant of non-qualified stock options ("Options") to selected
employees. Holdings has reserved 45,600 shares of common stock for issuance
under the Plan. The Plan is designed, through the award of incentive
compensation, to attract and retain key employees who are in a position to make
a significant contribution to the successful operation of the business of
Holdings and its subsidiaries. The Board of Directors will designate persons to
be granted awards under the Plan, the number of Options to purchase shares to be
granted, and any other conditions relating to the awards as it may deem
appropriate, consistent with the provisions of the Plan.
The Plan provides that the exercise price for Options granted pursuant to
the Plan shall be at least equal to the fair market value of the stock on the
date of grant. Options granted under the Plan shall expire on the earlier of the
tenth anniversary of the date the Option was granted or the 60th day following
termination of the optionee's employment with Holdings or its subsidiaries. The
Options will be exercisable after five years (or such earlier date as may be
specified by the Board of Directors or the Compensation Committee thereof).
Options will not be transferrable (other than by will or the laws of descent and
distribution) and, during the optionee's lifetime, will only be exercisable by
the optionee.
Holders of shares of common stock received pursuant to the Plan will be
required to become a party to the Voting Trust Agreement and a stockholder's
agreement having terms and conditions comparable to those contained in the
Common Stock Subscription Agreements (as herein defined). See "Business" and
"Security Ownership of Certain Beneficial Owners and Management."
SAVINGS PLAN
ARG currently has the American Restaurant Group Savings and Investment Plan
(the "Savings Plan"), which is a 401(k) plan established for the benefit of
employees who have satisfied certain requirements. These requirements include
completion of one year of service with a minimum of 1,000 hours worked. Subject
to applicable limits imposed on tax qualified plans, eligible employees may
elect pre-tax contributions up to 18.5% of a participant's total earnings for a
calendar year (but not in excess of $9,500 for 1996). ARG makes matching
contributions to the Savings Plan equal to 25% of the participant's
contributions up to 6% of the participant's earnings. A participant is entitled
to a distribution from the Savings Plan upon termination of employment and any
such distribution will be in a lump sum form. Distributable benefits are based
on the value of the participant's individual account balance which is invested
at the direction of the participant in one or a combination of six investment
funds, none of which include investments in Holdings or ARG. Under certain
circumstances, a participant may borrow amounts held in his account under the
Savings Plan. Based upon the Savings Plan vesting schedule, as of 1996, 100% of
ARG matching contributions were vested for Messrs. McCaffrey, Partridge and
Kelvie.
EXECUTIVE INSURANCE PLANS
ARG has made available an executive disability insurance plan to Messrs.
Soliman, Roberts, McCaffrey and Partridge which provides supplemental disability
income based on a percentage of their respective monthly salaries. In 1996, the
cost to ARG of such disability insurance for these executives was $66,300.
Messrs. Soliman, Roberts, McCaffrey and Partridge and their dependents also
participate in an executive medical plan which covers all of their medical and
dental expenditures. In 1996, the cost to ARG of this plan for these executives
as a group was $26,100.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holdings owns 100% of ARG's outstanding common stock. All of the Holdings'
management stockholders have entered into the Voting Trust Agreement in
accordance with which Anwar S. Soliman, Chairman and Chief Executive Officer of
the Company, exercises, as voting trustee, all voting and substantially all
other rights to which such shareholders would otherwise be entitled until the
earlier of December 31, 2001 or the earlier termination of the Voting Trust
Agreement. As a result, Mr. Soliman is considered the beneficial owner of
approximately 82% of the outstanding shares of Holdings' common stock
(approximately 61% on a fully diluted basis).
32
<PAGE> 36
As of June 30, 1997, holders of the senior discount debentures held
approximately 18% of the shares of Holdings' common stock (approximately 13% on
a fully diluted basis). In addition, holders of the Subordinated Notes held
warrants for common stock of approximately 26% on a fully diluted basis.
The following table sets forth certain information regarding the
beneficial ownership of Holdings common stock, as of August 26, 1997, by (i)
each of the Company's directors, (ii) the Chief Executive Officer and certain
other highly compensated executive officers of the Company, (iii) all executive
officers and directors as a group and (iv) each person believed by the Company
to own beneficially more than 5% of Holdings' outstanding common stock. As of
the date of this Prospectus, Holdings owned all of the issued and outstanding
capital stock of ARG.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OWNERSHIP OF CLASS
- ---------------- ----------------- --------
<S> <C> <C>
Anwar S. Soliman 228,577(1) 33.5%
Roberts Family Limited Partnership 114,266 16.8
William J. McCaffrey, Jr. 28,567 4.2
Wilfred H. Partridge 28,567 4.2
Patrick J. Kelvie 4,563 0.7
Hare & Co. 35,4747(2) 5.2
c/o The Bank of New York
P.O. Box 19266
Newark, New Jersey 07195
Dean Witter, Discover & Co. and Dean Witter InterCapital Inc. 78,557(3) 11.5
Two World Trade Center
New York, New York 10048
All directors and officers of the Company as a group (5 persons) 404,540 59.4
</TABLE>
- ----------
(1) Does not include 187,371 shares of Common Stock which Mr. Soliman is
deemed to be the owner of pursuant to the Voting Trust Agreement.
(2) Represents warrants which are immediately exercisable at a nominal
price per share. None of such warrants is exercisable after July 31,
2001.
(3) Pursuant to a Schedule 13G dated February 13, 1996, Dean Witter,
Discover & Co. and Dean Witter InterCapital Inc. reported holding
78,557 shares the beneficial ownership of which they disclaimed.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summaries are qualified in their entirety by reference to
the definitive agreements and instruments described herein.
CREDIT FACILITIES
The Company and a group of banks led by Bankers Trust Company have
entered into the Credit Facilities which provide for a letter of credit facility
in the principal amount of $11.0 million, which may be used only by the
subsidiaries of ARG party to the Credit Facilities to support certain insurance,
workers' compensation and performance or payment obligations of such
subsidiaries. As of June 30, 1997, the full $11.0 million of letters of credit
was outstanding under the Credit Facilities. The letter of credit facility
matures on October 15, 1997.
The Credit Facilities provide for a quarterly commitment fee of 0.5%
per annum and a quarterly fee of 3.75% per annum is payable on outstanding
letters of credit.
33
<PAGE> 37
The Credit Facilities are secured by a pledge of the stock of all of
the Subsidiary Guarantors, a guarantee by ARG and all of the Subsidiary
Guarantors and a first priority lien on substantially all real and personal
property of ARG and the Subsidiary Guarantors. See "--Intercreditor Agreement
and Collateral Documents."
The Credit Facilities contain financial and other covenants, including,
without limitation, (i) restrictions on the incurrence of indebtedness, leases,
liens and contingent obligations, (ii) restrictions on mergers, acquisitions,
sales of assets, investments and transactions with affiliates, (iii)
restrictions on dividends and other payments with respect to shares of ARG's
capital stock, (iv) restrictions on redemptions, prepayments and distributions
with respect to debt other than debt under the Credit Facilities, (v)
restrictions on capital expenditures, (vi) financial performance tests, (vii)
restrictions on amendments to the Debenture Indenture and the indentures
relating to the Senior Secured Notes and certain other agreements, (viii) a
prohibition on engaging in businesses unrelated to the business currently
conducted by ARG and (ix) requirements that certain substantial asset sales be
consummated. The Credit Facilities also contain provisions prohibiting Holdings
from engaging in any business other than ownership of ARG and from pledging the
capital stock of ARG and requiring Holdings to contribute to ARG the net
proceeds of any public offering of equity securities. In addition, the Credit
Facilities include a test of Consolidated EBITDA comparable to that contained in
the existing indentures with respect to the Senior Secured Notes, as amended
(collectively, the "Existing Senior Secured Note Indenture"). See "--Senior
Secured Notes--Maintenance of Consolidated EBITDA." As of the date of this
Prospectus, the Company was in compliance with the covenants contained in the
Credit Facilities.
Events of Default under the Credit Facilities include, among others,
(i) any failure of ARG to pay amounts owing under the Credit Facilities within 5
days after the date due, (ii) the breach by ARG or any of its subsidiaries of
any covenants, representations or warranties contained in the Credit Facilities,
(iii) any failure to pay amounts due under other indebtedness or contingent
obligations of ARG or any of its subsidiaries or defaults that result in or
permit the acceleration of such indebtedness or contingent obligations, if the
aggregate amount of such indebtedness or contingent obligations exceeds a
specified amount, (iv) certain events of bankruptcy, insolvency or dissolution
of ARG or any of its subsidiaries and (v) certain changes of control of ARG.
INTERCREDITOR AGREEMENT AND COLLATERAL DOCUMENTS
This summary description of the Intercreditor Agreement and the
Collateral Documents (each as defined herein) summarizes the material terms of
such documents but does not purport to be complete and is qualified in its
entirety by reference to the Intercreditor Agreement and the Collateral
Documents (each as defined herein). The Intercreditor Agreement is incorporated
by reference as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to mortgages, deeds of trust, personal property security
agreements, pledge agreements, a trademark security agreement and a cash
collection account agreement, in each case executed and delivered by ARG and/or
the Subsidiary Guarantors on March 20, 1992 (as amended or supplemented,
collectively, the "Collateral Documents"), ARG and the Subsidiary Guarantors
granted to Bankers Trust Company, as Collateral Agent (the "Collateral Agent"),
a security interest in substantially all of their respective assets (the
"Collateral"), for the benefit of the secured parties referred to in the
respective Collateral Documents. The obligations of ARG and the Subsidiary
Guarantors under the Credit Facilities, the Senior Secured Notes (as herein
defined) and the respective guarantees thereof are secured pari passu on a first
priority basis by substantially all of the assets of ARG and the Subsidiary
Guarantors pursuant to the Collateral Documents. The Collateral Documents also
provide for additional lenders ("Additional Lenders") to become beneficiaries
thereof pursuant to procedures described in the Intercreditor Agreement referred
to below, so long as the additional indebtedness ("Additional Debt") incurred
from such Additional Lenders is permitted by the Credit Facilities (or any
refinancing thereof) and the indentures relating to the Senior Secured Notes. In
addition, the Subordinated Loan Agreement is secured on a second priority basis
by the capital stock of ARG's direct subsidiaries.
The ability of the Collateral Agent to enter into amendments to the
Collateral Documents and to exercise its remedies thereunder, and to release
Collateral and take certain other actions in respect thereof, is governed by
Section 3 of the Intercreditor Agreement, dated March 20, 1992, among the
Collateral Agent, as Collateral Agent
34
<PAGE> 38
and as Agent, U.S. Trust Company of California, N.A., as Trustee, Merrill Lynch
Interfunding Inc., ARG and the Subsidiary Guarantors (the "Intercreditor
Agreement"). The Intercreditor Agreement provides that amendments to the
Collateral Documents (other than Material Amendments (as defined in the
Intercreditor Agreement)) and releases of Collateral (other than releases of a
Substantial Portion of Collateral (as defined in the Intercreditor Agreement)
and releases pursuant to permitted asset sales), generally require only the
consent of the holders of a majority of the outstanding indebtedness under the
Credit Facilities (or any refinancing thereof). After such indebtedness has been
paid in full, such amendments and releases will require the consent of a
majority of the sum of the outstanding indebtedness under the Senior Secured
Notes and the outstanding Additional Debt (or, if all such indebtedness shall
have been paid in full, the holders of a majority of the indebtedness
outstanding under the Subordinated Loan Agreement). Material amendments and
releases of a substantial portion of collateral (except in the case of releases
of collateral pursuant to sales of such collateral permitted by the
documentation governing ARG's indebtedness) require consent of (a) a majority of
the sum of the outstanding indebtedness under the Credit Facilities (or any
refinancing thereof) and the indentures relating to the Senior Secured Notes and
certain material outstanding Additional Debt and (b) 25% of the holders of each
class of indebtedness described in clause (a) above. The consent of a majority
of the outstanding indebtedness under the Credit Facilities (or any refinancing
thereof) and/or the indentures relating to the Senior Secured Notes (or, if all
such indebtedness shall have been paid in full, the holders of a majority of the
indebtedness outstanding under the Subordinated Loan Agreement) is required
before the Collateral Agent may foreclose upon the Collateral securing the
relevant obligations. The Intercreditor Agreement provides that proceeds of any
foreclosure upon the Collateral shall be applied pro rata to any outstanding
senior indebtedness entitled to the benefits of the Intercreditor Agreement
(including the Senior Secured Notes).
SENIOR SECURED NOTES
In September 1992, ARG issued $120,000,000 aggregate principal amount
of Senior Secured Notes. In December of 1993, ARG issued an additional
$50,000,000 aggregate principal amount of Senior Secured Notes. The following is
a summary of the material terms of the Senior Secured Notes:
Guarantee and Security. The obligations under the Senior Secured Notes
are secured by a pledge of the stock of all of the Subsidiary Guarantors, a
guarantee of such borrowings by all of the Subsidiary Guarantors and a first
priority lien on substantially all real and personal property of ARG and the
Subsidiary Guarantors. See "--Intercreditor Agreement and Collateral Documents."
Interest and Maturity. The Senior Secured Notes bear interest, paid
quarterly on March 15, June 15, September 15 and December 15 of each year, at a
rate of 13% per annum and will mature on September 15, 1998.
Redemption. At the option of ARG, the Senior Secured Notes may be
redeemed in whole or from time to time in part at a redemption price equal to
the applicable percentage of the principal amount thereof set forth below,
together with accrued and unpaid interest to the Redemption Date (as defined),
if redeemed during the periods as follows: (i) until March 14, 1997 at 105%;
(ii) March 15, 1997 through September 15, 1997 at 102.5% and (iii) thereafter,
at 100%. In addition, ARG is required to make a sinking fund payment on
September 15, 1997 in an amount, when added to the aggregate principal amount of
Senior Secured Notes redeemed with the proceeds of asset sales, sufficient to
retire 50% of the aggregate principal amount of Senior Secured Notes originally
issued under the indentures relating thereto (collectively, the "Existing Senior
Secured Note Indenture"), at a redemption price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest to the Redemption
Date.
Events of Default and Remedies. The following are Events of Default
under the Existing Senior Secured Note Indenture: (a) failure to pay principal
of the Senior Secured Notes when due; (b) failure to pay any interest on the
Senior Secured Notes when due, continued for 30 days; (c) failure to perform any
covenant of ARG or any Subsidiary Guarantor in the Existing Senior Secured Note
Indenture or the Senior Secured Notes (continued, in the case of certain
covenants, for 30 days after written notice); (d) failure to pay at final
maturity the principal amount of any indebtedness of ARG or the Subsidiary
Guarantors, or acceleration of the stated maturity of any such indebtedness, if
the aggregate principal amount of such indebtedness, together with the principal
amount of any other such indebtedness in default for failure to pay principal at
final maturity or which has been accelerated, aggregates $10 million or more at
any time; (e) certain events of bankruptcy, insolvency or reorganization; (f)
foreclosure and
35
<PAGE> 39
certain actions to foreclose on a material portion of the collateral securing
indebtedness of ARG and the Subsidiary Guarantors; (g) the entering of final
judgments not covered by insurance for the payment of money which in the
aggregate at any one time exceeds $10 million, which shall remain undischarged
and unbonded for a period (during which execution shall not be effectively
stayed) of 60 days after such judgment becomes final and nonappealable; and (h)
failure by ARG or the Subsidiary Guarantors to maintain the first priority lien
on a material portion of the Collateral for the benefit of the holders of the
Senior Secured Notes and the holders of other Senior Indebtedness (as defined).
Restrictive Covenants. The Existing Senior Secured Note Indenture
imposes certain limitations on the ability of ARG and each Subsidiary Guarantor
to, among other things, make payments in respect of the ARG's capital stock,
enter into transactions with affiliates and significant stockholders, incur
additional indebtedness or liens, allow to become effective any payment
restriction with respect to any of the Subsidiaries (as defined), dispose of
substantially all of the properties or assets used in the operation of Black
Angus restaurants, make certain other asset sales, amend certain agreements,
cause the Subsidiary Guarantors to issue preferred stock or dispose of capital
stock of the Subsidiary Guarantors. Additionally, except under certain
circumstances, ARG may not merge or consolidate with, or sell or convey all or
substantially all of its assets to, any person, or adopt a plan of liquidation.
Maintenance of Consolidated EBITDA. ARG is required to maintain
Consolidated EBITDA (as defined) for each period of four consecutive fiscal
quarters ending on or after June 30, 1997 at the levels specified below:
<TABLE>
<CAPTION>
Date Amount
---- ------
<S> <C>
June 30, 1997 $35,000,000
September 29, 1997 35,500,000
December 29, 1997 36,000,000
March 30, 1998 36,500,000
June 29, 1998 37,000,000
</TABLE>
In February and March of 1997, ARG solicited and received consents
("Consents") from holders of a majority in aggregate principal amount of its
Senior Secured Notes to amendments (the "Amendments") with respect to the
Existing Senior Secured Note Indenture. The Amendments, among other things,
amended the Existing Senior Secured Note Indenture to (a) eliminate the
two-quarter and four-quarter Consolidated EBITDA tests for the periods ending
December 30, 1996 (at a $33,000,000 level) and March 31, 1997 (at a $34,000,000
level) and (b) add a new Consolidated EBITDA test for the period of 12 months
ending May 31, 1997, with the required Consolidated EBITDA level being
$34,000,000. The Consents were solicited, among other reasons, to avoid an
anticipated default under the Consolidated EBITDA test for the period ending
March 31, 1997. However, ARG failed to meet the amended Consolidated EBITDA test
for the twelve-month period ended May 31, 1997 and for the four quarters ended
June 30, 1997. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
In addition, ARG is required to maintain Consolidated EBITDA of at
least $13,000,000 for each period of two consecutive fiscal quarters ending on
or after June 30, 1997.
Net Proceeds Purchase. ARG is required, upon certain asset sales or the
incurrence of mortgage indebtedness, to purchase with a specified portion of the
net proceeds thereof the Senior Secured Notes at a price equal to 100% of the
aggregate principal amount thereof, plus accrued interest to the date of
purchase.
Change of Control Offer. Upon the occurrence of a Change of Control (as
defined herein under "DESCRIPTION OF THE EXCHANGE DEBENTURES--Certain
Definitions"), each holder shall have the right to require the repurchase of
such holder's Senior Secured Notes at a purchase price equal to 101% of the
principal amount thereof plus accrued interest, if any, to the date of purchase.
36
<PAGE> 40
SUBORDINATED LOAN AGREEMENT
ARG has outstanding Subordinated Notes aggregating $45.0 million issued
to Merrill Lynch in July 1991 (and subsequently sold by Merrill Lynch to a group
of financial institutions) and maturing on September 30, 2000.
The interest rate applicable to the Subordinated Notes is a fixed rate
of 10.25%, with optional prepayments of the Subordinated Notes prohibited until
December 14, 1997. The holders of the Subordinated Notes has been granted
registration rights with respect to the Subordinated Notes.
The Subordinated Loan Agreement provides that the indebtedness under
the Subordinated Loan Agreement (including principal, premium, if any, and
interest) is subordinated in right of payment to the prior payment in full of
all Senior Indebtedness (as defined therein), including the indebtedness under
the Credit Facilities and the Senior Secured Notes.
The Subordinated Notes are secured on a second priority basis by a
pledge of the stock of all of the Subsidiary Guarantors directly owned by ARG,
subject to the prior lien of the Collateral Agent in favor of the banks under
the Credit Facilities and the holders of the Senior Secured Notes.
The Subordinated Loan Agreement contains various restrictive financial
and other covenants including, without limitation, (i) restrictions on the
incurrence of indebtedness, leases and liens, (ii) restrictions on mergers,
acquisitions, sales of assets, investments and transactions with affiliates,
(iii) restrictions on dividends and other payments with respect to shares of
ARG's capital stock, (iv) a prohibition on engaging in businesses unrelated to
the business conducted by ARG as of March 20, 1992 and (v) an EBITDA maintenance
covenant comparable to the EBITDA maintenance covenant contained in the Existing
Senior Secured Note Indenture that becomes applicable once ARG's senior debt is
paid in full. In addition, if the consolidated EBITDA of ARG falls below a
specified level for two consecutive fiscal quarters, ARG is required to offer to
purchase at par a portion of the outstanding Subordinated Notes. As of the date
of this Prospectus, the Company was in compliance with the covenants contained
in the Subordinated Loan Agreement.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Debentures were originally issued and sold on March 13, 1996. The
offer and sale of the Debentures was not required to be registered under the Act
in reliance upon the exemption provided by Section 4(2) of the Act. In
connection with the sale of the Debentures, Holdings agreed to file with the
Commission, and use all reasonable efforts to cause to become effective, a
registration statement relating to an exchange offer (the "Exchange Offer
Registration Statement") pursuant to which new debentures of Holdings covered by
such Exchange Offer Registration Statement and containing terms identical in all
respects to the terms of the Debentures would be offered in exchange for
Debentures tendered at the option of the holders thereof or, if applicable
interpretations of the staff of the Commission did not permit Holdings to effect
such an exchange offer, Holdings agreed, at its cost, to file a shelf
registration statement covering resales of the Debentures (the "Shelf
Registration Statement") and use all reasonable efforts to have such Shelf
Registration Statement declared effective and kept effective for a period of
three years from the effective date thereof.
