-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LpaYwcd/iQazF2/PbTmsbPAK8gWs7VR9xbsCNDBtLXXjZil83u8CwB70D0zW+PbM azd8/8xxxsp3oC5Vmz9AMA== 0000898430-01-503513.txt : 20020410 0000898430-01-503513.hdr.sgml : 20020410 ACCESSION NUMBER: 0000898430-01-503513 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRANDIUM INC CENTRAL INDEX KEY: 0000813856 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330197361 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-14051 FILM NUMBER: 1787463 BUSINESS ADDRESS: STREET 1: 18831 VON KARMAN AVE CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 9497577900 MAIL ADDRESS: STREET 1: 18831 VON KARMAN AVE STREET 2: STE 400 CITY: IRVINE STATE: CA ZIP: 92612 FORMER COMPANY: FORMER CONFORMED NAME: FAMILY RESTAURANTS DATE OF NAME CHANGE: 19940324 FORMER COMPANY: FORMER CONFORMED NAME: KOO KOO ROO ENTERTPRISES INC DATE OF NAME CHANGE: 19981109 FORMER COMPANY: FORMER CONFORMED NAME: RESTAURANT ENTERPRISES GROUP INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 or [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 33-14051 -------- Prandium, Inc. -------------- (Exact name of registrant as specified in its charter) Delaware 33-0197361 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 18831 Von Karman Avenue, Irvine, California 92612 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 757-7900 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 9, 2001, the registrant had issued and outstanding 180,380,513 shares of common stock, $.01 par value per share. -1- PART I. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ------ PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ($ in thousands) ----------------
September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 27,269 $ 53,505 Restricted cash 14,502 2,500 Receivables 2,635 2,075 Inventories 1,785 2,386 Other current assets 3,045 2,574 Property held for sale 18,991 - ------------ ---------- Total current assets 68,227 63,040 Property and equipment, net 103,432 124,922 Costs in excess of net assets of business acquired, net - 16,814 Other assets 11,211 15,736 ------------ ---------- $ 182,870 $ 220,512 ============ ========== LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities: Current portion of long-term debt, including capitalized lease obligations $ 234,712 $ 2,060 Accounts payable 5,068 8,150 Current portion of self-insurance reserves 3,223 2,812 Other accrued liabilities 72,265 58,760 Income taxes payable 3,296 3,523 ------------ ---------- Total current liablities 318,564 75,305 Self-insurance reserves 4,945 5,298 Other long-term liabilities 2,718 3,590 Long-term debt, including capitalized lease obligations, less current portion 1,311 235,696 Commitments and contingencies Stockholders' deficit: Common stock - authorized 300,000,000 shares, par value $.01 per share, 180,380,513 shares issued and outstanding on September 30, 2001 and on December 31, 2000 1,804 1,804 Additional paid-in capital 222,353 222,353 Accumulated deficit (368,825) (323,534) ------------ ---------- Total stockholders' deficit (144,668) (99,377) ------------ ---------- $ 182,870 $ 220,512 ============ ==========
See accompanying notes to condensed consolidated financial statements -2- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- ($ in thousands, except per share amounts) ------------------------------------------ (Unaudited)
For the Quarters Ended ---------------------------- September 30, September 24, 2001 2000 ------------- ------------- Sales $ 70,864 $ 78,040 ----------- ----------- Product costs 18,535 21,656 Payroll and related costs 25,266 27,985 Occupancy and other operating expenses 19,822 22,284 Depreciation and amortization 4,077 4,476 General and administrative expenses 5,069 5,477 Opening costs 130 326 Loss on disposition of properties, net 330 582 Provison for divestitures and write-down of long-lived assets 9,228 1,730 Restructuring costs 522 - ----------- ----------- Total costs and expenses 82,979 84,516 ----------- ----------- Operating loss (12,115) (6,476) Interest expense, net 7,098 7,131 Gain on sale of division - (60,978) ----------- ----------- Income (loss) before income tax provision (19,213) 47,371 Income tax provision 38 1,272 ----------- ----------- Net income (loss) $ (19,251) $ 46,099 =========== =========== Net income (loss) per share - basic and diluted $ (0.11) $ 0.26 =========== =========== Weighted average shares outstanding - basic and diluted 180,380,513 180,380,513 =========== ===========
See accompanying notes to condensed consolidated financial statements -3- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- ($ in thousands, except per share amounts) ------------------------------------------ (Unaudited)
For the Nine Months Ended ---------------------------- September 30, September 24, 2001 2000 ------------- ------------- Sales $ 221,374 $ 349,009 ------------ ------------ Product costs 58,842 92,010 Payroll and related costs 79,382 124,001 Occupancy and other operating expenses 64,612 92,980 Depreciation and amortization 12,154 18,526 General and administrative expenses 16,784 20,953 Opening costs 237 412 Loss on disposition of properties, net 1,101 1,036 Provision for divestitures and write-down of long-lived assets 9,417 1,730 Restructuring costs 3,075 - ------------ ------------ Total costs and expenses 245,604 351,648 ------------ ------------ Operating loss (24,230) (2,639) Interest expense, net 20,810 24,280 Gain on sale of division - (60,978) ------------ ------------ Income (loss) before income tax provision (45,040) 34,059 Income tax provision 251 1,526 ------------ ------------ Net income (loss) $ (45,291) $ 32,533 ============ ============ Net income (loss) per share - basic and diluted $ (0.25) $ 0.18 ============ ============ Weighted average shares outstanding - basic and diluted 180,380,513 180,380,513 ============ ============
See accompanying notes to condensed consolidated financial statements -4- PRANDIUM, INC. -------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- ($ in thousands) (Unaudited)
For the Nine Months Ended --------------------------- September 30, September 24, 2001 2000 ------------- ------------- Cash flows from operating activities: Cash received from customers, franchisees and licensees $ 222,446 $ 350,945 Cash paid to suppliers and employees (226,664) (333,661) Interest received (paid), net 402 (30,517) Opening costs (237) (412) Restructuring costs (2,630) - Income taxes paid (478) (727) ----------- ----------- Net cash used in operating activities (7,161) (14,372) ----------- ----------- Cash flows from investing activities: Proceeds from disposal of property and equipment 215 1,075 Proceeds from