The purpose of the Exchange Offer is to fulfill Holdings' obligations
with respect to the Registration Rights Agreement. Holdings is making the
Exchange Offer for the Debentures in reliance on the position of the staff of
the Division of Corporation Finance of the Commission as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
Holdings has not requested, and does not intend to request, its own interpretive
letter and there can be no assurance that the staff of the Division of
Corporation Finance of the Commission would make a similar determination with
respect to the Exchange Offer as it has in such interpretive letters to third
parties.
37
<PAGE> 41
Except as provided under "Plan of Distribution" with respect to certain
broker-dealers, this Prospectus may not be used by any holder of the Debentures
or any holder of the Exchange Debentures to satisfy the registration and
prospectus delivery requirements under the Act that may apply in connection with
any resale of the Debentures or the Exchange Debentures. See "--Terms of the
Exchange," below.
TERMS OF THE EXCHANGE
Holdings hereby offers to exchange, subject to the conditions set forth
herein and in the Letter of Transmittal accompanying this Prospectus, $1,000 in
principal amount of Exchange Debentures for each $1,000 in principal amount of
Debentures. The terms of the Exchange Debentures are identical in all respects
to the terms of the Debentures for which they may be exchanged pursuant to this
Exchange Offer, except that the Exchange Debentures will generally be freely
transferable by holders thereof and will not be subject to any covenant
regarding registration. The Exchange Debentures will evidence the same debt as
the Debentures and will be entitled to the benefits of the Debenture Indenture.
See "DESCRIPTION OF THE EXCHANGE DEBENTURES."
The Exchange Offer is not conditioned upon any minimum aggregate
principal amount of Debentures being tendered for exchange
Holdings has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Debentures issued pursuant to the Exchange Offer in exchange for the
Debentures may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
Holdings believes that Exchange Debentures issued pursuant to the Exchange Offer
in exchange for Debentures may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Debentures (other than any such
holder which without compliance with the registration and prospectus delivery
provisions of the Act, provided that (i) such Exchange Debentures are acquired
in the ordinary course of business of such holder or any beneficial owner, (ii)
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Debentures and (iii) neither the holder nor
any such beneficial owner is an "affiliate" of Holdings within the meaning of
Rule 405 under the Act). Any holder who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Debentures cannot
rely on such interpretation by the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Act in connection
with any resale transaction. Each broker-dealer that receives Exchange
Debentures for its own account in exchange for Debentures, where such Debentures
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Debentures. See "PLAN OF
DISTRIBUTION."
Interest on the Exchange Debentures shall accrue commencing December
15, 1998.
Tendering holders of the Debentures shall not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Debentures
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer shall expire on the Expiration Date. The term
"Expiration Date" means 5:00 p.m., New York City time, on ________, 1997, unless
Holdings in its sole discretion extends the period during which the Exchange
Offer is open, in which event the term "Expiration Date" shall mean the latest
time and date on which the Exchange Offer, as so extended by Holdings, shall
expire. Holdings reserves the right to extend the Exchange Offer at any time and
from time to time by giving oral or written notice to United States Trust
Company of New York (the "Exchange Agent") and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Debentures previously tendered pursuant to the Exchange
Offer will remain subject to the Exchange Offer.
38
<PAGE> 42
The Exchange Date will be the first business day following the
Expiration Date. Holdings expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Debentures if either of the
events set forth below under "Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by Holdings and (ii) amend the terms of
the Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the holders of the Debentures, whether before or after any
tender of the Debentures. Unless Holdings terminates the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration Date, Holdings will exchange
the Exchange Debentures for the Debentures on the Exchange Date.
TENDER PROCEDURE
The tender to Holdings of Debentures by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and Holdings in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
A holder of Debentures may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Debentures being tendered and any required
signature guarantees, to the Exchange Agent at its address set forth on the back
cover of this Prospectus on or prior to the Expiration Date (or complying with
the procedure for book-entry transfer described below) or (ii) complying with
the guaranteed delivery procedures described below.
If tendered Debentures are registered in the name of the signer of the
Letter of Transmittal and the Exchange Debentures to be issued in exchange
therefor are to be issued (and any untendered Debentures are to be reissued) in
the name of the registered holder (which term, for the purposes described
herein, shall include any participant in The Depository Trust Company (also
referred to as a "book-entry transfer facility") whose name appears on a
security listing as the owner of Debentures), the signature of such signer need
not be guaranteed. In any other case, the tendered Debentures must be endorsed
or accompanied by written instruments of transfer in form satisfactory to
Holdings and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a commercial bank or
trust company located or having an office, branch, agency or correspondent in
the United States, or by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. (any of the
foregoing hereinafter referred to as an "Eligible Institution"). If the Exchange
Debentures and/or Debentures not exchanged are to be delivered to an address
other than that of the registered holder appearing on the register for the
Debentures, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
THE METHOD OF DELIVERY OF DEBENTURES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Debentures at the
book-entry transfer facility for the purpose of facilitating the Exchange Offer,
and subject to the establishment thereof, any financial institution that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Debentures by causing such book-entry transfer facility to transfer
such Debentures into the Exchange Agent's account with respect to the Debentures
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of Debentures may be effected through book-entry
transfer into the Exchange Agent's accounts at the book-entry transfer facility,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth on the back cover page
of this Prospectus on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not
permit a Letter of Transmittal or Debentures to reach the Exchange Agent before
the Expiration Date or the procedure for book-entry transfer cannot
39
<PAGE> 43
be completed on a timely basis, a tender may be effected if the Exchange Agent
has received at its office listed on the back cover hereof on or prior to the
Expiration Date a letter, telegram or facsimile transmission (receipt confirmed
by telephone and an original delivered by guaranteed overnight courier) from an
Eligible Institution setting forth the name and address of the tendering holder,
the names in which the Debentures are registered and, if possible, the
certificate numbers of the Debentures to be tendered, and stating that the
tender is being made thereby and guaranteeing that within five New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, the Debentures, in proper
form for transfer (or a confirmation of book-entry transfer of such Debentures
into the Exchange Agent's account at the book-entry transfer facility), will be
delivered by such Eligible Institution together with a properly completed and
duly executed Letter of Transmittal (and any other required documents). Unless
Debentures being tendered by the above-described method are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
Holdings may, at its option, reject the tender. Copies of a Notice of Guaranteed
Delivery which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i)
the tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Debentures (or a confirmation of book-entry transfer of such
Debentures into the Exchange Agent's account at the book-entry transfer
facility) is received by the Exchange Agent, or (ii) a Notice of Guaranteed
Delivery or letter, telegram or facsimile transmission to similar effect (as
provided above) from an Eligible Institution is received by the Exchange Agent.
Issuances of Exchange Debentures in exchange for Debentures tendered pursuant to
a Notice of Guaranteed Delivery or letter, telegram or facsimile transmission to
similar effect (as provided above) by an Eligible Institution will be made only
against deposit of the Letter of Transmittal (and any other required documents)
and the tendered Debentures.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Debentures will be
determined by Holdings, whose determination will be final and binding. Holdings
reserves the absolute right to reject any or all tenders not in proper form or
the acceptance for exchange of which may, in the opinion of Holdings' counsel,
be unlawful. Holdings also reserves the absolute right to waive any of the
conditions of the Exchange Offer or any defect or irregularity in the tender of
any Debentures. None of Holdings, the Exchange Agent or any other person will be
under any duty to give notification of any defects or irregularities in tenders
or incur any liability for failure to give any such notification.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Debentures for exchange (the "Transferor")
exchanges, assigns and transfers the Debentures to Holdings and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Debentures to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Debentures, and to
acquire Exchange Debentures issuable upon the exchange of such tendered
Debentures, and that, when the same are accepted for exchange, Holdings will
acquire good and unencumbered title to the tendered Debentures free and clear of
all liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The Transferor also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or Holdings to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Debentures or transfer ownership of such Debentures on the account
books maintained by a book-entry transfer facility. The Transferor further
agrees that acceptance of any tendered Debentures by Holdings and the issuance
of Exchange Debentures in exchange therefor shall constitute performance in full
by Holdings of its obligations under the Registration Rights Agreement and that
Holdings shall have no further obligations or liabilities thereunder except as
provided in Section 7 of said agreement. All authority conferred by the
Transferor will survive the death or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
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<PAGE> 44
The Transferor certifies that neither it nor any beneficial owner of
the Exchange Debentures is an "affiliate" of Holdings within the meaning of Rule
405 under the Act and that it and any beneficial owner is acquiring the Exchange
Debentures offered hereby in the ordinary course of business and that such
Transferor has no arrangement or understanding with any person to participate in
the distribution of such Exchange Debentures. Each Transferor which is a
broker-dealer receiving Exchange Debentures for its own account must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Debentures. By so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Act. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Exchange
Debentures received in exchange for Debentures where such Debentures were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. Holdings will, for a period of 180 days after the Expiration
Date, make this Prospectus available to any broker-dealer for use in connection
with any such resale.
WITHDRAWAL RIGHTS
Tenders of Debentures pursuant to the Exchange Offer are irrevocable,
except that Debentures tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date.
To be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must be timely received by the Exchange Agent
at its address set forth on the back cover of this Prospectus, and with respect
to a facsimile transmission, must be confirmed by telephone and an original
delivered by guaranteed overnight delivery. Any such notice of withdrawal must
specify the person named in the Letter of Transmittal as having tendered
Debentures to be withdrawn, the certificate numbers of Debentures to be
withdrawn, the principal amount of Debentures to be withdrawn, a statement that
such holder is withdrawing his election to have such Debentures exchanged, and
the name of the registered holder of such Debentures, and must be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to Holdings that the person withdrawing the tender has succeeded to
the beneficial ownership of the Debentures being withdrawn. The Exchange Agent
will return the properly withdrawn Debentures promptly following receipt of
notice of withdrawal. If Debentures have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at the book-entry transfer facility to be credited with
the withdrawn Debentures or otherwise comply with the book-entry transfer
facility procedure. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by Holdings and such determination
will be final and binding on all parties.
ACCEPTANCE OF DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE DEBENTURES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Debentures validly tendered and not withdrawn and
issuance of the Exchange Debentures will be made on the Exchange Date. For the
purposes of the Exchange Offer, Holdings shall be deemed to have accepted for
exchange validly tendered Debentures when, as and if Holdings has given written
notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of
Debentures for the purposes of receiving Exchange Debentures from Holdings and
causing the Debentures to be assigned, transferred and exchanged. Upon the terms
and subject to the conditions of the Exchange Offer, delivery of Exchange
Debentures to be issued in exchange for accepted Debentures will be made by the
Exchange Agent promptly after acceptance by Holdings of the tendered Debentures.
Tendered Debentures not accepted for exchange by Holdings will be returned
without expense to the tendering holders promptly following the Expiration Date
or, if Holdings terminates the Exchange Offer prior to the Expiration Date,
promptly after the Exchange Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, Holdings will not be required to issue Exchange
Debentures in respect of any properly tendered Debentures not previously
accepted and may terminate the Exchange Offer (by oral or written notice to the
Exchange Agent and by
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<PAGE> 45
timely public announcement communicated, unless otherwise required by applicable
law or regulation, by making a release to the Dow Jones News Service), or, at
its option, modify or otherwise amend the Exchange Offer, if either of the
following events occur:
(a) any law, rule or regulation or applicable interpretations of the
staff of the Commission which, in the good faith determination of Holdings,
do not permit Holdings to effect the Exchange Offer; or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Debentures issued
pursuant to the Exchange Offer in exchange for Debentures to be offered for
resale, resold and otherwise transferred by holders thereof (other than any
such holder which is an "affiliate" of Holdings within the meaning of Rule
405 under the Act) without compliance with the registration and prospectus
delivery provisions of the Act provided that such Exchange Debentures are
acquired in the ordinary course of such holders' business and such holders
have no arrangement with any person to participate in the distribution of
such Exchange Debentures.
Holdings expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Debentures upon the occurrence of either of the
foregoing conditions (which represent all of the material conditions to the
acceptance by Holdings of properly tendered Debentures). In addition, Holdings
may amend the Exchange Offer at any time prior to the Expiration Date if either
of the conditions set forth above occur. Moreover, regardless of whether either
of such conditions has occurred, Holdings may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the
Debentures.
The foregoing conditions are for the sole benefit of Holdings and may
be waived by Holdings, in whole or in part, in its sole discretion, subject to
the rules and regulations of the Commission, provided that such waiver is, in
its good faith judgment, advantageous to holders of the Debentures. Any
determination made by Holdings concerning an event, development or circumstance
described or referred to above will be final and binding on all parties.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the
Exchange Agent for the Exchange Offer. Letters of Transmittal must be addressed
to the Exchange Agent at its address set forth on the back cover page of this
Prospectus. United States Trust Company of New York, also acts as Trustee under
the Debenture Indenture.
Delivery to an address other than as set forth herein, or transmissions
of instructions via a facsimile or telex number other than the ones set forth
herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
Holdings has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. Holdings
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. Holdings will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this and related documents to the
beneficial owners of the Debentures and in handling or forwarding tenders for
their customers.
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by Holdings. Neither the delivery
of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of Holdings since the respective dates as of which information is given
herein. The Exchange Offer is not being made to (nor will tenders be accepted
for or on behalf of) holders of Debentures in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with
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<PAGE> 46
the laws of such jurisdiction. However, Holdings may, at its discretion, take
such action as it may deem necessary to make the Exchange Offer in any such
jurisdiction and extend the Exchange Offer to holders of Debentures in such
jurisdiction. In any jurisdiction in which the securities laws or the blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of Holdings by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Debentures are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Debentures pursuant to the terms of, this Exchange Offer,
Holdings will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Debentures who do not tender their certificates in the
Exchange Offer will continue to hold such certificates and will be entitled to
all the rights, and limitations applicable thereto, under the Debenture
Indenture, except for any such rights under the Registration Rights Agreement
which by their terms terminate or cease to have further effectiveness as a
result of the making of this Exchange Offer. See "Description of the Exchange
Debentures." All untendered Debentures will continue to be subject to the
restrictions on transfer set forth in the Debenture Indenture.
Holdings may in the future seek to acquire untendered Debentures in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. Holdings has no present plan to acquire any Debentures
which are not tendered in the Exchange Offer.
DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures will be issued under an Indenture, dated as of
December 1, 1993, as supplemented by the First Supplemental Indenture thereto,
dated as of March 13, 1996 (the "Debenture Indenture"), between the Company and
United States Trust Company of New York as trustee (the "Debenture Trustee").
The terms of the Exchange Debentures will be identical in all respects to the
terms of the Debentures and to the $88,557,000 aggregate principal amount of
Series B Securities (as defined in the Debenture Indenture) issued on March 16,
1994 under the Debenture Indenture (the "Existing Series B Debentures"). The
following summaries of certain provisions of the Exchange Debentures and the
Debenture Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Exchange
Debentures and the Debenture Indenture, respectively, including the definitions
therein of certain terms. Particular provisions and defined terms referred to in
the following summaries refer to and incorporate by reference the provisions and
defined terms of the Debenture Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Debentures, together with the Debentures and the Existing
Series B Debentures, are limited in aggregate principal amount to $105,887,000.
The Exchange Debentures will be issued only in fully registered form without
coupons in denominations of $1,000 and any integral multiple thereof.
The Exchange Debentures will mature on December 15, 2005. No interest
on the Exchange Debentures will accrue until December 15, 1998. Interest on the
Exchange Debentures will accrue thereafter at the rate of 14% per annum and will
be payable semi-annually on each June 15 and December 15, commencing on June 15,
1999 to the holders of record of the Exchange Debentures (the "Holders") at the
close of business on the immediately preceding June 1 and December 1.
Principal of, premium, if any, and interest on the Exchange Debentures
will be payable, and the Exchange Debentures may be presented for registration
of transfer or exchange, at the corporate trust office of the Debenture Trustee
or such other office or agency of the Company as may be designated by the
Company for such purpose. At
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<PAGE> 47
the option of the Company, payment of interest may be made by check mailed to
the Holders at their respective addresses set forth in the register of Holders
of Exchange Debentures.
MANDATORY REDEMPTION
Except as set forth below under "Change of Control" and "Certain
Covenants--Limitation on Sale of Assets," the Company will not be required to
make mandatory redemption payments with respect to the Exchange Debentures.
OPTIONAL REDEMPTION AND PREPAYMENT
Except as set forth herein, the Exchange Debentures will not be
redeemable at the Company's option prior to December 15, 1998. Thereafter, the
Exchange Debentures will be subject to redemption at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on December 15 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------
<S> <C>
1998 107.0%
1999 103.5%
2000 and thereafter 100.0%
</TABLE>
SELECTION AND NOTICE
In case of a partial redemption, selection of the Exchange Debentures
or portions thereof for redemption shall be made by the Debenture Trustee by
lot, pro rata or in such manner as it shall deem appropriate and fair and in
such manner as complies with any applicable legal requirements. Exchange
Debentures may be redeemed in part in multiples of $1,000 principal amount only.
Notice of redemption will be sent, by first class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to each Holder whose Exchange Debentures are to be redeemed at the last address
for such Holder then shown on the registry books. If any Debenture is to be
redeemed in part only, the notice of redemption that relates to such Debenture
shall state the portion of the principal amount thereof to be redeemed. A new
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Debenture. On and after any redemption date, interest will cease to accrue on
the Exchange Debentures or part thereof called for redemption as long as the
Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Debenture Indenture.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence being
a "Change of Control Date"), the Company shall notify the Holders in writing of
such occurrence and shall make an offer to purchase for cash (a "Change of
Control Offer"), on a business day (a "Change of Control Payment Date") not
later than 70 days following the Change of Control Date, all Exchange Debentures
then outstanding at a purchase price (the "Change of Control Purchase Price")
equal to 101% of the Accreted Value thereof to the Change of Control Payment
Date (if prior to December 15, 1998) or 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the Change of Control Payment Date
(if on or after December 15, 1998). Notice of a Change of Control Offer shall be
mailed by the Company not less than 30 days nor more than 40 days before the
Change of Control Payment Date. The Change of Control Offer is required to
remain open for at least 20 business days and until the close of business on the
Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Exchange Debentures that might be delivered
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<PAGE> 48
by Holders seeking to accept the Change of Control Offer. In addition, the
covenants contained in the Debenture Indenture would not necessarily afford
holders of the Exchange Debentures protection in the event of a highly leveraged
transaction or a takeover, recapitalization or similar restructuring involving
the Company which may adversely affect holders of the Exchange Debentures.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of the Exchange Debentures
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the Debenture Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Change of Control" provisions of the Debenture Indenture
by virtue thereof.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company will not, directly or
indirectly, (a) declare or pay any dividend or make any distribution on its
Capital Stock, or otherwise, to its shareholders (other than dividends or
distributions payable in its Qualified Capital Stock), (b) purchase, redeem or
otherwise acquire or retire for value, or permit any Subsidiary to purchase,
redeem or otherwise acquire for value, any Qualified Capital Stock of the
Company (including any warrants, rights or options to purchase or acquire shares
of any class of such Capital Stock but excluding exchangeable or convertible
Indebtedness of such person), other than through the issuance in exchange
therefor solely of Qualified Capital Stock of the Company, (c) redeem,
repurchase, defease, or otherwise acquire or retire for value, or permit any of
its Subsidiaries to, directly or indirectly, redeem, repurchase, defease, or
otherwise acquire or retire for value, prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, Indebtedness of the
Company that is subordinate in right of payment to the Debentures or the
Exchange Debentures or (d) make, or permit any of its Subsidiaries to make, any
Investment (excluding any Permitted Investment) (each of the foregoing actions
set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or Event of Default shall have occurred and be
continuing, (ii) immediately after such Restricted Payment and after giving
effect thereto on a pro forma basis, the Company could not incur at least $1.00
of additional Indebtedness pursuant to the first paragraph of the "Limitation on
Incurrence of Additional Indebtedness" covenant (without giving effect to the
second paragraph thereof), or (iii) such Restricted Payment, together with all
other Restricted Payments subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, shall be the fair market value of such
property as determined in good faith by senior management of the Company or, if
the market value of such property exceeds $1,000,000, by the Board of Directors
(which determination shall be evidenced by a Board Resolution)) shall exceed the
sum of:
(1) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss) of the Company earned from the beginning of the first fiscal
quarter commencing after the Issue Date to the date of such Restricted
Payment (treating such period as a single accounting period); and
(2) 100% of the aggregate Net Cash Proceeds received by the
Company from any person (other than a Subsidiary) from the issuance and
sale after the Issue Date of Qualified Capital Stock (excluding (A)
Qualified Capital Stock paid as a dividend on any Capital Stock or as
interest on any Indebtedness and (B) any Net Cash Proceeds from
issuances and sales of Qualified Capital Stock financed directly or
indirectly using funds borrowed from the Company or any Subsidiary,
until and to the extent such borrowing is repaid).
The foregoing provisions shall not prohibit:
(1) the payment of any dividend within 60 days after the date
of its declaration if the dividend would have been permitted on the
date of declaration;
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<PAGE> 49
(2) the acquisition, redemption or retirement of any shares of
Capital Stock of the Company or the repayment of any Indebtedness of
the Company in exchange for or solely out of the proceeds of the
substantially concurrent sale (other than to a Subsidiary) of shares of
Qualified Capital Stock;
(3) any payments by the Company to repurchase its Common Stock
from employees of the Company or any of its Subsidiaries (or their
respective estates or heirs) pursuant to the terms of the Common Stock
Subscription Agreements (or the Stock Option Plan); provided that such
payments shall not exceed in the aggregate $1,000,000 in any Yearly
Period (provided that any unused amounts may be carried over to the
immediately succeeding Yearly Period); provided, however, that in
addition to the foregoing, the Company may repurchase its Common Stock
pursuant to the terms of the Common Stock Subscription Agreements (or
the Stock Option Plan) through the issuance of debt securities in an
aggregate principal amount outstanding at any time of up to $2,000,000
and having the maturity, interest rate and subordination provisions
referred to in the Common Stock Subscription Agreements as in effect on
the Issue Date; and provided, further, that, for purposes of this
clause (3) only, the aggregate cash purchase price paid by the Company
to repurchase such Common Stock shall be deemed to have been reduced by
the amount, if any, of cash proceeds received by the Company subsequent
to the Issue Date from the sale or resale of Common Stock to employees
of the Company or any of its Subsidiaries;
(4) the refinancing, refunding, replacement or exchange of
Indebtedness of the Company incurred after the Issue Date which by its
terms is subordinate in right and priority of payment to the prior
performance and payment in full of the Indebtedness under the Debenture
Indenture and the Debentures and the Exchange Debentures for
Disqualified Capital Stock of the Company or for other Indebtedness of
the Company incurred after the Issue Date which is also so
subordinated; provided that such Disqualified Capital Stock or
subordinated Indebtedness was incurred in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant;
(5) payments to repurchase Common Stock with the proceeds of
key-man life insurance from the estate or heirs of Anwar S. Soliman and
Ralph S. Roberts; and
(6) the payment of cash dividends on any Preferred Stock of
the Company issued in exchange for, or in order to refinance,
Indebtedness as to which cash interest was payable at the time of such
exchange or refinancing, provided that the Fixed Charge Coverage Ratio
at the time of and after giving effect to any such dividend payment is
equal to or greater than 1.75 to 1.0;
provided that (A) in the case of clauses (2) through (6), no Default or Event of
Default shall have occurred and be continuing at the time of such payment or as
a result thereof and (B) in the case of clause (1), such dividends are declared
and paid in accordance with the Company's Certificate of Incorporation and
applicable law.
In determining the aggregate amount of Restricted Payments permissible
under clause (iii) of the first paragraph hereunder, amounts expended, incurred
or outstanding pursuant to clauses (1), (3) and (6) of the immediately preceding
paragraph shall be included as Restricted Payments and amounts expended,
incurred or outstanding pursuant to clauses (2), (4) and (5) of the immediately
preceding paragraph shall not be included as Restricted Payments.
Limitation on Incurrence of Additional Indebtedness. The Company will
not, and will not permit any of its Subsidiaries to, after the Issue Date,
directly or indirectly, incur, assume, guarantee, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for the payment of
(collectively, "incur") any Indebtedness; provided, however, that the Company or
any Subsidiary may incur Indebtedness if (A) no Default or Event of Default
shall have occurred and be continuing at the time of or as a consequence of the
incurrence of such Indebtedness and (B) on the date of the incurrence of such
Indebtedness, the Fixed Charge Coverage Ratio of the Company would be greater
than or equal to 2.25 to 1.0.
Notwithstanding the foregoing, the Company and its Subsidiaries may
incur (i) Indebtedness of ARG and its Subsidiaries under the Credit Facility and
any refinancing, refunding, replacement or extension thereof in an
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<PAGE> 50
aggregate principal amount at any time outstanding not to exceed $26 million
(plus obligations for related payments for early termination, interest, fees,
expenses and indemnities and other amounts payable thereunder or in connection
therewith); (ii) Indebtedness evidenced by the Senior Secured Notes; (iii)
Indebtedness evidenced by the Debentures and the Exchange Debentures; (iv)
purchase money Indebtedness incurred in the ordinary course of business, or
Indebtedness incurred for Capital Expenditures directly related to the
restaurant business of the Company and its Subsidiaries not to exceed
$10,000,000 in the aggregate; (v) intercompany Indebtedness between and among
the Subsidiaries and the Company; (vi) other Indebtedness existing on the Issue
Date as in effect on the Issue Date (after giving affect to the application of
the Net Proceeds of the Offerings); (vii) Indebtedness incurred for Capitalized
Leases and any renewals, extensions, refinancings or replacements thereof;
provided that (a) such Capitalized Leases are directly related to the restaurant
business of the Company and its Subsidiaries, (b) the aggregate principal amount
incurred pursuant to this clause (vii) in any Yearly Period shall not exceed
$5,000,000 (provided that any unused amounts may be carried over to the next two
(but not any subsequent) Yearly Periods) and (c) the aggregate principal amount
incurred pursuant to this clause (vii) at any time outstanding shall not exceed
$20,000,000; (viii) Mortgage Indebtedness; provided, that such Mortgage
Indebtedness may, at the option of the Company, be incurred by a Mortgage
Subsidiary; and provided, further, (a) the loan-to-value ratio is not less than
60% and not more than 100% for properties owned in fee at the time of issuance;
and (b) the Net Cash Proceeds of Mortgage Indebtedness with respect thereto are
used to make an Asset Sale Offer if required by the covenant "Limitation on Sale
of Assets"; (ix) Indebtedness in the form of promissory notes issued to a
financing subsidiary of an insurance company in connection with the furnishing
of credit support for workers' compensation and general liability obligations;
provided that such Indebtedness is not, and is not required by GAAP to be,
reflected on the balance sheet of the Company or any of its Subsidiaries; (x)
Indebtedness of the Company pursuant to promissory notes issued in accordance
with a Common Stock Subscription Agreement to repurchase Common Stock from an
employee of the Company or any Subsidiary pursuant to such Agreement; (xi)
Indebtedness under letters of credit (other than Letter of Credit Obligations);
provided that such letters of credit are issued in connection with furnishing of
credit support for (a) workers' compensation, insurance and general liability
obligations of the Company or any Subsidiary or (b) the performance, payment,
deposit or surety obligations of the Company or any Subsidiary, and in the case
of obligations under this clause (b) if required by law or governmental rule or
regulation or in accordance with the custom and practice in the restaurant
industry; provided, further, that such obligations are not for money borrowed;
(xii) Indebtedness of a Subsidiary of the Company which is Acquired Indebtedness
to the extent that such Indebtedness could have been incurred by the Company
pursuant to the immediately preceding paragraph; (xiii) Interest Swap
Obligations; provided that the stated notional amount of such Interest Swap
Obligations does not exceed the principal amount of floating rate Indebtedness
of the Company or the Subsidiary to which such Interest Swap Obligations relate;
(xiv) any Refinancing Indebtedness and (xv) Indebtedness not otherwise expressly
permitted by clauses (i) through (xiv) above in an aggregate principal amount
not to exceed $25,000,000 at any one time.
Limitation on Transactions with Affiliates and Significant
Stockholders. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of, an
Affiliate or Significant Stockholder (or any Affiliate of such Significant
Stockholder) of the Company or any Subsidiary (an "Affiliate Transaction"),
other than (i) Affiliate Transactions (including lease transactions) that are
fair to the Company or such Subsidiary, as the case may be, and on terms at
least as favorable as might reasonably have been obtainable at such time from an
unaffiliated party; provided that, if any such Affiliate Transaction involves or
has a value of more than $1,000,000, the determination that such Affiliate
Transaction is fair to the Company or such Subsidiary, as the case may be, and
is on terms at least as favorable as might reasonably have been obtainable at
such time from an unaffiliated party must be made reasonably and in good faith
by the Board of Directors of the Company or such Subsidiary, as the case may be,
which determination shall be evidenced by a Board Resolution; provided, further,
that if an Affiliate Transaction or series of related Affiliate Transactions
involves or has a value of more than $10,000,000 the Company or such Subsidiary,
as the case may be, must receive an opinion from an Independent Financial
Advisor, to the effect that the financial terms of such Affiliate Transaction
are fair to the Company or such Subsidiary, as the case may be, from a financial
point of view, (ii) any Restricted Payment that is made in compliance with the
provisions of the "Limitation on Restricted Payments" covenant, (iii) reasonable
and customary fees and compensation paid to, and indemnity provided on behalf
of, officers, directors, employees or consultants of the Company or any
Subsidiary, as determined by the Board of Directors of the Company or any
Subsidiary or the senior management thereof in good faith, (iv) transactions
exclusively between
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or among the Company and any of its Subsidiaries or exclusively between or among
such Subsidiaries, provided such transactions are not otherwise prohibited by
the Debenture Indenture, (v) any agreement as in effect as of the Issue Date or
any amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) so long as any such amendment is not
disadvantageous to the Debentureholders in any material respect, (vi) the
existence of, or the performance by the Company or any of its Subsidiaries of
its obligations under the terms of, any Common Stock Subscription Agreement or
other stockholder agreement or any stock option or incentive plan (including any
registration rights agreement or purchase agreement related thereto) to which it
is a party as of the Issue Date and any similar agreements which it may enter
into thereafter; provided, however, that the performance by the Company or any
of its Subsidiaries of obligations under any future amendment to any such
existing agreement or under any similar agreement entered into after the Issue
Date shall only be permitted by this clause (vi) to the extent that the terms of
any such amendment or new agreement are not otherwise disadvantageous to the
Debentureholders in any material respect, or (vii) transactions permitted by,
and complying with, the provisions of the "Limitations on Mergers,
Consolidations or Sales of Assets" covenant.
Limitation on Payment Restrictions Affecting Subsidiaries. The Company
will not, and will not permit any Subsidiary to, directly or indirectly, create
or suffer to exist, or allow to become effective, any Payment Restriction with
respect to any of its Subsidiaries, except for (a) any such restrictions
contained in (i) the Credit Facility and the documents related thereto as in
effect on the Issue Date, as any such Payment Restriction may apply to any
present or future Subsidiary, (ii) Indebtedness of any Subsidiary existing on
the Issue Date and the documents relating thereto, in each case, as in effect on
the Issue Date, (iii) the Debenture Indenture, (iv) the Senior Secured Note
Indentures, as in effect on the Issue Date, (v) Indebtedness of a person
existing at the time such person becomes a Subsidiary; provided that (x) such
Indebtedness is not incurred in connection with, or in contemplation of, such
person becoming a Subsidiary, (y) such restriction is not applicable to any
person, or the properties or assets of any person, other than the person so
acquired and (z) such Indebtedness is otherwise permitted to be incurred
pursuant to the "Limitation on Incurrence of Additional Indebtedness" covenant
and (vi) secured Indebtedness otherwise permitted to be incurred pursuant to the
"Limitation on Incurrence of Additional Indebtedness" covenant that limits the
right of the debtor to dispose of the assets securing such Indebtedness; (b)
customary non-assignment provisions restricting subletting or assignment of any
lease or assignment of any contract of any Subsidiary; (c) customary net worth
provisions contained in leases and other agreements entered into by a Subsidiary
of the Company in the ordinary course of business; (d) customary restrictions
with respect to a Subsidiary of the Company pursuant to an agreement that has
been entered into for the sale or disposition of any of the Capital Stock or
assets of such Subsidiary; (e) customary provisions in instruments or agreements
relating to any Lien prohibiting the transfer of the property subject to such
Lien; (f) restrictions contained in documents relating to Indebtedness incurred
to refinance, refund, extend or renew Indebtedness referred to in clause (a)
above or amendments to documents relating to the Indebtedness referred to in
clause (a) above; provided that the restrictions contained therein relating to
the payment of dividends by such Subsidiaries are not materially less favorable
to the Holders than those provided for in such Indebtedness being refinanced,
refunded, extended, renewed or amended; and (g) restrictions contained in
documents relating to other Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided that
the restrictions contained therein relating to the payment of dividends by such
Subsidiaries are not materially less favorable to the Holders than those
provided for in the Credit Facility as in effect on the Issue Date.
Limitation on Liens. The Company shall not create, incur, assume or
suffer to exist any Liens upon any of its assets other than Liens to secure
Indebtedness which is pari passu with the Debentures and the Exchange Debentures
so long as the Debentures are secured on an equal and ratable basis with such
Indebtedness. Notwithstanding the foregoing, the Company shall be permitted to
incur, assume or suffer to exist (i) Permitted Liens; (ii) Liens existing on the
Issue Date; (iii) Liens to secure Indebtedness which is incurred to renew,
extend, replace or refinance Indebtedness secured by a Lien on any property or
asset of the Company and which is permitted to be incurred pursuant to the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided that
such Liens do not extend to or cover any property or asset other than the
property or asset securing the Indebtedness being renewed, extended, replaced or
refinanced; (iv) Liens with respect to Acquired Indebtedness permitted to be
incurred under the "Limitation on Incurrence of Additional Indebtedness"
covenant; provided that such Liens secured such Acquired Indebtedness at the
time of the incurrence of such Acquired Indebtedness by the Company and were not
incurred in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company;
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and provided, further, that such Liens do not extend to or cover any property or
assets of the Company other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company; (v) Liens in favor of the Debenture
Trustee; (vi) Liens not otherwise permitted hereby which secure Indebtedness or
other obligations permitted to be incurred hereunder not exceeding $5,000,000 in
the aggregate at any one time; (vii) Liens on cash collateral consisting solely
of borrowed money evidenced by the promissory notes referred to in clause (ix)
of the second paragraph of the "Limitation on Incurrence of Additional
Indebtedness" covenant securing obligations relating to the credit support
arrangements referred to therein; and (viii) any replacement, extension or
renewal, in whole or in part, of any Lien described in the foregoing clauses (i)
through (vii); provided that if any such clauses limit the amount secured or the
assets subject to such Liens, no extension or renewal shall increase the amount
or the assets subject to such Liens. Notwithstanding anything to the contrary
herein, the Company will not create, incur, assume, or suffer to exist any Lien
on any of the Capital Stock of ARG owned by the Company.
Limitation on Sale of Assets. The Company will not, and will not permit
any of its Subsidiaries to, consummate any Asset Sale, unless (i) the Company or
the applicable Subsidiary receives consideration at the time of such Asset Sale
at least equal to the fair market value of the assets sold or otherwise disposed
of (as determined in good faith by senior management of the Company, or if the
aggregate fair market value of all non-cash consideration (other than Cash
Equivalents) received by the Company or such Subsidiary, as the case may be,
from such Asset Sale shall be greater than $2,000,000 but less than $5,000,000
by the Board of Directors of the Company or, if the aggregate fair market value
of all non-cash consideration (other than Cash Equivalents) received by the
Company or such Subsidiary, as the case may be, from any such Asset Sale shall
be $5,000,000 or greater, as determined in good faith by an Independent
Financial Advisor) and (ii) except in the case of Asset Sales with respect to
one or more Designated Restaurants, at least 75% of the consideration received
by the Company or such Subsidiary, as the case may be, from such Asset Sale
shall be cash or Cash Equivalents. Nothing in this covenant shall have the
effect of prohibiting any transaction expressly permitted by the "Limitation on
Mergers, Consolidations or Sales of Assets" covenant.
Upon the date of consummation of any Asset Sale or upon receipt of Net
Cash Proceeds of Mortgage Indebtedness (the date of such consummation or
receipt, a "Consummation Date"), the Net Cash Proceeds thereof shall be applied
by the Company or such Subsidiary within 270 days of the relevant Consummation
Date at its election to either: (i) the payment of amounts outstanding under
Indebtedness of the Company or a Subsidiary, or (ii) a Related Business
Investment, or (iii) a combination of payment and investment permitted by the
foregoing clauses (i) and (ii). On the earlier of (A) the 271st day after a
Consummation Date or (B) such date as the Board of Directors of the Company or
of such Subsidiary determines (as evidenced by a Board Resolution) not to apply
such Net Cash Proceeds as set forth in clauses (i)-(iii) of the next preceding
sentence (each of (A) and (B), a "Net Proceeds Offer Trigger Date"), the
aggregate amount of Net Cash Proceeds which have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (i), (ii) and (iii)
of the next preceding sentence (the "Net Proceeds Offer Amount") shall be
applied by the Company or such Subsidiary to make an offer to purchase for cash
(the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not
less than 30 nor more than 60 days following the applicable Net Proceeds Offer
Trigger Date, from all Holders on a pro rata basis Debentures and Exchange
Debentures with an Accreted Value or principal amount, as the case may be, equal
to the Net Proceeds Offer Amount at a price equal to 100% of the Accreted Value,
if the Net Proceeds Offer Payment Date is prior to December 15, 1998, or 100% of
principal amount, if the Net Proceeds Offer Payment Date is subsequent to
December 15, 1998, of the Debentures or Exchange Debentures to be repurchased,
plus accrued and unpaid interest, if any, thereon to the date of repurchase.
Notwithstanding the foregoing, if a Net Proceeds Offer Amount is less than $5
million, the application of the Net Cash Proceeds constituting such Net Proceeds
Offer Amount to a Net Proceeds Offer may be deferred until such time as such Net
Proceeds Offer Amount plus the aggregate amount of all Net Proceeds Offer
Amounts arising from all subsequent Asset Sales and incurrences of Mortgage
Indebtedness by the Company and its Subsidiaries aggregates at least $5 million,
at which time the Company or such Subsidiary shall apply all Net Cash Proceeds
constituting all Net Proceeds Offer Amounts that have been so deferred to make a
Net Proceeds Offer (the first date the aggregate of all such deferred Asset Sale
Offer Amounts is equal to $5 million or more shall be deemed to be a "Net
Proceeds Offer Trigger Date").
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Any Net Cash Proceeds remaining after the purchase of Debentures and
Exchange Debentures on any Net Proceeds Offer Purchase Date shall become general
unrestricted funds of the Company and its Subsidiaries, and may be applied
without regard to the restrictions described in this "Limitation on Sale of
Assets" covenant or clause (viii) of the "Limitations on Incurrence of
Additional Indebtedness" covenant.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
person in a transaction permitted under the covenant "Limitation on Mergers,
Consolidations or Sales of Assets" below, the successor corporation shall be
deemed to have sold the properties and assets of the Company and its
Subsidiaries not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale.
Each Net Proceeds Offer will be mailed to the record Holders as shown
on the register of Holders within 10 days following the Net Proceeds Offer
Trigger Date, with a copy to the Debenture Trustee, and shall comply with the
procedures set forth in the Debenture Indenture. Upon receiving notice of the
Net Proceeds Offer, Holders may elect to tender their Debentures or Exchange
Debentures in whole or in part in integral multiples of $1,000 principal amount
at maturity in exchange for cash. To the extent Holders properly tender
Debentures and Exchange Debentures in an aggregate amount exceeding the Net
Proceeds Offer Amount, Debentures and Exchange Debentures of tendering Holders
will be repurchased on a pro rata basis (based on amounts tendered). A Net
Proceeds Offer shall remain open for a period of 20 business days or such longer
period as may be required by law.
If an offer is made to repurchase the Debentures and Exchange
Debentures pursuant to a Net Proceeds Offer, the Company will and will cause its
Subsidiaries to comply with all tender offer rules under state and Federal
securities laws, including, but not limited to, Section 14(e) under the Exchange
Act and Rule 14e-1 thereunder, to the extent applicable to such offer.
Limitation on Issuance of Preferred Stock by Subsidiaries. The Company
will not permit any Subsidiary to issue any Preferred Stock or to have
outstanding any shares of Preferred Stock, except (a) issuances of Preferred
Stock to the Company or a Wholly-Owned Subsidiary of the Company; provided that
the Company or such Wholly-Owned Subsidiary at all times is the sole beneficial
and record owner of such Preferred Stock and (b) Preferred Stock issued in
accordance with the "Limitation on Incurrence of Additional Indebtedness"
covenant.
Restriction on Sale and Issuance of ARG Stock. The Company will not
permit ARG to issue any of its Capital Stock (including any rights, options or
warrants with respect thereto), or any securities convertible into or
exchangeable or exercisable for its Capital Stock, to any person other than the
Company or one or more of its Wholly-Owned Subsidiaries nor permit any person
(other than the Company or one or more of its Wholly-Owned Subsidiaries) to own
or hold any Capital Stock of ARG. In the event any Wholly-Owned Subsidiary which
holds Capital Stock of ARG shall cease to be a Wholly-Owned Subsidiary, such
event shall be deemed to be the issuance of Capital Stock of ARG to a person
other than the Company or a Wholly-Owned Subsidiary. Nothing in this covenant
shall have the effect of prohibiting any transaction expressly permitted by the
"Limitation on Mergers, Consolidations or Sales of Assets" covenant or the
"Limitation on Issuance of Preferred Stock by Subsidiaries" covenant.
Limitation on Mergers, Consolidations or Sales of Assets. The Company
shall not in a single transaction or through a series of related transactions,
(i) consolidate with or merge with or into any other person, or transfer (by
lease, assignment, sale or otherwise) all or substantially all of its properties
and assets as an entirety or substantially as an entirety to another person or
group of affiliated persons or (ii) adopt a Plan of Liquidation, unless, in
either case, (1) either the Company shall be the continuing person, or the
person (if other than the Company) formed by such consolidation or into which
the Company is merged or to which all or substantially all of the properties and
assets of the Company as an entirety or substantially as an entirety are
transferred (or, in the case of a Plan of Liquidation, any person to which
assets are transferred) (the Company or such other person being hereinafter
referred to as the "Surviving Person") shall be a corporation organized and
validly existing under the laws of the United States, any State thereof or the
District of Columbia, and shall expressly assume, by supplemental indenture,
executed and delivered to the Debenture Trustee, in form satisfactory to the
Debenture Trustee, all the obligations of the Company under the Debentures, the
Exchange Debentures and the Debenture Indenture; (2) except
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in the case of a transaction described in clause (i) or (ii) above between
Holdings and ARG, immediately after giving effect to such transaction on a pro
forma basis, the Surviving Person could incur $1.00 of Indebtedness pursuant to
the first paragraph of the "Limitation on Incurrence of Additional Indebtedness"
covenant (without giving effect to the second paragraph thereof); (3)
immediately before and immediately after giving effect to such transaction and
the assumption of the obligations as set forth in clause (1) above and the
incurrence or anticipated incurrence of any Indebtedness to be incurred in
connection therewith, no Default or Event of Default shall have occurred and be
continuing; and (4) the Company has delivered to the Debenture Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer or adoption and such supplemental indenture
comply with this covenant and that all conditions precedent herein provided
relating to such transaction have been satisfied.
Supplemental Debenture Indentures. The Debenture Indenture permits the
Company and the Debenture Trustee, together, to amend or supplement the
Debenture Indenture or the Debentures and the Exchange Debentures without notice
to or consent of any Holder: (i) to cure any ambiguity, defect or inconsistency;
provided that such amendment or supplement does not adversely affect the rights
of any Holder; (ii) to comply with the "Limitation on Mergers, Consolidations or
Sales of Assets" covenant; (iii) to provide for uncertificated Debentures or
Exchange Debentures in addition to or in place of certificated Debentures or
Exchange Debentures; (iv) to comply with any requirements of the Commission in
connection with the qualification of the Debenture Indenture under the Trust
Indenture Act of 1939, as amended (the "TIA"); or (v) to make any other change
that does not materially adversely affect the rights of any Holders under the
Debenture Indenture. Subject to the absolute and unconditional rights of any
Holder to receive principal, premium, if any, and interest, other modifications,
amendments or supplements to the Debenture Indenture or the Debentures and
Exchange Debentures may be made with the consent of the Holders of not less than
a majority in aggregate principal amount of the then outstanding Debentures and
Exchange Debentures, and such modifications, amendments or supplemental
indentures will be binding on every Holder whether or not such Holder has
consented thereto; provided that no such modification, amendment or supplemental
indenture shall, without the consent of Holders of each outstanding Debenture
and Exchange Debenture affected thereby, among other things, (i) reduce the
aggregate principal amount of Debentures and Exchange Debentures whose Holders
must consent to an amendment, supplement or waiver of any provision of the
Debenture Indenture or the Debentures and Exchange Debentures; (ii) reduce the
rate or extend the time for payment of interest on any Debenture or Exchange
Debenture; (iii) reduce the principal amount of any Debenture or Exchange
Debenture; (iv) change the maturity date of any Debenture or Exchange Debenture,
or alter the optional redemption provisions of the Debenture Indenture, in a
manner adverse to any Holder; (v) make any changes in the provisions concerning
waivers of Defaults or Events of Default by Holders or the rights of Holders to
recover the principal of, interest on, or redemption payment with respect to,
any Debenture or Exchange Debenture; (vi) make the principal of, or the interest
on, any Debenture or Exchange Debenture payable in money other than as provided
for in the Debenture Indenture and the Debentures and Exchange Debentures as in
effect on the Issue Date.
EVENTS OF DEFAULT
The following are Events of Default under the Debenture Indenture:
(i) default in the payment of any interest on the Debentures or the
Exchange Debentures when it becomes due and payable and such default
continues for a period of 30 days or more; or
(ii) the default in the payment of the principal of, or premium, if
any, on any Debenture or Exchange Debenture when the same becomes due and
payable at maturity, upon acceleration, redemption or otherwise (including,
without limitation, the failure to purchase Debentures or Exchange
Debentures tendered pursuant to a Change of Control Offer or Asset Sale
Offer); or
(iii) default in the performance, or breach, of any covenant in the
Debenture Indenture (other than defaults specified in clause (i) or (ii)
above), and continuance of such default or breach for a period of 30 days
after written notice to the Company by the Debenture Trustee or to the
Company and the Debenture Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Debentures and Exchange
Debentures; or
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(iv) failure by the Company or any Subsidiary to perform any term,
covenant, condition, or provision of one or more classes or issues of other
Indebtedness in an aggregate principal amount of $10,000,000 or more, which
failure results in an acceleration of the maturity thereof; or
(v) final judgments not covered by insurance for the payment of money
which in the aggregate at any one time exceeds $10,000,000 shall be rendered
against the Company or any of its Significant Subsidiaries by a court of
competent jurisdiction and shall remain undischarged and unbonded for a
period (during which execution shall not be effectively stayed) of 60 days
after such judgment becomes final and nonappealable; or
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any Significant Subsidiary shall have occurred.
If an Event of Default (other than an Event of Default specified in
clause (vi) above with respect to the Company) occurs and is continuing, then
the Holders of at least 25% in aggregate principal amount of the outstanding
Debentures and Exchange Debentures may, by written notice, and the Debenture
Trustee upon the request of the Holders of not less than 25% in aggregate
principal amount of the outstanding Debentures and Exchange Debentures shall,
declare the Accreted Value of (if prior to December 15, 1998) or all principal
of, premium, if any, and accrued interest on (if on or after December 15, 1998)
the Debentures and the Exchange Debentures to be due and payable immediately.
Upon any such declaration such amounts shall become due and payable immediately.
If an Event of Default specified in clause (vi) above occurs with respect to the
Company and is continuing, then the Accreted Value of (if prior to December 15,
1998) or all principal of, premium, if any, and accrued interest on (if on or
after December 15, 1998) the Debentures and the Exchange Debentures shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Debenture Trustee or any Holder.
After a declaration of acceleration, the Holders of a majority in
aggregate principal amount of outstanding Debentures and Exchange Debentures
may, by notice to the Debenture Trustee, rescind such declaration of
acceleration if all existing Events of Default have been cured or waived, other
than nonpayment or principal of, premium, if any, and accrued interest on the
Debentures and the Exchange Debentures that has become due solely as a result of
such acceleration and if the rescission of acceleration would not conflict with
any judgment or decree. The Holders of a majority in aggregate principal amount
of the outstanding Debentures and the Exchange Debentures also have the right to
waive past defaults under the Debenture Indenture except a default in the
payment of principal of, premium, if any, or interest on any Debenture or
Exchange Debenture, or in respect of a covenant or a provision which cannot be
modified or amended without the consent of all Holders.
No Holder of any of the Debentures or Exchange Debentures has any right
to institute any proceeding with respect to the Debenture Indenture or any
remedy thereunder, unless the Holders of at least 25% in aggregate principal
amount of the outstanding Debentures and the Exchange Debentures have made
written request, and offered reasonable indemnity to the Debenture Trustee to
institute such proceeding as Debenture Trustee, the Debenture Trustee has failed
to institute such proceeding within 30 days after receipt of such notice and the
Debenture Trustee has not within such 30-day period received directions
inconsistent with such written request by Holders of a majority in aggregate
principal amount of the outstanding Debentures and Exchange Debentures. Such
limitations do not apply, however, to a suit instituted by a Holder of a
Debenture or Exchange Debenture for the enforcement of the payment of the
principal of, premium, if any, or accrued interest on, such Debenture or
Exchange Debenture on or after the respective due dates expressed in such
Debenture or Exchange Debenture.
The Holders of a majority in aggregate principal amount of the
outstanding Debentures and Exchange Debentures may direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee, or exercising any trust, or power conferred on the Debenture Trustee.
Subject to certain restrictions, however, the Debenture Trustee may refuse to
follow any directions that conflict with law or the Debenture Indenture.
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DEFEASANCE
The Company may at any time terminate all of its obligations with
respect to the Debentures and the Exchange Debentures ("defeasance"), except for
certain obligations, including those regarding any trust established for a
defeasance and obligations to register the transfer or exchange of the
Debentures and Exchange Debentures, to replace mutilated, destroyed, lost or
stolen Debentures and Exchange Debentures and to maintain agencies in respect of
Debentures and Exchange Debentures. The Company may at any time terminate its
obligations under certain covenants set forth in the Debenture Indenture, some
of which are described under "Certain Covenants" above, and any omission to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Debentures and Exchange Debentures issued under the
Debenture Indenture ("covenant defeasance"). In order to exercise either
defeasance or covenant defeasance, the Company must irrevocably deposit in
trust, for the benefit of the holders of the Debentures and the Exchange
Debentures, with the Debenture Trustee money or U.S. government obligations, or
a combination thereof, in such amounts as will be sufficient to pay the
principal of, and premium, if any, and interest on the Debentures and the
Exchange Debentures to redemption or maturity and comply with certain other
conditions, including the delivery of an opinion as to certain tax matters.
The Debenture Indenture will be discharged and will cease to be of
further effect (except as to surviving rights or registration of transfer or
exchange of Debentures and Exchange Debentures) as to all outstanding Debentures
and Exchange Debentures when either (a) all such Debentures and Exchange
Debentures theretofore authenticated and delivered (except lost, stolen or
destroyed Debentures and Exchange Debentures which have been replaced or paid
and Debentures and Exchange Debentures for whose payment moneys has theretofore
been deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have been
delivered to the Debenture Trustee for cancellation; or (b) (i) all such
Debentures and Exchange Debentures not theretofore delivered to the Debenture
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Debenture Trustee, as
trust funds, an amount of money sufficient to pay and discharge the entire
indebtedness on the Debentures and Exchange Debentures not theretofore delivered
to the Debenture Trustee for cancellation, for principal, premium, if any, and
accrued interest to the date of such deposit; (ii) the Company has paid all sums
payable by it under the Debenture Indenture; and (iii) the Company has delivered
irrevocable instructions to the Debenture Trustee to apply the deposited money
toward the payment of the Debentures and Exchange Debentures at maturity or the
redemption date, as the case may be. In addition, the Company must deliver an
Officer's Certificate and an Opinion of Counsel stating that all conditions
precedent to satisfaction and discharge have been complied with.
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date of determination prior to
December 15, 1998, the sum of (a) the initial offering price of each Debenture
and (b) the portion of the excess of the principal amount of each Debenture over
such initial offering price which shall have been amortized through such date,
such amount to be so amortized on a daily basis and compounded semi-annually on
each June 15 and December 15 at the rate of 14% per annum from the date of
issuance of the Debentures through the date of determination computed on the
basis of a 360-day year of twelve 30-day months. For the purposes of determining
the Accreted Value of the Debentures, the initial offering price thereof shall
be $688.75 per $1,000 principal amount of Debentures and the date of issuance
thereof shall be March 13, 1996.
"Acquired Indebtedness" means Indebtedness of a person or any of its
subsidiaries existing at the time such person becomes a Subsidiary or assumed in
connection with the acquisition of assets from such person (whether by merger,
consolidation, purchase of assets or otherwise) and not incurred by such person
in connection with, or in anticipation or contemplation of, such person becoming
a Subsidiary or such acquisition.
"Affiliate" means, when used with reference to any person, any other
person directly or indirectly controlling, or controlled by, or under direct or
indirect common control with, the referent person or such other person, as the
case may be. For the purposes of this definition, "control" when used with
respect to any specified person means the power to direct or cause the direction
of management or policies of such person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "affiliated,"
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"controlling" and "controlled" have the meanings correlative to the foregoing.
For purposes of "Limitations on Transactions with Affiliates and Significant
Stockholders", the term "Affiliate" shall include any person who, as a result of
any transaction described in "Limitations on Transactions with Affiliates and
Significant Stockholders" would become an Affiliate. Notwithstanding the
foregoing, the term "Affiliate," with respect to the Company and its Affiliates,
shall not include BT Securities Corporation or any of its Affiliates.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Asset Sale" means any sale, lease, assignment or other disposition for
value by the Company or any of its Subsidiaries (including, without limitation,
any Sale/leaseback) to any other person of (i) any of the Capital Stock of any
Subsidiary of the Company owned by the Company or any of its Subsidiaries, (ii)
all or substantially all of the assets of any division or line of business of
the Company or any of its Subsidiaries or (iii) any other assets or rights, or
related group of assets or rights, of the Company or any of its Subsidiaries
having a book value or sales price in excess of $150,000 (it being understood
that if the book value or sales price thereof exceeds $150,000, the entire value
and not just the portion thereof in excess of $150,000 shall be subject to the
"Limitation on Sale of Assets" covenant) other than the trade-in or replacement
of assets for or with assets of comparable value in the ordinary course of
business of the Company and its Subsidiaries, provided that any sale or transfer
of assets (a) from a Subsidiary to the Company or any Wholly-Owned Subsidiary or
(b) made in accordance with the "Limitation on Mergers, Consolidations or Sales
of Assets" covenant shall not constitute an Asset Sale.
"Average Life" means, as of any date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (i) the sum of the products
of the numbers of years (calculated to the nearest one-twelfth) from such date
of determination to the respective dates of each successive scheduled principal
payment in respect of such Indebtedness multiplied by the amount of such
principal payment by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Board of Directors" means, with respect to any person, the board of
directors of such person or any committee of the board of directors of such
person duly authorized, with respect to any particular matter, to exercise the
power of the board of directors of such person.
"Board Resolution" means, with respect to any person, a duly adopted
resolution of the Board of Directors of such person.
"Capital Expenditures" shall mean payments for the Company's and its
Subsidiaries' assets, or improvements, replacements, substitutions or additions
thereto, that have a useful life of more than one year and which, in accordance
with generally accepted accounting principles consistently applied, are required
to be capitalized (as opposed to expensed in the period in which the payment
occurred).
"Capital Lease", as applied to any person, means any lease of any
property (whether real, personal or mixed) by that person as lessee that, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that person.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such person,
together with any warrants, rights or options to purchase or acquire any of the
foregoing.
"Cash Equivalents" means (i) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation or Moody's Investors
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Service, Inc.; (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-2 from Standard & Poor's Corporation or at least P-2 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptance
maturing within one year from the date of acquisition thereof issued by any
commercial bank organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a foreign bank
having at the date of acquisition thereof combined capital and surplus of not
less than $500,000,000; (v) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds substantially all the assets
of which are comprised of securities of the types described in clauses (i)
through (v) above.
"Change of Control" means (i) an event whereby at any time any "person"
or "group" (within the meaning of Section 13(d) and 14(d)(2) of the Exchange
Act), excluding the Permitted Investors and their Affiliates, acquires, in one
or more transactions, (a) beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of more than 50 percent of the total voting power
represented by all then outstanding Capital Stock of the Company ordinarily (and
apart from rights exercisable under certain circumstances) having the right to
vote in the election of directors or (b) the power to elect a majority of the
Board of Directors of the Company or (ii) so long as any Senior Secured Notes
remain outstanding, the occurrence of a "Change of Control" as such term is
defined in the Senior Secured Note Indenture governing such Senior Secured
Notes.
"Common Stock" means the common stock of the Company, par value $.01
per share.
"Common Stock Subscription Agreements" means the Common Stock
Subscription Agreements between the Company and certain officers and executives
of the Company or its Subsidiaries, together with any other agreements entered
into from time to time by the Company and certain officers or executives of the
Company or its Subsidiaries in connection with the acquisition of Common Stock
by such officers or executives, in each case as amended, supplemented or
otherwise modified from time to time.
"Company" means American Restaurant Group Holdings, Inc. until a
successor replaces it pursuant to the Debenture Indenture and thereafter means
such successor.
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of (i) Consolidated Net Income, (ii) provisions for taxes based on
income, (iii) Consolidated Interest Expense, (iv) to the extent Consolidated Net
Income has been reduced thereby, amortization expense, depreciation expense and
other non-cash expenses other than non-cash interest, (v) losses on Asset Sales
and (vi) other non-cash items other than non-cash interest reducing Consolidated
Net Income less the sum (without duplication) of (a) gains on Asset Sales and
(b) other non-cash items increasing Consolidated Net Income, all as determined
on a consolidated basis for the Company and its Subsidiaries in conformity with
GAAP. For the purposes of calculating Consolidated EBITDA pursuant to the
"Limitation on Incurrence of Additional Indebtedness" covenant, amounts
otherwise excluded from Consolidated Net Income pursuant to clause (iii) of the
definition thereof shall be included.
"Consolidated Interest Expense" means, for any period, interest expense
with respect to all outstanding Indebtedness of the Company and its
Subsidiaries, including the net costs associated with Interest Swap Obligations,
for such period determined on a consolidated basis in conformity with GAAP.
"Consolidated Net Income" means, for any period, the net income (or
loss) of the Company and its Subsidiaries, after provisions for taxes, on a
consolidated basis for such period taken as a single accounting period
determined in conformity with GAAP; provided that there shall be excluded (i)
the income (or loss) of any Person (other than the Company or any Subsidiary of
the Company), except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Subsidiaries by such
Person during such period, (ii) the income (or loss) of any Person accrued prior
to the date it becomes a Subsidiary of the Company to the extent that the
declaration or payments of dividends or similar distributions by that Subsidiary
of that income is not at the time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Subsidiary and (iii) the income of
any Subsidiary of the Company to the extent that the declaration or payments of
dividends or similar distributions by that Subsidiary of that income
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is not at the time permitted by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary.
"Credit Facility" means the Credit Agreement, dated as of March 20,
1992, as amended as of the Issue Date, by and among ARG, certain of its
subsidiaries, the Lenders and Bankers Trust Company, as agent, as the same may
be further amended, extended, renewed, restated, supplemented or otherwise
modified (in whole or in part, and without limitation as to amount, terms,
conditions, covenants and other provisions) from time to time, and any agreement
governing Indebtedness incurred to refund, refinance or replace the borrowings
and commitments then outstanding or permitted to be outstanding under such
Credit Agreement or such agreement. The Company shall promptly notify the
Debenture Trustee of any such refunding, refinancing or replacement of the
Credit Facility.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Restaurant" means any restaurant designated by the Company
concurrently with an Asset Sale in respect thereof so long as, for the most
recent period of twelve consecutive calendar months ending more than 30 days
prior to the date of such Asset Sale the net income of such restaurant before
any charge for interest expense, income taxes, depreciation, amortization and
divisional and corporate general and administrative expense was less than zero,
provided, that the maximum number of restaurants so designated shall be limited
to 5 in any Yearly Period and 25 during the term of the Debenture Indenture.
"Disqualified Capital Stock" means, with respect to any person, any
Capital Stock of such person that, by its terms, by the terms of any agreement
related thereto or by the terms of any security into which it is convertible,
puttable or exchangeable, is, or upon the happening of an event or the passage
of time would be, required to be redeemed or repurchased by such person or its
subsidiaries, including at the option of the holder, in whole or in part, or
has, or upon the happening of an event or passage of time would have, a
redemption or similar payment due, on or prior to the Maturity Date, or any
other Capital Stock of such person designated as Disqualified Capital Stock by
such person at the time of issuance; provided, however, that if such Capital
Stock is redeemable or repurchasable solely at the option of such person, such
Capital Stock shall not constitute Disqualified Capital Stock unless so
designated; provided, however, that the existence of the put rights contained in
the Common Stock Subscription Agreements as in effect on the Issue Date hereof
(or as such agreements may be amended from time to time in any manner not
materially adverse to the Holders) shall not render the Common Stock, to which
such agreements relate, as Disqualified Capital Stock.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Fixed Charge Coverage Ratio" means, with respect to any person, the
ratio of (i) the sum of Consolidated EBITDA during the four full fiscal quarters
ending on or prior to the date of the transaction giving rise to the need to
calculate the Fixed Charge Coverage Ratio (the "Transaction Date") to (ii)
Consolidated Interest Expense of such person for the four full fiscal quarters
ending on or prior to the Transaction Date plus the product of (x) the amount of
all cash dividend payments on any series of Preferred Stock of such person or
any Subsidiary of such person (other than any such cash dividend payments made
to such person or a Wholly-Owned Subsidiary of such person) times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated federal, state and local tax rate
of such person, in each case during the four full fiscal quarters ending on or
prior to the Transaction Date.
"GAAP" means generally accepted accounting principles as in effect in
the United States of America as of the date of the Debenture Indenture (it being
understood that calculations in connection with the definitions, covenants and
other provisions of the Debenture Indenture shall utilize accounting principles
and policies in conformity with those used to prepare the financial statements
of the Company for the fiscal year ended December 28, 1992).
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"Holder" or "Debentureholder" means the person in whose name a
Debenture is registered on the Registrar's books.
"Indebtedness" as applied to any person, means, without duplication,
(i) all indebtedness for borrowed money whether or not evidenced by a promissory
note, draft or similar instrument (including, without limitation, obligations
with respect to letters of credit (which shall include the stated amount thereof
and any unreimbursed drawings in relation thereto), bankers' acceptances and
Interest Swap Obligations), (ii) that portion of obligations with respect to
Capital Leases that is properly classified as a liability on a balance sheet in
conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit, (iv) any obligation owed for all or any part of the
deferred purchase price of property or services, which purchase price is due
more than six months from the date of incurrence of the obligation in respect
thereof, if and to the extent such obligation is properly classified as a
liability in conformity with GAAP, (v) all indebtedness to the extent secured by
any Lien on any property or asset owned by that person regardless of whether the
indebtedness secured thereby shall have been assumed by that person or is
nonrecourse to the credit of that person and (vi) all Disqualified Capital Stock
of the Company and all Preferred Stock of any Subsidiary (other than any such
Preferred Stock owned by the Company or a Wholly-Owned Subsidiary) (the amount
of Indebtedness represented by any such Disqualified Capital Stock or Preferred
Stock will be the greater of the voluntary or involuntary liquidation preference
with respect thereto).
"Independent Financial Advisor" means a reputable accounting, appraisal
or investment banking firm that is, in the reasonable judgment of the Board of
Directors of the Company, qualified to perform the task for which such firm has
been engaged hereunder and disinterested and independent with respect to the
Company and its Affiliates.
"Interest Swap Obligations" means the obligations of any person,
pursuant to any arrangement with any other person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made to such other
person calculated by applying a fixed or a floating rate of interest on the same
notional amount.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended to the date hereof and from time to time hereafter.
"Investment" as applied to any person, means any direct or indirect
purchase or other acquisition by that person of, or of a beneficial interest in,
stock or other securities of any other person (other than a person that prior to
the relevant purchase or acquisition was the Company or a Subsidiary), or any
direct or indirect loan, advance (other than advances to employees for moving
and travel expenses, drawing accounts and similar expenditures made in the
ordinary course of business) or capital contribution by that person to any other
person (other than the Company or a Subsidiary), including all indebtedness and
accounts receivable from that other person that are not current assets or did
not arise from sales of goods or services to that other person in the ordinary
course of business. The amount of any Investment shall be the fair market value
of such Investment, as determined at the time such Investment is made.
"Issue Date" means the date of first issuance of the Debentures under
the Debenture Indenture.
"Lenders" means the Lenders listed on the signature pages of the Credit
Facility, together with any financial institution that may become a party to the
Credit Facility as therein provided.
"Letter of Credit Obligations" means Indebtedness of the Company and
its Subsidiaries with respect to letters of credit issued pursuant to the Credit
Facility.
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof, and any
agreement to give any security interest).
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"Maturity Date" means December 15, 2005.
"Mortgage Indebtedness" means mortgage-backed Indebtedness secured by
real property fee or leasehold interests (together with related furniture,
fixtures and equipment) and any renewals, extensions, refinancings or
replacements thereof.
"Mortgage Subsidiary" means a Subsidiary, the sole activities of which
shall be the holding of any real property fee or leasehold interests and related
furniture, fixtures and equipment, the incurrence by such Subsidiary of Mortgage
Indebtedness permitted by clause (viii) of the "Limitations on Incurrence of
Additional Indebtedness" covenant (provided, that the Net Cash Proceeds of such
Mortgage Indebtedness are used in the manner contemplated in such clause) and
the leasing of such assets to the Company and its Subsidiaries on terms
customary for similar types of leases.
"Net Cash Proceeds" means with respect to any person the cash proceeds
(including any cash received by way of deferred payment pursuant to, or
monetization of, a note receivable or otherwise, but only as and when so
received and excluding the portion of such deferred payment which constitutes
interest, which portion shall be deemed not to constitute Net Cash Proceeds)
received by such person from any sale, transfer or other disposition of property
or issuance of a security net of (i) the direct costs relating to such sale,
transfer, or other disposition (including, without limitation, legal, accounting
and investment banking fees and sales commissions), (ii) taxes paid or payable
((a) including, without limitation, income taxes reasonably estimated to be
actually payable as a result of any disposition of property within two years of
the date of disposition and (b) but after taking into account any reduction in
tax liability due to available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on any such property, and (iv) any reasonable
reserve for adjustment in respect of the sale price of such property.
"Operating Lease" means, as applied to any person, any lease
(including, without limitation, leases that may be terminated by the lessee at
any time) of any property (whether real, personal or mixed) that is not a
Capital Lease other than any such lease under which that person is the lessor.
"Payment Restriction" means, with respect to a subsidiary of any
person, any material encumbrance, restriction or limitation, either by operation
of the terms of its charter or by reason of any agreement or instrument to which
the Company or any Subsidiary is a party, on the ability of (i) such subsidiary
to (a) pay dividends or make other distributions on its Capital Stock or make
payments on any obligation, liability or Indebtedness owed to such person or any
other subsidiary of such person, (b) make loans or advances to such person or
any other subsidiary of such person, or (c) transfer any of its material
properties or assets to such person or any other subsidiary of such person, or
(ii) such person or any other subsidiary of such person to receive or retain any
such (a) dividends, distributions or payments, (b) loans or advances, or (c)
transfer of material properties or assets.
"Permitted Investment" by any person means (i) any Related Business
Investment, (ii) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale or any other
disposition of assets not constituting an Asset Sale by reason of the $150,000
threshold contained in the definition thereof, (iii) cash and Cash Equivalents,
(iv) Investments existing on the Issue Date, (v) Investments by the Company in
its Subsidiaries, (vi) Investments by Subsidiaries in the Company or any
Subsidiary, (vii) Investments in the form of obligations of third parties which
obligations were acquired in connection with the settlement or other compromise
of legal proceedings in the ordinary course of business, (viii) Investments in
connection with any merger, consolidation or sale of assets in accordance with
the provisions of the "Limitation on Mergers, Consolidations or Sales of Assets"
covenant, and (ix) other Investments so long as the aggregate amount so expended
by the Company or its Subsidiaries shall not exceed $2,500,000 net of any cash
amounts received by the Company or its Subsidiaries from any Investments made
pursuant to this clause (ix).
"Permitted Investors" means Anwar Soliman, Ralph Roberts, the members
of their immediate families, the respective estates, spouses, heirs, ancestors,
lineal descendants, legatees and legal representatives of any of the foregoing
and the trustee of any bona fide trust of which one or more of the foregoing are
the sole beneficiaries or the grantors thereof.
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"Permitted Liens" shall mean (i) Liens for taxes, assessments or
governmental charges or claims the payment of which is not at the time required
by the "Payment of Taxes and Other Claims" covenant; (ii) statutory Liens of
landlords and Liens of carriers, warehousemen, mechanics, materialmen and other
Liens imposed by law incurred in the ordinary course of business which either
(a) are for sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required by GAAP
shall have been made therefor, or (b) do not in the aggregate with respect to
any one property so encumbered have a material adverse effect on the value or
use of such property; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the performance of
tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, trade contracts, performance and return-of-money bonds and
other similar obligations (exclusive of obligations for the payment of borrowed
money); (iv) any attachment or judgment Lien unless the judgment it secures
would constitute an Event of Default; (v) easements, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances which (a) do not interfere in any material respect with the
ordinary conduct of the business of the Company or any of its Subsidiaries and
(b) do not in the aggregate with respect to any one property have a material
adverse effect on the use of such property; (vi) any interest or title of a
lessor or lessee under any lease; (vii) purchase-money Liens on inventory,
fixtures, furniture and equipment incurred in the ordinary course of business
and Liens on goods for sale on consignment or a similar basis; and (viii) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
"Plan of Liquidation" means, with respect to any person, a plan
(including by operation of law) that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or not
substantially contemporaneously, in phases or otherwise) (i) the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
such person otherwise than as an entirety or substantially as an entirety and
(ii) the distribution of all or substantially all of the proceeds of such sale,
lease, conveyance or other disposition and all or substantially all of the
remaining assets of such person to holders of Capital Stock of such person.
"Preferred Stock" means, with respect to any person, any Capital Stock
of such person other than common stock of such person and any warrants, rights
or options to purchase or acquire such common stock.
"Qualified Capital Stock" means, with respect to any person, any
Capital Stock of such person that is not Disqualified Capital Stock.
"Refinancing Indebtedness" means any Indebtedness issued in connection
with any refinancing, refunding, replacement or extension, in whole or in part,
of any Indebtedness incurred pursuant to clauses (b) (ii), (iii), (vi) or (xiv)
of the "Limitation on Incurrence of Additional Indebtedness" covenant; provided,
that (a) such Refinancing Indebtedness shall have an Average Life equal to or
greater than the Average Life of either (I) the Indebtedness being refinanced,
refunded, replaced or extended or (II) the Debentures, (b) Indebtedness incurred
by any Subsidiary of the Company shall not be used to refinance, refund, replace
or extend any Indebtedness of the Company, (c) Indebtedness incurred to
refinance any Indebtedness of the Company subordinated or junior in right of
payment to the Debentures shall be subordinated or junior in right of payment at
least to the same extent as the Indebtedness being refinanced and (d) such
Refinancing Indebtedness is in an aggregate principal amount not in excess of
the outstanding aggregate principal amount of the Indebtedness being refinanced
plus any premium required by the terms thereof and the amount of customary fees
and expenses payable by the Company in connection therewith.
"Related Business Investment" means (i) any Investment by the Company
or any Subsidiary in any other person at least 80% of whose revenues are derived
from the operation of one or more restaurants; and (ii) any Capital Expenditures
or other expenditures related to the business of the Company and its
Subsidiaries as it is conducted in accordance with the terms of the Debenture
Indenture.
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"Sale/leaseback" means any lease, whether an Operating Lease or a
Capital Lease, whereby the Company or any of its Subsidiaries, directly or
indirectly, becomes or remains liable as lessee or as guarantor or other surety,
of any property (whether real or personal or mixed) whether now owned or
hereafter acquired, (i) that the Company or its Subsidiaries, as the case may
be, has sold or transferred or is to sell or transfer to any other person (other
than the Company or any of its Subsidiaries), or (ii) that the Company or its
Subsidiaries, as the case may be, intends to use for substantially the same
purpose as any other property that has been or is to be sold or transferred by
the Company or any such Subsidiary to any person (other than the Company or any
of its Subsidiaries) in connection with such lease.
"Senior Secured Notes" means the separate issues of Senior Secured
Notes Due 1998 under the Senior Secured Note Indentures.
"Senior Secured Note Indentures" means the Indenture dated as of
September 15, 1992 among ARG, the Subsidiary Guarantors named therein and U.S.
Trust Company of California, N.A., as trustee and the Indenture, dated as of
December 1, 1993 among ARG, the Subsidiary Guarantors named therein and U.S.
Trust Company of California, N.A., as trustee, in each case as amended,
supplemented or otherwise modified from time to time.
"Significant Stockholder" means, with respect to any person, any other
person who is the beneficial owner (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 10% of any class of equity securities of such person
that are entitled to vote on a regular basis for the election of directors of
such person.
"Significant Subsidiary" means each subsidiary of the Company that is
either (a) a "significant subsidiary" as defined in Rule 1-02(v) of Regulation
S-X under the Securities Act and the Exchange act (as such regulation is in
effect on the date hereof) or (b) material to the financial condition or results
of operations of the Company and its Subsidiaries taken as a whole.
"Stock Option Plan" means the Stock Option Plan for Key Employees of
the Company, as amended or otherwise modified from time to time.
"Subsidiary" of any person means (i) a corporation a majority of whose
Capital Stock with voting power, under ordinary circumstances, to elect
directors is, at the date of determination, directly or indirectly, owned by
such person, by one or more subsidiaries of such person or by such person and
one or more subsidiaries of such person or (ii) a partnership in which such
person or a subsidiary of such person is, at the date of determination, a
general partner of such partnership, or (iii) any other person (other than a
corporation or a partnership) in which such person, a subsidiary of such person
or such person and one or more subsidiaries of such person, directly or
indirectly, at the date of determination, has (x) at least a majority ownership
interest or (y) the power to elect or direct the election of a majority of the
directors or other governing body of such person.
"Subsidiary" means any subsidiary of the Company.
"Wholly-Owned Subsidiary" means, with respect to any Person, any
subsidiary of such Person all the outstanding shares of Capital Stock of which
are owned directly by such Person or another Wholly-Owned Subsidiary of such
Person except for (i) directors' qualifying shares, if applicable and (ii)
Preferred Stock of such Subsidiary.
"Yearly Period" means a fiscal year of the Company and its
Subsidiaries. On the date of the Debenture Indenture, the fiscal year of the
Company and its Subsidiaries ends on the last Monday of December of each year.
DELIVERY AND FORM
The certificates representing the Exchange Debentures will be issued
only in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple thereof. The Exchange Debentures will be deposited with,
or on behalf of, The Depository Trust Company, New York, New York ("DTC"), and
registered in the name of Cede & Co. as DTC's nominee in the form of a global
Debenture certificate.
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DESCRIPTION OF THE DEBENTURES
The terms of the Debentures are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Exchange Debentures for which they may be exchanged pursuant to this Exchange
Offer, except that the Debentures are not freely transferable by holders thereof
and were issued subject to certain covenants regarding registration as provided
therein and in the Registration Rights Agreement (which covenants will terminate
and be of no further force or effect upon completion of this Exchange Offer).
REGISTRATION RIGHTS AGREEMENT
Holdings entered into the Registration Rights Agreement for the benefit
of the holders of the Debentures. The following summary of certain provisions of
the Registration Rights Agreement does not purport to be complete and is subject
to, and is qualified by reference to, all the provisions of such agreement which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to the Registration Rights Agreement Holdings has agreed, for
the benefit of the holders of the Debentures, that it will, at its cost, (i)
within 30 days after December 1, 1996 (the "Commencement Date"), file a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to the Exchange Offer and (ii) use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Act on or prior to October 31, 1997. Holdings has agreed to keep the
Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date notice of the Exchange Offer is mailed to the
holders of the Debentures.
In the event that applicable interpretations of the staff of the
Commission do not permit Holdings to effect the Exchange Offer, or if for any
other reason the Exchange Offer is not consummated within 180 days of the
Commencement Date, Holdings will, at its own expense, (a) as promptly as
practicable, file the Shelf Registration Statement, (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the Act
and (c) use its best efforts to keep effective the Shelf Registration Statement
until three years after its effective date. Holdings will, in the event of the
Shelf Registration Statement, provide to each holder of the Debentures copies of
the prospectus, which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement for the Debentures has become
effective and take certain other actions as are required to permit unrestricted
resales of the Debentures. A holder of Debentures who sells such Debentures
pursuant to the Shelf Registration Statement generally would be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification rights and obligations).
If Holdings fails to comply with the above provisions, then, as
liquidated damages, additional interest (the "Additional Interest") shall become
payable in respect of the Debentures as follows:
(i) if the Exchange Offer Registration Statement or Shelf
Registration Statement is not filed within 30 days after the
Commencement Date, then commencing on the 31st day after the Issue
Date, Additional Interest shall accrue on the Debentures (in addition
to the accretion of OID) at a rate of .50% per annum;
(ii) if an Exchange Offer Registration Statement or Shelf
Registration Statement is not declared effective within 120 days after
the Commencement Date, then commencing on the 121st day after such
date, Additional Interest shall accrue on the Debentures (in addition
to the accretion of OID) at a rate of .50% Per annum; and
(iii) if either (A) Holdings has not exchanged the Exchange
Debentures for all Debentures validly tendered in accordance with the
terms of the Exchange Offer on or prior to 60 days after the date on
which the Exchange Offer Registration Statement was declared effective
or (B) if the Exchange Offer Registration Statement ceases to be
effective at any time prior to the time that the Exchange Offer is
consummated or (C) if applicable, the Shelf Registration Statement has
been declared effective and such Shelf Registration
61
<PAGE> 65
Statement ceases to be effective at any time prior to the third
anniversary of its effective date, then Additional Interest shall
accrue on the Debentures (in addition to the accretion of OID) at a
rate of .50% per annum on (x) the 61st day after such effective date,
in the case of clause (A) above, or (y) the date the Exchange Offer
Registration Statement ceases to be effective, in the case of clause
(B) above, or (z) the day the Shelf Registration Statement ceases to be
effective, in the case of clause (C) above;
provided, that (1) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clause (i) above), (2) upon
the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
exchange of Exchange Debentures for all Debentures tendered (in the case of
clause (iii)(A) above) or upon the effectiveness of the Exchange Offer
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(B) above), or upon the effectiveness of the Shelf Registration
Statement which has ceased to remain effective (in the case of clause (iii)(C)
above, Additional Interest on the Debentures as a result of clause (i), (ii) or
(iii) above (or the relevant subclause thereof), as the case may be, shall cease
to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash, semiannually on each June 15 and December
15, commencing with the first such date occurring after any such Additional
Interest commences to accrue. The amount of Additional Interest will be
determined by multiplying the applicable Additional Interest rate by the
Accreted Value of the Debentures, multiplied by a fraction, the numerator of
which is the number of days such Additional Interest rate was applicable during
such period (determined on the basis of a 360-day year comprised of twelve
30-day months) and the denominator of which is 360.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Debentures pursuant to the terms of the Exchange Offer,
Holdings will have fulfilled its obligations under the Registration Rights
Agreement and accordingly, there will be no increase in the interest rate on the
Debentures and the holders of the Debentures will have no further registration
or other rights under such Agreement.
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS
In the opinion of Tax Counsel, the following discussion summarizes the
material United States federal income tax consequences of the ownership of
Exchange Debentures as of the date hereof. Except where noted, it deals only
with Exchange Debentures held as capital assets by initial purchasers of the
Debentures that are United States Holders and does not deal with special
situations, such as those of dealers in securities, financial institutions, life
insurance companies, persons holding Exchange Debentures as part of a hedging or
conversion transaction or a straddle or holders whose "functional currency" is
not the U.S. Dollar. Furthermore, the discussion below is based upon the
provisions of the Internal Revenue Code of 1986 (the "Code") and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in federal
income tax consequences different from those discussed below. PERSONS
CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF EXCHANGE DEBENTURES SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN
LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER
THE LAWS OF ANY OTHER TAXING JURISDICTION.
UNITED STATES HOLDERS
As used herein, a "United States Holder" of an Exchange Debenture means
a holder that is (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of its
source or (iv) a trust which is subject to the primary supervision of a court
within the United States and the control of a United States fiduciary as
described in section 7701(a)(30).
62
<PAGE> 66
EXCHANGE OFFER
In the opinion of Tax Counsel, the exchange of Debentures for Exchange
Debentures in the Exchange Offer will not constitute a taxable event to United
States Holders. Consequently, no gain or loss will be recognized by a United
States Holder upon the receipt of an Exchange Debenture, the holding period of
the Exchange Debenture will include the holding period of the Debenture and the
basis of the Exchange Debenture will be the same as the basis of the Debenture
immediately before the exchange.
The following discussion assumes that the Exchange Debentures are
treated as a continuation of the Debentures in the hands of a holder of the
Debentures and as debt for federal income tax purposes. Accordingly, the
Exchange Debentures should be treated as having the same issue date and issue
price as the Debentures for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
The Exchange Debentures will be treated as issued with original issue
discount ("OID") for federal income tax purposes and thus are subject to special
tax accounting rules. United States Holders should be aware that they generally
must include OID in gross income in advance of the receipt of cash attributable
to that income (regardless of whether the United States Holder is a cash or
accrual method taxpayer). However, United States Holders generally will not be
required to include separately in income cash payments received on the Exchange
Debentures, even if denominated as interest. This summary is based upon final
Treasury regulations addressing debt instruments issued with OID (the "OID
Regulations").
The amount of OID with respect to each Exchange Debenture is the excess
of its stated redemption price at maturity (the sum of all payments to be made
on the Exchange Debenture other than "qualified stated interest") over its
"issue price." Payments of interest on the Exchange Debentures will not qualify
as "qualified stated interest payments" because such payments, under the terms
of the Exchange Debentures, will not be unconditionally payable at least
annually at a single fixed rate during the entire term of the Exchange
Debenture. As a result, the stated redemption price at maturity of each Exchange
Debenture under the OID Regulations will include all cash payments (including
principal and interest) required to be made thereunder until and at maturity,
and each Exchange Debenture therefore has a substantial amount of OID.
The "issue price" of each Debenture offered by Holdings in the
Debenture Offering was the first price at which a substantial amount of
Debentures were sold to the public (not including bond houses, brokers or
similar persons acting in the capacity of underwriters or wholesalers). The
amount of OID includable in income by the initial United States Holder of an
Exchange Debenture is the sum of the "daily portions" of OID with respect to the
Exchange Debenture for each day during the taxable year or portion of the
taxable year in which such United States Holder held such Exchange Debenture
("accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. The "accrual period" for an Exchange Debenture may be of any length and
may vary in length over the term of the Exchange Debenture, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the product of the Exchange Debenture's adjusted issue price at the beginning of
such accrual period and its yield to maturity (determined on the basis of
compounding at the close of each accrual period and properly adjusted for the
length of the accrual period). OID allocable to a final accrual period is the
difference between the amount payable at maturity and the adjusted issue price
at the beginning of the final accrual period. If all accrual periods are of
equal length, except for either an initial shorter accrual period or an initial
and a final shorter accrual period, the amount of OID allocable to the initial
accrual period may be computed under any reasonable method. The "adjusted issue
price" of an Exchange Debenture at the start of any accrual period is equal to
its issue price increased by the accrued OID for each prior accrual period
(determined without regard to the amortization of any acquisition premium, as
described below) and reduced by any prior payments, or any payments made on the
first day of the accrual period, with respect to such Exchange Debenture. Under
these rules, a United States Holder will have to include in income increasingly
greater amounts of OID in successive accrual periods.
63
<PAGE> 67
Holdings is required to report the amount of OID accrued on Exchange Debentures
held of record by persons other than corporations and other exempt holders.
The Exchange Debentures may be redeemed prior to maturity at the option
of Holdings. Under the OID Regulations, if, based on all the facts and
circumstances as of the issue date, it is more likely than not that an Exchange
Debenture's stated payment schedule will not occur, then the yield and maturity
of the Exchange Debenture will be computed based on the payment schedule likely
to occur. Moreover, Holdings will be deemed to exercise or not exercise its
option to redeem an Exchange Debenture in a manner that minimizes the yield on
the Exchange Debenture.
MARKET DISCOUNT
If a United States Holder purchases an Exchange Debenture for an amount
that is less than its adjusted issue price, the amount of the difference will be
treated as a "market discount" for federal income tax purposes, unless such
difference is less than a specified de minimis amount. Under the market discount
rules, a United States Holder will be required to treat any principal payment
on, or any gain on the sale exchange, retirement or other disposition of, an
Exchange Debenture as ordinary income to the extent of the market discount which
has not previously been included in income and is treated as having accrued on
such Exchange Debenture at the time of such payment or disposition. In addition,
the United States Holder may be required to defer, until the maturity of the
Exchange Debenture or its earlier disposition in a taxable transaction, the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry such Exchange Debenture.
Any market discount will be considered to accrue on a straight-line
basis during the period from the date of acquisition to the maturity date of the
Exchange Debenture, unless the United States Holder elects to accrue on a
constant interest method. A United States Holder of an Exchange Debenture may
elect to include market discount in income currently as it accrues (on either a
straight-line or constant interest basis), in which case the rule described
above regarding deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies, and may not be revoked without the consent of the United
States Internal Revenue Service (the "IRS").
ACQUISITION PREMIUM
A United States Holder who purchases an Exchange Debenture for an
amount that is greater than its adjusted issue price but equal to or less than
the sum of all amounts payable on the Exchange Debenture after the purchase date
will be considered to have purchased such Exchange Debenture at an "acquisition
premium." Under the acquisition premium rules the amount of OID which such
holder must include in its gross income with respect to such Exchange Debenture
for any taxable year will be reduced by the portion of such acquisition premium
properly allocable to such year.
SALE, EXCHANGE AND RETIREMENT OF DEBENTURES
A United States Holder's tax basis in the Exchange Debenture is equal
to its issue price, increased by OID included in income by the United States
Holder and reduced by any amortized premium and any cash payments on the
Exchange Debenture. Upon the sale, exchange or retirement of an Exchange
Debenture, a United States Holder will recognize gain or loss equal to the
difference between the amount realized upon the sale, exchange or retirement and
the adjusted tax basis of the Exchange Debenture. Any such gain or loss should
be capital gain or loss (except, with respect to the sale, exchange or
retirement of an Exchange Debenture, as discussed in "Market Discount" above)
and will be long-term capital gain or loss if the Exchange Debenture has been
held for more than one year. Under current law, net capital gains of individuals
are, under certain circumstances, taxed at lower rates than items of ordinary
income. The deductibility of capital losses is subject to limitations.
64
<PAGE> 68
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest, OID and premium paid on Exchange Debentures and
to the proceeds of sale of an Exchange Debenture made to United States Holders
other than certain exempt recipients (such as corporations). A 31 percent backup
withholding tax will apply to such payments if the United States Holder fails to
provide a taxpayer identification number or certification of exempt status or
fails to report in full dividend and interest income and received notice to that
effect from the IRS. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's U.S. federal
income tax liability provided the required information is furnished to the IRS.
DEDUCTIBILITY OF ORIGINAL ISSUE DISCOUNT
The deduction by Holdings of OID and interest payments with respect to
the Exchange Debentures will be limited under Section 163(e)(5) of the Code if
the Exchange Debentures are "applicable high yield discount obligations," as
defined in Section 163(i) of the Code. The Exchange Debentures will be
applicable high yield discount obligations because the yield to maturity on the
Exchange Debentures is more than the sum of the applicable federal rate (a rate
published by the IRS on a monthly basis) in effect at the time of issuance of
the Exchange Debentures (the "AFR"), plus five percentage points and the
Exchange Debentures were issued with significant OID. As a result, (i) since the
yield to maturity of the Exchange Debentures exceeds the sum of the AFR plus six
percentage points, the product of the total original issue discount under the
Exchange Debentures times the ratio of the excess of the yield to maturity of
the Exchange Debentures over the sum of the AFR plus six percentage points to
the yield to maturity of the Exchange Debentures will not be deductible by
Holdings and generally will be treated as dividends to the United States Holders
of the Exchange Debentures (to the extent that such amount would have been
treated as a dividend if it had been a distribution made by Holdings with
respect to its stock) and (ii) the remainder of the OID on the Exchange
Debentures will not be deductible by Holdings until paid.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Debentures for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus with any resale of such Exchange Debentures. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Debentures received in exchange for
Debentures where such Exchange Debentures were acquired as a result of
market-making activities or other trading activities. Holdings will, for a
period of 180 days after the Expiration Date, make this Prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale.
Holdings will not receive any proceeds from any sale of Exchange
Debentures by broker-dealers. Exchange Debentures received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Debentures or a
combination of such methods of resales, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchaser of any such
Exchange Debentures. Any broker-dealer that resells Exchange Debentures that
were received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Debentures
may be deemed to be an "underwriter" within the meaning of the Act and any
profit on any such resale of Exchange Debentures and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Act.
For a period of 180 days after the Expiration Date, Holdings will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
65
<PAGE> 69
in the Letter of Transmittal. Holdings has agreed in the Registration Rights
Agreement to pay all expenses incident to the Exchange Offer other than
commissions or concessions of any brokers or dealers.
Prior to the offering contemplated hereby, there has been no active
market for the Exchange Debentures. The Initial Purchaser has advised Holdings
that it currently intends to make a market in the Exchange Debentures, but it is
not obligated to do so and may discontinue any such market making at any time
without notice. Accordingly, there can be no assurance that an active market
will develop for the Exchange Debentures.
LEGAL MATTERS
The validity of the Exchange Debentures under New York law and certain
tax matters will be passed upon for Holdings by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
66
<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................................................................. F-2
Consolidated Balance Sheets as of December 25, 1995, December 30, 1996 and June 30, 1997.................. F-3
Consolidated Statements of Operations for the Years Ended December 26, 1994, December 25, 1995
and December 30, 1996 and for the Twenty-six Weeks Ended June 24, 1996 and June 30, 1997.................. F-5
Consolidated Statements of Common Stockholders' Equity for Years Ended December 26, 1994,
December 25, 1995 and December 30, 1996 and for the Twenty-six Weeks Ended June 30, 1997.................. F-6
Consolidated Statements of Cash Flows for Years Ended December 26, 1994, December 25, 1995 and
December 30, 1996 and for the Twenty-six Weeks Ended June 24, 1996 and June 30, 1997...................... F-7
Notes to Consolidated Financial Statements................................................................ F-8
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
American Restaurant Group Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN
RESTAURANT GROUP HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 25, 1995 and December 30, 1996, and the related consolidated statements
of operations, common stockholders' equity (deficit) and cash flows for the
years ended December 26, 1994, December 25, 1995 and December 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Restaurant Group
Holdings, Inc. and subsidiaries as of December 25, 1995 and December 30, 1996,
and the results of their operations and their cash flows for the years ended
December 26, 1994, December 25, 1995 and December 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1.b. and other
notes to the financial statements, the Company has suffered recurring losses
from operations, has a net capital deficit, has a sinking fund payment of $40.9
million due September 15, 1997, and may be required to renegotiate its senior
debt if it cannot meet amended covenants, that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1.b. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As explained in Note 2. of the financial statements, as required by FAS 121,
effective December 25, 1995, the Company changed its method of accounting for
the impairment of long-lived assets.
ARTHUR ANDERSEN LLP
Orange County, California
February 28, 1997, except certain matters
in Note 4. which date is March 13, 1997
F-2
<PAGE> 72
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 25, 1995, DECEMBER 30, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
------------ ------------ ------------
ASSETS (UNAUDITED)
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 10,385,000 $ 7,493,000 $ 4,375,000
Accounts receivable, net of reserve of $777,000, 7,734,000 7,465,000 6,896,000
$1,041,000 and $1,059,000 at December 25, 1995,
December 30, 1996 and June 30, 1997, respectively
Inventories 6,597,000 6,818,000 6,450,000
Prepaid expenses 4,607,000 4,485,000 3,048,000
------------ ------------ ------------
Total current assets 29,323,000 26,261,000 20,769,000
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Land and land improvements 52,991,000 6,158,000 5,655,000
Buildings and leasehold improvements 141,382,000 110,071,000 112,465,000
Fixtures and equipment 90,520,000 84,162,000 86,856,000
Property held under capital leases 13,067,000 12,375,000 12,375,000
Construction in progress 3,749,000 6,487,000 1,520,000
------------ ------------ ------------
301,709,000 219,253,000 218,871,000
Less-Accumulated depreciation 130,679,000 118,084,000 122,250,000
------------ ------------ -----------
171,030,000 101,169,000 96,621,000
------------ ------------ ------------
OTHER ASSETS:
Intangible assets 14,137,000 13,039,000 13,032,000
Deferred debt costs 26,552,000 26,325,000 27,763,000
Leasehold interests 10,176,000 9,946,000 9,946,000
Franchise rights 8,798,000 6,876,000 6,876,000
Liquor licenses and other 3,899,000 6,259,000 6,799,000
Cost in excess of net assets acquired 14,671,000 13,305,000 13,305,000
------------ ------------ ------------
78,233,000 75,750,000 77,721,000
Less-Accumulated amortization 24,095,000 25,975,000 29,341,000
------------ ------------ ------------
54,138,000 49,775,000 48,380,000
------------ ------------ ------------
Total assets $254,491,000 $177,205,000 $165,770,000
============ ============ ============
</TABLE>
(consolidated balance sheets continued on following page)
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 73
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
------------- ------------- -------------
(UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable $ 29,239,000 $ 33,394,000 $ 34,428,000
Accrued liabilities 14,226,000 14,435,000 13,103,000
Accrued insurance 16,694,000 15,848,000 12,158,000
Accrued interest 5,855,000 921,000 2,188,000
Accrued payroll costs 10,171,000 11,059,000 10,805,000
Current portion of obligations under
capital leases 858,000 902,000 931,000
Current portion of long-term debt 7,850,000 41,324,000 171,930,000
------------- ------------- -------------
Total current liabilities 84,893,000 117,883,000 245,543,000
------------- ------------- -------------
LONG-TERM LIABILITIES, net of current portion:
Obligations under capital leases 9,344,000 8,443,000 7,973,000
Long-term debt 273,935,000 207,897,000 83,281,000
------------- ------------- -------------
Total long-term liabilities 283,279,000 216,340,000 91,254,000
------------- ------------- -------------
DEFERRED GAIN -- 5,806,000 5,559,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK, $0.01 par value; 10,000
shares authorized, no shares issued or
outstanding at December 25, 1995,
December 30, 1996 or March 31, 1997 -- -- --
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value; 1,000,000
shares authorized, 513,631 shares
issued and 504,505 shares outstanding at December 25,
1995 and 504,505 shares
issued and outstanding at
December 30, 1996 and June 30, 1997 2,000 2,000 2,000
Treasury stock (50,000) (50,000) (50,000)
Paid-in capital 17,539,000 17,539,000 17,539,000
Accumulated deficit (131,172,000) (180,315,000) (194,077,000)
------------- ------------- -------------
Total common stockholders' deficit (113,681,000) (162,824,000) (176,586,000)
------------- ------------- -------------
Total liabilities and common
stockholders' equity $ 254,491,000 $ 177,205,000 $ 165,770,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 74
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 26, 1994,
DECEMBER 25, 1995 AND DECEMBER 30, 1996
AND FOR THE TWENTY-SIX WEEKS ENDED
JUNE 24, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
--------------------------------------------------- --------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30, JUNE 24, JUNE 30,
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES ..................... $ 460,406,000 $ 445,966,000 $ 445,424,000 $ 225,669,000 $ 226,945,000
RESTAURANT COSTS:
Food and beverage ............ 142,828,000 138,270,000 141,032,000 71,671,000 71,958,000
Payroll ...................... 136,151,000 134,532,000 137,104,000 67,508,000 67,598,000
Direct operating ............. 108,382,000 110,399,000 114,589,000 55,166,000 57,301,000
Depreciation and amortization 26,723,000 23,171,000 20,791,000 10,307,000 10,082,000
GENERAL AND ADMINISTRATIVE
EXPENSES ..................... 31,063,000 31,387,000 28,110,000 13,266,000 16,494,000
NON-CASH CHARGE FOR
IMPAIRMENT OF LONG-LIVED
ASSETS ...................... -- 20,178,000 13,205,000 -- --
------------- ------------- ------------- ------------- -------------
Operating profit (loss) 15,259,000 (11,971,000) (9,407,000) 7,751,000 3,512,000
INTEREST EXPENSE, net ........ 34,190,000 35,450,000 37,954,000 18,788,000 17,233,000
------------- ------------- ------------- ------------- -------------
Loss before provision for
income taxes and extraordinary
loss ........................ (18,931,000) (47,421,000) (47,361,000) (11,037,000) (13,721,000)
PROVISION FOR INCOME TAXES ... 64,000 75,000 94,000 60,000 41,000
------------- ------------- ------------- ------------- -------------
Loss before extraordinary loss (18,995,000) (47,496,000) (47,455,000) (11,097,000) (13,762,000)
EXTRAORDINARY LOSS ON
EXTINGUISHMENT OF DEBT ..... -- -- (1,688,000) -- --
------------- ------------- ------------- ------------ -------------
Net loss ................... $ (18,995,000) $ (47,496,000) $ (49,143,000) $ (11,097,000) $ (13,762,000)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 75
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 26, 1994,
DECEMBER 25, 1995 AND DECEMBER 30, 1996
AND FOR THE TWENTY-SIX WEEKS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK PAID-IN CAPITAL DEFICIT TOTAL
------------ -------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 27, 1993..... $2,000 $ -- $17,539,000 $ (64,681,000) $ (47,140,000)
Net loss ................. -- -- -- (18,995,000) (18,995,000)
------ -------- ----------- ------------- -------------
BALANCE, December 26, 1994 .... 2,000 -- 17,539,000 (83,676,000) (66,135,000)
Net loss ................. -- -- -- (47,496,000) (47,496,000)
Purchase of treasury
stock .................. -- (50,000) -- -- (50,000)
------ -------- ----------- ------------- -------------
BALANCE, December 25, 1995..... 2,000 (50,000) 17,539,000 (131,172,000) (113,681,000)
Net loss ................. -- -- -- (49,143,000) (49,143,000)
------ -------- ----------- ------------- -------------
BALANCE, December 30, 1996..... 2,000 (50,000) 17,539,000 (180,315,000) (162,824,000)
Net loss (unaudited) ......... -- -- -- (13,762,000) (13,762,000)
------ -------- ----------- ------------- -------------
BALANCE, June 30, 1997
(unaudited).................... $2,000 $(50,000) $17,539,000 $(194,077,000) $(176,586,000)
====== ======== =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 76
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 26, 1994,
DECEMBER 25, 1995 AND DECEMBER 30, 1996
AND FOR THE TWENTY-SIX WEEKS ENDED JUNE 24, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
-------------------------------------------- ----------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30, JUNE 24, JUNE 30,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 460,024,000 $ 446,355,000 $ 445,678,000 $ 225,865,000 $ 227,353,000
Cash paid to suppliers and employees (414,550,000) (413,219,000) (415,679,000) (216,488,000) (216,089,000)
Interest paid, net (27,800,000) (27,912,000) (32,524,000) (14,140,000) (10,539,000)
Income taxes paid (62,000) (95,000) (87,000) (60,000) (41,000)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities 17,612,000 5,129,000 (2,612,000) (4,823,000) 684,000
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,178,000) (16,277,000) (13,279,000) (4,484,000) (2,339,000)
Net (increase) decrease in other assets 209,000 181,000 (2,455,000) (609,000) (757,000)
Proceeds from disposition of assets 508,000 29,000 64,560,000 10,000 610,000
Sale/leaseback costs included in deferred gain -- -- (1,112,000) -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (21,461,000) (16,067,000) $ 47,714,000 (5,083,000) (2,486,000)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on indebtedness (631,000) (3,877,000) (51,834,000) (2,705,000) (636,000)
Borrowings on indebtedness -- 11,000,000 8,906,000 7,115,000 1,199,000
Net increase in deferred debt costs (510,000) (5,000) (4,209,000) (66,000) (1,438,000)
Payments on capital lease obligations (970,000) (777,000) (857,000) (417,000) (441,000)
Purchase of treasury stock -- (50,000) -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities (2,111,000) 6,291,000 (47,994,000) 3,927,000 (1,316,000)
------------- ------------- ------------- ------------- -------------
NET DECREASE IN CASH (5,960,000) (4,647,000) (2,892,000) (5,979,000) (3,118,000)
CASH, at beginning of period 20,992,000 15,032,000 10,385,000 10,385,000 7,493,000
------------- ------------- ------------- ------------- -------------
CASH, at end of period $ 15,032,000 $ 10,385,000 $ 7,493,000 $ 4,406,000 $ 4,375,000
============= ============= ============= ============= =============
RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net loss (18,995,000) (47,496,000) (49,143,000) (11,097,000) (13,762,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss on extinguishment of debt -- -- 1,688,000 -- --
Loss on impairment of long-lived assets -- 20,178,000 13,205,000 -- --
Depreciation and amortization 26,723,000 23,171,000 20,791,000 10,307,000 10,082,000
Loss on disposition of assets 2,183,000 684,000 1,610,000 105,000 4,114,000
Amortization of deferred gain -- -- (123,000) -- (247,000)
Accretion on indebtedness 6,616,000 7,565,000 10,364,000 4,655,000 5,427,000
(Gain) loss in value of interest rate swap (661,000) 98,000 -- -- --
Gain on extinguishment of debt (550,000) -- -- -- --
(Increase) decrease in current assets:
Accounts receivable, net (382,000) 389,000 254,000 196,000 408,000
Inventories (769,000) 1,483,000 (221,000) (15,000) 368,000
Prepaid expenses (1,817,000) (1,288,000) (467,000) 1,579,000 399,000
Increase (decrease) in current liabilities:
Accounts payable 5,453,000 (1,706,000) 4,155,000 (4,131,000) 1,034,000
Accrued liabilities (1,671,000) 870,000 167,000 (6,911,000) (4,462,000)
Accrued insurance (794,000) 2,167,000 (846,000) 1,143,000 (3,690,000)
Accrued interest (45,000) (125,000) (4,934,000) (7,000) 1,267,000
Accrued payroll costs 2,321,000 (861,000) 888,000 (647,000) (254,000)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities $ 17,612,000 $ 5,129,000 $ (2,612,000) $ (4,823,000) $ 684,000
============= ============= ============= ============= =============
</TABLE>
F-7
<PAGE> 77
AMERICAN RESTAURANT GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1994, DECEMBER 25, 1995, DECEMBER 30, 1996 AND JUNE 30, 1997
(INFORMATION FOR THE TWENTY-SIX WEEKS ENDED JUNE 24, 1996 AND
JUNE 30, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. COMPANY
American Restaurant Group Holdings, Inc. ("Holdings"), a
Delaware corporation, was formed in September 1993 to own 100%
of the outstanding common stock of American Restaurant Group,
Inc. ("ARG"), a Delaware corporation.
Holdings, through ARG and its subsidiaries (collectively, the
"Company"), operates middle and upper price dinner houses,
casual dining restaurants and fast food restaurants primarily
in California and Texas. At year end 1994, 1995 and 1996, the
Company operated 246, 248 and 247 restaurants, respectively.
b. SIGNIFICANT RISKS AND OPERATIONS
The Company's operations are affected by local and regional
economic conditions, including competition in the restaurant
industry, and the effect that such conditions have on the
markets it serves. Due to a decline in restaurant revenues in
1996, the Company was two weeks late, but within the grace
period, in paying the quarterly interest on its subordinated
debt which was due on December 15, 1996 and was four weeks
late, but within the grace period, in the quarterly payment
due on March 15, 1997. The Company also renegotiated its
senior debt covenants in March 1997 (see Note 4.) and may be
required to renegotiate if it is not in compliance with the
amended covenants.
The Company has initiated plans and transactions in 1997 to
assist it in meeting its obligations subsequent to December
30, 1996. The Company expects to pursue additional asset
sales, including the sale of its Black Angus division, in
order to repay its senior secured notes prior to the required
sinking fund payment of $40,949,000 due September 15, 1997.
Any additional asset sale proceeds in excess of the amount
required to repay the senior secured notes in full, together
with any proceeds from additional refinancing, will be used to
repay the subordinated debt. In addition, the Company expects
to obtain a replacement letter of credit facility. However,
there can be no assurance that any such asset sales or
refinancing will be completed on acceptable terms.
The financial statements do not include any adjustments
relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to
accomplish its plans.
c. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
F-8
<PAGE> 78
d. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions which affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those
estimates.
e. RELATED-PARTY TRANSACTIONS
In fiscal years 1995 and 1996, the Company had $27,000 and
$83,000, respectively, in net receivables due from certain
officers for advanced expenses.
f. INVENTORIES AND PREPAID EXPENSES
Inventories consist of food, beverages and supplies and are
valued at the lower of cost (first-in, first-out method) or
market value. When a restaurant is opened, the initial
purchase of expendable equipment, such as china, glassware and
silverware, is set up as prepaid supplies and is not
depreciated; however, all replacements are expensed.
g. ADVERTISING COSTS
Advertising costs are accrued as a percentage of sales and
expensed during the year. Production costs are allocated to
the related advertisements. At year end, production costs for
advertisements which have not been aired are included in
prepaid expenses. Prepaid advertising costs of $1,946,000 and
$1,215,000 were included in prepaid expenses at December 25,
1995 and December 30, 1996, respectively. Advertising expenses
included in net loss were $17,644,000, $16,768,000, and
$20,870,000 in fiscal years 1994, 1995 and 1996, respectively.
h. PREOPENING COSTS
Costs incurred in connection with opening a new restaurant,
principally occupancy and staff training, are accumulated as
prepaid expenses and amortized over the initial year of
operations.
i. PROPERTY AND EQUIPMENT
Property and equipment is carried at the lower of cost or, if
impaired, at the estimated fair value of the asset (see Note
2). The Company provides for depreciation and amortization
based upon the estimated useful lives of depreciable assets
using the straight-line method. Estimated useful lives are as
follows:
Land improvements 20 years
Buildings 30 to 35 years
Leasehold improvements Life of lease
Fixtures and equipment 3 to 10 years
Property held under capital leases Life of lease
Substantially all of the Company's assets, including property
and equipment, are pledged as collateral on the senior debt of
the Company.
j. INTEREST COSTS
Interest costs incurred during the construction period of
restaurants are capitalized. The Company capitalized
approximately $184,000, $130,000 and 168,000 for the years
ended 1994, 1995 and 1996, respectively.
F-9
<PAGE> 79
k. OTHER ASSETS
Other assets include intangible assets, leasehold interests,
franchise rights, liquor licenses and cost in excess of net
assets acquired. These costs are amortized using the
straight-line method over the periods estimated to be
benefited, not greater than 40 years.
Deferred debt costs are amortized using the effective interest
method over the related debt term.
Estimated useful lives are as follows:
Intangible assets 3 to 40 years
Deferred debt costs Term of debt
Leasehold interests Life of lease
Franchise rights 35 years
Liquor licenses 40 years
Cost in excess of net assets acquired 40 years
l. INTANGIBLE ASSETS
The following table details the components of intangible
assets included in the accompanying consolidated balance
sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Assembled workforce $ 5,556 $ 5,109 $ 5,109
Goodwill 3,854 3,502 3,502
Trademark/service marks 2,963 2,769 2,769
Acquisition costs 1,322 1,209 1,209
Other 442 450 443
------- ------- -------
Total $14,137 $13,039 $13,032
======= ======= =======
</TABLE>
m. INSURANCE
The Company self-insures the first $100,000 of its annual
medical and dental benefits per family. The Company also
self-insures the first $100,000 of property damage and the
first $250,000 to $350,000 per incident for general liability,
automotive liability and workers' compensation risks inherent
in its operations. Reserves for losses are established
currently based upon estimated obligations.
n. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash,
accounts receivable and payable and debt instruments. The
carrying values of all financial instruments, other than debt
instruments, are representative of their fair value due to
their short-term maturity. The fair value of the Company's
long-term debt instruments is estimated based on the current
rates offered to the Company.
o. FRANCHISE INCOME
The Company franchises fast food restaurants. Franchise fees
are recognized as income as services are rendered. Franchise
royalties based upon a percentage of the franchisees' gross
sales are
F-10
<PAGE> 80
accrued currently. Revenues include franchise royalties and
franchise fees of $2,483,000, $2,176,000 and $1,995,000,
respectively, for the years ended 1994, 1995 and 1996. There
were 59, 55 and 56 franchised restaurants at year end 1994,
1995 and 1996, respectively.
p. ACCOUNTING PERIOD
The Company's fiscal year ends on the last Monday in December.
The years ended 1994 and 1995 included 52 weeks while 1996
included 53 weeks.
q. RECLASSIFICATIONS
Certain prior year accounts have been reclassified to conform
to the current year presentation.
2. IMPAIRMENT OF LONG-LIVED ASSETS
Effective December 25, 1995, the Company adopted the provisions of
Financial Accounting Standards Number 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (FAS 121). The new statement changes the method of valuing
long-lived assets, including the Company's intangible assets, whereby
long-lived assets are to be carried at the lower of cost or, if
impaired, fair value of the asset, rather than at original cost less
accumulated depreciation. Various assumptions and estimates are used to
determine fair value. The calculation of the impairment loss is based
on estimated future cash flows of individual restaurants. The estimates
used to determine the impairment adjustment can change in the near term
as the economy and operations of specific restaurants change.
Generally, individual restaurants with impairment losses in 1995 did
not have additional impairment losses in 1996. The adoption of FAS 121,
together with the effects of continuing adverse operations of certain
restaurants, resulted in a pre-tax non-cash charge of $20,178,000 and
$13,205,000 for the years ended 1995 and 1996, respectively.
Intangible assets allocated to individual restaurants with an
impairment loss were written off first, followed by equipment and
property. Of the pre-tax, non-cash charges in 1995 and 1996,
$11,496,000 and $3,410,000, respectively, were related to intangible
assets while $8,682,000 and $9,795,000, respectively, were related to
equipment and property.
3. LEASE OBLIGATIONS
The Company leases certain of its operating facilities under terms
ranging up to 40 years. These leases are classified as both operating
and capital leases. Certain of the leases contain provisions calling
for additional rentals based on sales or other provisions obligating
the Company to pay related property taxes and certain other expenses.
The following is a summary of property held under leases that have been
capitalized and included in the accompanying consolidated balance
sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Property $13,067 $12,375 $12,375
Less-Accumulated depreciation 6,650 7,066 7,221
------- ------- -------
$ 6,417 $ 5,309 $ 5,154
======= ======= =======
</TABLE>
The following represents the minimum lease payments remaining under
noncancelable operating leases and capitalized leases as of December
30, 1996 (in thousands):
F-11
<PAGE> 81
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
FISCAL YEARS ENDING LEASES LEASES
<S> <C> <C>
1997 $ 28,984 $ 1,966
1998 26,823 1,881
1999 25,542 1,791
2000 24,266 1,694
2001 22,999 1,694
Thereafter 252,707 6,639
-------- -------
Total minimum lease payments $381,321 $15,665
======== =======
Less-imputed interest (7.75% to 15.5%) 6,320
-------
Present value of minimum lease payments 9,345
Less Current portion 902
-------
Long-term portion $ 8,443
=======
</TABLE>
Rental expense (including $1,300,000, $1,019,000 and $895,000,
respectively, for contingent rents under operating leases) was
$21,823,000, $22,863,000 and $24,814,000 during 1994, 1995 and 1996,
respectively.
4. LONG-TERM DEBT
In 1991, ARG secured financing of $45,000,000 which was subordinated to
existing debt.
In 1992, ARG issued and sold $120,000,000 of senior secured notes.
These notes are due September 15, 1998. Simultaneously with its
issuance of the notes, ARG entered into a senior credit agreement
providing for a term loan of $40,000,000, a revolving credit facility
of $11,000,000 and a letter of credit facility of $15,000,000. ARG used
the proceeds to repay existing debt and to purchase previously issued
warrants from the previous lender.
In December 1993, the Company consummated a refinancing which included,
among other things, (a) the private placement by ARG of $50,000,000 of
senior secured notes due September 15, 1998 (the "Note Offering") and
(b) the private placement by Holdings of 88,557 units consisting of
$88,557,000 aggregate principal amount of 14% senior discount
debentures due 2005 and 88,557 shares of Holdings common stock (the
"Debenture Offering") at a total price of $45,000,000. Substantially
all of the net proceeds of the Debenture Offering were contributed by
Holdings to ARG. The combined net proceeds from the Note Offering and
the Debenture Offering were used by ARG to repay a portion of ARG's
indebtedness and to retire all of its outstanding preferred stock at a
cost which was $42,545,000 less than its book value. ARG repaid the
senior term loan and the outstanding indebtedness on the revolving
credit facility. The existing credit agreement was also amended and
restated for the revolving credit and letter of credit facilities.
In March 1994, the Company consummated a registered exchange offer
whereby ARG exchanged $50,000,000 of its senior secured notes due
September 15, 1998, Series B, for one hundred percent of the senior
secured notes that had been privately placed in the Note Offering and
Holdings exchanged $88,577,000 of its 14% senior discount debentures
due 2005 for one hundred percent of the senior discount debentures that
had been privately placed in the Debenture Offering.
In March 1996, Holdings completed a private placement of its 14% senior
discount debentures due 2005 with a face value of $17,000,000 producing
aggregate proceeds of approximately $7,114,000. Substantially all of
the net proceeds of the offering were contributed by Holdings to ARG.
The net proceeds were used by ARG for general corporate purposes.
F-12
<PAGE> 82
In August 1996, ARG's senior secured noteholders consented to an
amendment which increased the interest rate from 12% to 13% and changed
interest payment dates from semi-annual to quarterly beginning December
15, 1996. The amendment also replaced a net worth covenant with an
EBITDA (earnings before interest, taxes, depreciation and amortization)
covenant and required ARG to consummate asset sales or sale/leaseback
transactions prior to December 31, 1996.
In September 1996, ARG completed a sale/leaseback transaction under
which it sold the real property relating to 24 Stuart Anderson's Black
Angus and Stuart Anderson's Cattle Company restaurants for an aggregate
sales price of $48,080,000 and simultaneously executed long-term leases
under which it will continue to operate the restaurants. The proceeds
of the transaction were used to redeem at par principal senior secured
notes of $32,383,000 together with interest thereon; to repay bank
debt; to partially cash collateralize outstanding letters of credit; to
pay fees and expenses of this transaction as well as the above noted
consent solicitation and a portion was retained by ARG to be invested
in productive assets within six months. ARG recorded an extraordinary
loss on extinguishment of debt relating to the write-off of capitalized
debt costs in the amount of $1,095,000. In addition, a $5,929,000 gain
related to this sale/leaseback was deferred and will be amortized over
the life of the underlying leases.
In December 1996, ARG completed a sale/leaseback transaction under
which it sold the real property relating to 30 Grandy's restaurants for
an aggregate sales price of $12,500,000 and simultaneously executed a
long-term lease under which it will continue to operate the
restaurants. The proceeds of this transaction were used to redeem at
par principal senior secured notes of $9,543,000 together with interest
thereon and to partially cash collateralize outstanding letters of
credit and a portion was retained by ARG to be invested in productive
assets within six months. ARG recorded a loss of $1,484,000 on the sale
of this property and an extraordinary loss of $593,000 on
extinguishment of debt relating to the write-off of capitalized debt
costs.
During 1996, ARG also completed the sale of three additional Grandy's
restaurants and the sale/leaseback of two Spoons restaurants, the
proceeds of which were applied in accordance with the requirements of
ARG's debt instruments. The combined aggregate sales price of these
transactions was $3,918,000.
In 1997, ARG was in default under a covenant that required certain
sales or sale/leaseback transactions by December 31, 1996. In March
1997, ARG's senior secured noteholders consented to an amendment which
replaced the EBITDA covenants for the year ended December 30, 1996 and
for the four quarters ended March 31, 1997 with an EBITDA covenant for
the twelve months ended May 31, 1997, reduced the amount of net cash
proceeds from asset sales or sale/leaseback transactions required by
December 31, 1996 to $15,000,000 (which was accomplished) and waived
any related existing defaults or events of default. The amendment
provided for an increase of $10 in the stated principal amount for each
$1,000 in stated principal amount of consenting noteholders. This
resulted in an increase of approximately $1,617,000 in the stated
principal amount of the senior secured notes and $1,200,000 in the
actual outstanding principal amount of the senior secured notes.
ARG failed to meet EBITDA covenants under its senior secured notes for
the twelve months ended May 31, 1997 and for the four quarters ended
June 30, 1997. ARG's lenders have not moved to accelerate the repayment
of this debt, however, the Company has included its senior secured
notes and its subordinated debt in the current portion of long-term
debt. Of these amounts, $40.9 million is due on September 15, 1997
under the sinking fund provisions of the senior secured notes. The
Company is pursuing the sale of its Black Angus division in order to
repay in full its senior secured notes. There can be no assurance that
this sale will be completed on acceptable terms.
Substantially all assets of ARG are pledged to its senior lenders. In
addition, the subsidiaries have guaranteed the indebtedness owed by ARG
and such guarantee is secured by substantially all of the assets of the
subsidiaries. In connection with such indebtedness, contingent and
mandatory prepayments may be required under certain specified
conditions and events. There are no compensating balance requirements.
F-13
<PAGE> 83
A quarterly commitment fee of 0.5% per annum is payable on the letter
of credit facility and a quarterly fee of 3.75% per annum is payable on
outstanding letters of credit.
At year end 1995 and 1996, ARG had outstanding letters of credit
primarily related to its self-insurance programs of approximately
$14,435,000 and $12,356,000, respectively. At June 30, 1997, the
Company had outstanding letters of credit of approximately $11,005,000.
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Senior discount debentures, interest only due semi-annually
beginning June 15, 1999 at 14%, matures December 15, 2005 ................... $ 59,257 $ 76,637 $ 82,010
Senior secured notes, interest only due semi-annually beginning September 15,
1992 at 12%, amended to 13% beginning August 28, 1996, principal due
September 15, 1998, sinking fund payment due September 15, 1997 ............. 120,000 84,270 84,714
Senior secured notes, interest only due semi-annually beginning March 15, 1994
at 12%, amended to 13% beginning August 28, 1996, principal due September 15,
1998, sinking fund payment due September 15, 1997 ........................... 49,671 41,584 41,951
Revolving line of credit, interest at the prime rate plus 1.875%
or LIBOR plus 3.25% due quarterly, paid September 13, 1996 .................. 7,500 -- --
Subordinated note payable, quarterly principal payments of $5,625,000 due
beginning December 31, 1998, interest only due quarterly at 10.25% .......... 45,000 45,000 45,000
Other ........................................................................ 357 1,730 1,536
-------- -------- --------
281,785 249,221 255,211
Less Current portion ......................................................... 7,850 41,324 171,930
-------- -------- --------
Long-term portion ............................................................ $273,935 $207,897 $ 83,281
======== ======== ========
</TABLE>
Maturities of long-term debt during each of the five fiscal years
subsequent to year end 1996 are $41,324,000, $85,104,000, $22,750,000,
$22,781,000 and $315,000.
5. INCOME TAXES
On January 1, 1993, the Company adopted, prospectively, FAS 109. The
adoption of this statement had no material effect on the Company's
financial statements.
The Company's provision for income taxes includes the following
components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1994 1995 1996
------------ ----------- -----------
Current:
<S> <C> <C> <C>
Federal ..................... $-- $-- $--
State ....................... 64 75 94
-- -- --
64 75 94
-- -- --
</TABLE>
F-14
<PAGE> 84
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1994 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Deferred:
Federal .................... -- -- --
State ...................... -- -- --
--- --- ---
Provision for income taxes ... $64 $75 $94
=== === ===
</TABLE>
The deferred income tax provision resulted from the following temporary
differences in the recognition of revenues and expenses for tax and financial
reporting purposes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1994 1995 1996
-----------------------------------------------
<S> <C> <C> <C>
Deferred tax liability:
Decrease in liability reserves ................... $ 841 $ -- $ --
Costs capitalized for financial reporting purposes
and expensed on tax return ..................... 283 -- 395
Other, net ....................................... 370 57 113
------- -------- --------
Deferred tax liability ......................... 1,494 57 508
------- -------- --------
Deferred tax asset:
Tax depreciation less than depreciation for
financial reporting purposes ................... (2,850) (1,313) (639)
Long-lived asset impairment not recognized on
tax return ..................................... -- -- (5,426)
Tax gain on sale/leaseback transaction, net ...... -- -- (3,759)
Increase in liability reserves ................... -- (1,460) (2,413)
Costs expensed for financial reporting purposes
and capitalized on tax return .................. -- (482) --
Carryover of tax net operating loss .............. (5,539) (16,519) (17,767)
------- -------- --------
Deferred tax asset ............................. (8,389) (19,774) (30,004)
------- -------- --------
Deferred asset, net of deferred liability ......... (6,895) (19,717) (29,496)
Valuation allowance ............................... 6,895 19,717 29,496
------- -------- --------
Net deferred tax liability ........................ $ -- $ -- $ --
======= ======== ========
</TABLE>
The components of the Company's deferred income tax liability are as follows (in
thousands):
F-15
<PAGE> 85
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
DECEMBER 25, DECEMBER 30,
1995 1996
------------------------------
<S> <C> <C>
Deferred tax liability:
Tax depreciation greater than depreciation for financial
reporting purposes ................................... $ 7,639 $ 7,000
Costs capitalized for financial reporting purposes and
expensed on tax return ............................... 4,578 4,973
Other, net ............................................. 872 985
-------- ---------
Deferred tax liability ............................... 13,089 12,958
-------- ---------
Deferred tax asset:
Increase in liability reserves ......................... (3,368) (5,781)
Long-lived asset impairment not recognized on tax return -- (5,426)
Tax gain on sale/leaseback transactions, net ........... -- (3,759)
Carryover of tax net operating loss .................... (95,945) (113,712)
-------- ---------
Deferred tax asset ................................... (99,313) (128,678)
-------- ---------
Deferred asset, net of deferred liability ............... (86,224) (115,720)
Valuation allowance ..................................... 86,224 115,720
-------- ---------
Net deferred tax liability .............................. $ -- $ --
======== =========
</TABLE>
F-16
<PAGE> 86
The effective tax rate differs from the Federal statutory rate of 34
percent as a result of the following items (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
DECEMBER 26, DECEMBER 25, DECEMBER 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax credit at statutory rates .. $(6,437) $(16,123) $(16,677)
State income tax provision for which no federal
benefit was recorded ........................ 42 50 62
Losses for which no federal benefit was
recorded .................................... 5,757 14,175 15,661
Permanent items, principally intangible
amortization ................................ 702 1,973 1,048
------- -------- --------
Provision for income taxes .................... $ 64 $ 75 $ 94
======= ======== ========
</TABLE>
At December 30, 1996, the Company had available net operating loss
carryforwards for Federal income tax purposes of $113,712,000, expiring
in 2003 to 2011.
6. COMMITMENTS AND CONTINGENCIES
ARG is obligated under employment agreements with certain officers and
employees. Obligations under the agreements are $2,229,000 in 1997,
provide for periodic increases and expire in 1997 unless extended.
The Company has been named as defendant in various lawsuits. It is the
opinion of management that the outcome of such litigation will not
materially affect the Company's financial position or results of
operations.
7. PREFERRED STOCK
At year end 1995 and 1996, there were 10,000 authorized shares of
preferred stock (one cent par value). There were no issued or
outstanding shares.
8. COMMON STOCK
Common stock (one cent par value) authorized, issued and outstanding is
as follows:
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 30, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Shares authorized ...... 1,000,000 1,000,000 1,000,000
Shares issued .......... 513,631 513,631 513,631
Shares outstanding ..... 504,505 504,505 504,505
Treasury shares ........ 9,126 9,126 9,126
</TABLE>
The Chairman and certain other members of the Company's management own all
outstanding shares of Holdings common stock other than shares of Holdings common
stock issued to holders of the debenture units in connection with the
refinancing and rights to acquire shares of Holdings common stock issuable upon
exercise of options and warrants. All such shares owned by management are
subject to a common stock voting trust agreement, in accordance with which the
Chairman and Chief Executive Officer of the Company exercises all voting and
substantially all other rights to which stockholders would otherwise be entitled
until the earlier of December 31, 2001 or the termination of the common stock
voting trust agreement.
F-17
<PAGE> 87
During 1994, the Company acquired 9,126 shares of treasury stock. No shares of
treasury stock were acquired by the Company in 1995 and 1996.
9. STOCK-BASED COMPENSATION PLANS
The Company adopted a Stock Option Plan for Key Employees (the "Plan"). The
Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. FAS 123 "Accounting for Stock-Based
Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the
methods for recognition of cost on plans similar to those of the Company.
Adoption of FAS 123 is optional; however, pro forma disclosures as if the
Company had adopted the cost recognition method are required for the periods in
which awards are granted. The Company did not award stock options during the
fiscal years ended December 25, 1995 or December 30, 1996 or for the twenty-six
weeks ended June 30, 1997.
Under the Plan, the Company may grant options for up to 45,600 shares and the
option exercise price is equal to at least the stock market price on the date of
grant. Vesting provisions for the stock options are determined by the Board of
Directors on a per-grant basis.
A summary of the status of the Company's stock option plan at December 25, 1995
and December 30, 1996 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
DECEMBER 26, 1994 DECEMBER 25, 1995 DECEMBER 30, 1996
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 26,700 $ 3.94 21,572 $ 12.40 21,572 $ 12.40
Granted ........................ 4,000 50.05 -- -- -- --
Exercised ...................... -- -- -- -- -- --
Forfeited ...................... (9,128) 3.94 -- -- (9,128) 3.94
Expired ........................ -- -- -- -- -- --
------ ------- ------ ------- ------ -------
Outstanding at end of year ..... 21,572 $ 12.40 21,572 $ 12.40 12,444 $ 18.60
====== ======= ====== ======= ======= =======
</TABLE>
At December 30, 1996, options for 8,444 shares were outstanding having an
exercise price of $3.94 with a remaining contractual life of approximately five
years and options for 4,000 shares were outstanding having an exercise price of
$50.05 with a remaining contractual life of approximately seven years. None of
the options were exercisable at December 30, 1996.
F-18
<PAGE> 88
UNITED STATES TRUST COMPANY OF NEW YORK
Exchange Agent:
By Hand/Overnight Express:
(insured or registered recommended)
United States Trust Company of
New York
65 Beaver Street
Ground Floor
New York, NY 10005
Attn: Corporate Trust and
Agency Services
By Mail:
(insured or registered recommended)
United States Trust Company of
New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust and
Agency Services
By Overnight Delivery:
(insured or registered recommended)
United States Trust Company of
New York
770 Broadway
7th Floor
New York, New York 10003
Attention: Corporate Trust and
Agency Services
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm By Telephone:
800-548-6565
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "GCL") provides in relevant part that a Delaware corporation may indemnify
any persons, including officers and directors, who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer or director of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer or director acted in good faith and in
a manner he reasonably believed to be in or not opposed to the corporation's
best interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation
in the performance of his duty. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
Article IV of the by-laws of American Restaurant Group Holdings, Inc.
("Holdings") provides for indemnification of its officers and directors to the
fullest extent permitted by Section 145 of the GCL.
Section 102(b)(7) of the GCL provides that a Delaware corporation may
eliminate or limit the personal liability of a director to a Delaware
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the GCL relating to the unlawful payment of a
dividend or an unlawful stock purchase or redemption or (iv) for any transaction
from which the director derived an improper personal benefit.
Article 7 of the Certificate of Incorporation of Holdings provides for
the elimination of personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except as otherwise provided by the GCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Purchase Agreement dated as of September 11, 1996 by and between ARG
Property Management Corporation and ARG Enterprises, Inc. and ARG
Properties I, LLC.*******
2.2 Master lease dated September 11, 1996 between ARG Properties I, LLC, as
Landlord, and ARG Enterprises, Inc. as Tenant.*******
2.3 Lease #06152 dated September 11, 1996 between Captec Net Lease Realty,
Inc. and ARG Enterprises, Inc., as Tenant for Bloomington,
Minnesota.*******
II-1
<PAGE> 90
2.4 Lease #06153 dated September 11, 1996 between Captec Net Lease Realty,
Inc. and ARG Enterprises, Inc., as Tenant for Fridley,
Minnesota.*******
2.5 Lease #06154 dated September 11, 1996 between Captec Net Lease Realty,
Inc. and ARG Enterprises, Inc., as Tenant for Minnetonka,
Minnesota.*******
2.6 Lease #06155 dated September 11, 1996 between Captec Net Lease Realty,
Inc. and ARG Enterprises, Inc., as Tenant for Roseville,
Minnesota.*******
2.7 Lease dated September 11, 1996 between Safeway Inc., as Landlord and
ARG Enterprises, Inc., as Tenant.*******
2.8 Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc., as
Tenant, to ARG Properties I, LLC, as Landlord.*******
2.9 A Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc.,
as Tenant, to Captec Net Lease Realty, Inc., as Landlord for each of
four Minnesota restaurants.*******
2.10 Guaranty of Lease dated September 11, 1996 by ARG Enterprises, Inc., as
Tenant, and Safeway Inc., as Landlord.*******
3.1 Certificate of Incorporation of Holdings, filed with the Secretary of
State of Delaware on September 24, 1993.***
3.2 Certificate of Amendment to Certificate of Incorporation of Holdings,
filed with the Secretary of State of Delaware on December 10, 1993.***
3.3 By-Laws of Holdings.***
4.1 Indenture, dated as of December 1, 1993, between Holdings and United
States Trust Company of New York.***
4.2 First Supplemental Indenture, dated as of March 13, 1996, between the
Company and United States Trust Company of New York.*****
4.3 Specimen Certificate of 14% Senior Discount Debentures due 2005, Series
A.***
4.4 Specimen Certificate of 14% Senior Discount Debentures due 2005, Series
B ("Exchange Debenture").***
4.5 Indenture, dated as of December 1, 1993, between American Restaurant
Group, Inc. ("ARG") and U.S. Trust Company of California, N.A.
(including the form of notes).**
4.6 Shareholders and Registration Rights Agreement, dated as of December
14, 1993, between Holdings, certain management stockholders and BT
Securities Corporation.***
4.7 Registration Rights Agreement, dated as of March 13, 1996, between the
Company and certain purchasers referred to therein.*****
4.8 Amended and Restated Credit Agreement, dated as of December 13, 1993,
among ARG, the subsidiaries of ARG parties thereto, Bankers Trust
Company, as Agent, and the several banks named thereto.**
4.9 Second Amended and Restated Subordinated Loan Agreement, dated as of
December 14, 1993, between ARG and Merrill Lynch Interfunding Inc.**
II-2
<PAGE> 91
4.10 Registration Rights Agreement, dated as of December 14, 1993, between
ARG and Merrill Lynch Interfunding Inc.**
4.11 Stockholders and Registration Rights Agreement, dated as of December
14, 1993, among Holdings, ARG, the stockholders parties thereto and
Merrill Lynch Interfunding Inc.**
4.12 Warrant Certificate, dated as of December 14, 1993, between Holdings
and Merrill Lynch Interfunding Inc.***
4.13 Indenture, dated as of September 15, 1992, between ARG and U.S. Trust
Company of California, N.A., as Trustee (including the form of note).*
4.14 Intercreditor Agreement, dated March 20, 1992, among Bankers Trust
Company, as Collateral Agent and as Agent, U.S. Trust Company of
California, N.A., as Trustee, Merrill Lynch Interfunding Inc., ARG and
the Subsidiary Guarantors.*
4.15 Acknowledgement to Intercreditor Agreement, dated as of December 13,
1993, between the Lenders named therein and U.S. Trust Company of
California, N.A., as Trustee.**
4.16 First Supplemental Indenture, dated as of December 9, 1993, between ARG
and U.S. Trust Company of California, N.A., as Trustee.**
4.17 Limited Waiver and Fourth Amendment to Amended and Restated Credit
Agreement, dated November 1, 1995, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.****
4.18 Limited Waiver and Fifth Amendment to Amended and Restated Credit
Agreement, dated February 27, 1996, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.****
4.19 Limited Waiver and Sixth Amendment to Amended and Restated Credit
Agreement, dated August 26, 1996, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.******
4.20 Limited Waiver and Seventh Amendment to Amended and Restated Credit
Agreement, dated September 10, 1996, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.******
4.21 Limited Waiver and Eighth Amendment to Amended and Restated Credit
Agreement, dated February 25, 1997, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.******
4.21 Limited Waiver and Ninth Amendment to Amended and Restated Credit
Agreement, dated February 27, 1997, among ARG, the subsidiaries of ARG
parties hereto, Bankers Trust Company, as Agent, and the several banks
named thereto.******
5.1 Opinion of Simpson Thacher & Bartlett.********
8.1 Opinion of Simpson Thacher & Bartlett regarding tax matters.
9.1 Common Stock Voting Trust Agreement, dated as of December 14, 1993,
among the stockholders named therein and Anwar S. Soliman, as Voting
Trustee.***
10.1 Common Stock Subscription Agreement, dated as of December 14, 1993,
between Holdings and Anwar S. Soliman.***
II-3
<PAGE> 92
10.2 Common Stock Subscription Agreement, dated as of December 14, 1993,
between Holdings and Ralph S. Roberts.***
10.3 Common Stock Subscription Agreements, each dated as of December 14,
1993, between Holdings and the subscriber party thereto.***
10.4 Amended and Restated Employment Agreement, dated as of December 14,
1993, between ARG and Anwar S. Soliman.***
10.5 Amended and Restated Employment Agreement, dated as of December 14,
1993, between ARG and Ralph S. Roberts.***
10.6 Amended and Restated Employment Agreement, dated as of December 14,
1993, between ARG and Wilfred H. Partridge.***
10.7 Stock Option Plan for Key Employees of American Restaurant Group
Holdings, Inc.***
12.1 Statement of Computation of the Ratios of Earnings to Fixed
Charges.********
22.1 Subsidiaries of Holdings.***
24.1 Consent of Arthur Andersen LLP
24.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1
hereto).********
24.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 8.1 hereto).
25.1 Powers of Attorney (included in the signature pages to the Registration
Statement).********
26.1 Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of United States Trust Company of New York.***
28.1 Form of Letter of Transmittal.********
28.2 Form of Notice of Guaranteed Delivery.********
28.3 Form of Exchange Agency Agreement to be entered into between Holdings
and United States Trust Company of New York.******
- ----------
* Incorporated by reference to ARG's Registration Statement No. 33-48183
on Form S-4 filed with the Securities and Exchange Commission on May
28, 1992, as amended with Amendment No. 1 filed on September 11, 1992.
** Incorporated by reference to ARG's Current Report on Form 8-K dated
December 14, 1993 filed with the Securities and Exchange Commission on
December 30, 1993.
*** Incorporated by reference to the Registrant's Registration Statement
No. 33-74012 on Form S-4 filed with the Securities and Exchange
Commission on January 12, 1994.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 25, 1995 filed with the
Securities and Exchange Commission on March 25, 1996.
II-4
<PAGE> 93
***** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 25, 1996 filed with
the Securities and Exchange Commission on May 8, 1996.
****** Incorporated by reference to ARG's Annual Report on Form 10-K for
the fiscal year ended December 30, 1996, filed with the Securities
and Exchange Commission on April 14, 1997.
******* Incorporated by reference to ARG's Annual Current Report on Form 8-K
dated September 13, 1996, filed with the Securities and Exchange
Commission on September 30, 1996.
******** Previously filed.
ITEM 22. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
B. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; or
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of
this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
II-5
<PAGE> 94
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
II-6
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, hereunto duly authorized in the City of
Newport Beach, State of California on the 29th day of August, 1997.
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
By: /s/ William J. McCaffrey, Jr.
--------------------------------------------
William J. McCaffrey, Jr.
Chief Financial Officer, Vice President, Treasurer
and Assistant Secretary (and Director)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
AMERICAN RESTAURANT GROUP HOLDINGS, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Anwar S. Soliman Chairman, Chief Executive August 29, 1997
- ----------------------------------- Officer and Director
(Anwar S. Soliman) (Principal Executive Officer)
/s/ William J. McCaffrey, Jr. Chief Financial Officer, August 29, 1997
- ----------------------------------- Vice President, Treasurer,
(William J. McCaffrey, Jr.) Assistant Secretary and
Director (Principal Financial
and Accounting Officer)
/s/ Ralph S. Roberts President, Chief Operating August 29, 1997
- ----------------------------------- Officer and Director
(Ralph S. Roberts)
</TABLE>
<PAGE> 96
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Purchase Agreement dated as of September 11, 1996 by and
between ARG Property Management Corporation and ARG
Enterprises, Inc. and ARG Properties I, LLC.*******
2.2 Master lease dated September 11, 1996 between ARG Properties
I, LLC, as Landlord, and ARG Enterprises, Inc. as
Tenant.*******
2.3 Lease #06152 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc., as Tenant for
Bloomington, Minnesota.*******
2.4 Lease #06153 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc., as Tenant for Fridley,
Minnesota.*******
2.5 Lease #06154 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc., as Tenant for
Minnetonka, Minnesota.*******
2.6 Lease #06155 dated September 11, 1996 between Captec Net Lease
Realty, Inc. and ARG Enterprises, Inc., as Tenant for
Roseville, Minnesota.*******
2.7 Lease dated September 11, 1996 between Safeway Inc., as
Landlord and ARG Enterprises, Inc., as Tenant.*******
2.8 Guaranty of Lease dated September 11, 1996 by ARG Enterprises,
Inc., as Tenant, to ARG Properties I, LLC, as Landlord.*******
2.9 A Guaranty of Lease dated September 11, 1996 by ARG
Enterprises, Inc., as Tenant, to Captec Net Lease Realty,
Inc., as Landlord for each of four Minnesota
restaurants.*******
2.10 Guaranty of Lease dated September 11, 1996 by ARG Enterprises,
Inc., as Tenant, and Safeway Inc., as Landlord.*******
3.1 Certificate of Incorporation of Holdings, filed with the
Secretary of State of Delaware on September 24, 1993.***
3.2 Certificate of Amendment to Certificate of Incorporation of
Holdings, filed with the Secretary of State of Delaware on
December 10, 1993.***
3.3 By-Laws of Holdings.***
4.1 Indenture, dated as of December 1, 1993, between Holdings and
United States Trust Company of New York.***
4.2 First Supplemental Indenture, dated as of March 13, 1996,
between the Company and United States Trust Company of New
York.*****
4.3 Specimen Certificate of 14% Senior Discount Debentures due
2005, Series A.***
4.4 Specimen Certificate of 14% Senior Discount Debentures due
2005, Series B ("Exchange Debenture").***
<PAGE> 97
4.5 Indenture, dated as of December 1, 1993, between American
Restaurant Group, Inc. ("ARG") and U.S. Trust Company of
California, N.A. (including the form of notes).**
4.6 Shareholders and Registration Rights Agreement, dated as of
December 14, 1993, between Holdings, certain management
stockholders and BT Securities Corporation.***
4.7 Registration Rights Agreement, dated as of March 13, 1996,
between the Company and certain purchasers referred to
therein.*****
4.8 Amended and Restated Credit Agreement, dated as of December
13, 1993, among ARG, the subsidiaries of ARG parties thereto,
Bankers Trust Company, as Agent, and the several banks named
thereto.**
4.9 Second Amended and Restated Subordinated Loan Agreement, dated
as of December 14, 1993, between ARG and Merrill Lynch
Interfunding Inc.**
4.10 Registration Rights Agreement, dated as of December 14, 1993,
between ARG and Merrill Lynch Interfunding Inc.**
4.11 Stockholders and Registration Rights Agreement, dated as of
December 14, 1993, among Holdings, ARG, the stockholders
parties thereto and Merrill Lynch Interfunding Inc.**
4.12 Warrant Certificate, dated as of December 14, 1993, between
Holdings and Merrill Lynch Interfunding Inc.***
4.13 Indenture, dated as of September 15, 1992, between ARG and
U.S. Trust Company of California, N.A., as Trustee (including
the form of note).*
4.14 Intercreditor Agreement, dated March 20, 1992, among Bankers
Trust Company, as Collateral Agent and as Agent, U.S. Trust
Company of California, N.A., as Trustee, Merrill Lynch
Interfunding Inc., ARG and the Subsidiary Guarantors.*
4.15 Acknowledgement to Intercreditor Agreement, dated as of
December 13, 1993, between the Lenders named therein and U.S.
Trust Company of California, N.A., as Trustee.**
4.16 First Supplemental Indenture, dated as of December 9, 1993,
between ARG and U.S. Trust Company of California, N.A., as
Trustee.**
4.17 Limited Waiver and Fourth Amendment to Amended and Restated
Credit Agreement, dated November 1, 1995, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.****
4.18 Limited Waiver and Fifth Amendment to Amended and Restated
Credit Agreement, dated February 27, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.****
4.19 Limited Waiver and Sixth Amendment to Amended and Restated
Credit Agreement, dated August 26, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.******
4.20 Limited Waiver and Seventh Amendment to Amended and Restated
Credit Agreement, dated September 10, 1996, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.******
<PAGE> 98
4.21 Limited Waiver and Eighth Amendment to Amended and Restated
Credit Agreement, dated February 25, 1997, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.******
4.21 Limited Waiver and Ninth Amendment to Amended and Restated
Credit Agreement, dated February 27, 1997, among ARG, the
subsidiaries of ARG parties hereto, Bankers Trust Company, as
Agent, and the several banks named thereto.******
5.1 Opinion of Simpson Thacher & Bartlett.********
8.1 Opinion of Simpson Thacher & Bartlett regarding tax matters.
9.1 Common Stock Voting Trust Agreement, dated as of December 14,
1993, among the stockholders named therein and Anwar S.
Soliman, as Voting Trustee.***
10.1 Common Stock Subscription Agreement, dated as of December 14,
1993, between Holdings and Anwar S. Soliman.***
10.2 Common Stock Subscription Agreement, dated as of December 14,
1993, between Holdings and Ralph S. Roberts.***
10.3 Common Stock Subscription Agreements, each dated as of
December 14, 1993, between Holdings and the subscriber party
thereto.***
10.4 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Anwar S. Soliman.***
10.5 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Ralph S. Roberts.***
10.6 Amended and Restated Employment Agreement, dated as of
December 14, 1993, between ARG and Wilfred H. Partridge.***
10.7 Stock Option Plan for Key Employees of American Restaurant
Group Holdings, Inc.***
12.1 Statement of Computation of the Ratios of Earnings to Fixed
Charges.********
22.1 Subsidiaries of Holdings.***
24.1 Consent of Arthur Andersen LLP
24.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1
hereto).********
24.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 8.1
hereto).
25.1 Powers of Attorney (included in the signature pages to the
Registration Statement).********
26.1 Statement of Eligibility and Qualification (Form T-1) under
the Trust Indenture Act of 1939 of United States Trust Company
of New York.***
28.1 Form of Letter of Transmittal.********
28.2 Form of Notice of Guaranteed Delivery.********
28.3 Form of Exchange Agency Agreement to be entered into between
Holdings and United States Trust Company of New York.******
<PAGE> 99
- ----------
* Incorporated by reference to ARG's Registration Statement No. 33-48183
on Form S-4 filed with the Securities and Exchange Commission on May
28, 1992, as amended with Amendment No. 1 filed on September 11, 1992.
** Incorporated by reference to ARG's Current Report on Form 8-K dated
December 14, 1993 filed with the Securities and Exchange Commission on
December 30, 1993.
*** Incorporated by reference to the Registrant's Registration Statement
No. 33-74012 on Form S-4 filed with the Securities and Exchange
Commission on January 12, 1994.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 25, 1995 filed with the
Securities and Exchange Commission on March 25, 1996.
***** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 25, 1996 filed with the
Securities and Exchange Commission on May 8, 1996.
****** Incorporated by reference to ARG's Annual Report on Form 10-K for the
fiscal year ended December 30, 1996, filed with the Securities and
Exchange Commission on April 14, 1997.
******* Incorporated by reference to ARG's Annual Current Report on Form 8-K
dated September 13, 1996, filed with the Securities and Exchange
Commission on September 30, 1996.
******** Previously filed.
<PAGE> 1
EXHIBIT 8.1
SIMPSON THACHER & BARTLETT
A PARTNERSHIP WHICH INCLUDES PROFESSIONAL CORPORATIONS
425 LEXINGTON AVENUE
NEW YORK, N.Y. 10017-3954
(212) 455-2000
FAX: (212) 455-2502
August 29, 1997
American Restaurant Group Holdings, Inc.
450 Newport Center Drive
Newport Beach, California 92660
Ladies and Gentlemen:
We have acted as special counsel for American Restaurant Group
Holdings, Inc., a Delaware corporation (the "Company"), in connection with
Amendment No. 1 to the Registration Statement on Form S-4 (the "Registration
Statement") filed by the Company with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the issuance by the Company of $17,000,000 aggregate
principal amount of its 14% Senior Discount Debentures due 2005, Series B (the
"Exchange Debentures"), which are to be offered by the Company in exchange for
$17,000,000 aggregate principal amount of its outstanding 14% Senior Discount
Debentures due 2005, Series A (the "Debentures").
We have examined the Registration Statement and the Indenture
dated as of December 1, 1993, as supplemented by the First Supplemental
Indenture thereto, dated as of March 13, 1996 (the "Debenture Indenture")
between the Company and United States Trust Company of New York, as Trustee (the
"Debenture Trustee"), which has been filed with the Commission as an Exhibit to
the Registration Statement. In addition, we have examined, and have relied as to
matters of fact upon, the originals or copies, certified or
<PAGE> 2
American Restaurant Group -2- August 29, 1997
Holdings, Inc.
otherwise identified to our satisfaction, of such corporate records, agreements,
documents and other instruments and such certificates or comparable documents of
public officials and of officers and representatives of the Company, and have
made such other and further investigations, as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed that the Debenture Indenture
has been duly authorized, executed and delivered by the Debenture Trustee. In
addition, we have assumed the genuineness of all signatures, the legal capacity
of natural persons, the authenticity of all documents submitted to us as
originals and the conformity to original documents of all documents submitted to
us as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that the statements made in the
Registration Statement under the caption "Certain United States Federal Income
Tax Considerations," insofar as they purport to constitute summaries of matters
of United States federal income tax law and regulations or legal conclusions
with respect thereto, constitute accurate summaries of the matters described
therein in all material respects.
We are members of the Bar of the State of New York and we do not
express any opinion herein concerning any law other than the law of the State of
New York and the federal law of the United States. This opinion is rendered to
you solely in connection
<PAGE> 3
American Restaurant Group -3- August 29, 1997
Holdings, Inc.
with the above-described transaction and may not be relied upon for any other
purpose without our prior written consent.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
/s/ Simpson Thacher & Bartlett
----------------------------------
SIMPSON THACHER & BARTLETT
<PAGE> 1
EXHIBIT 24.1
CONSENT
As independent public accountants, we hereby consent to the
use of our report (and to all references to our Firm) included in or made a part
of the Registration Statement File No.
333-17463.
/s/ Arthur Andersen LLP
------------------------------
ARTHUR ANDERSEN LLP
Orange County, California
August 29, 1997
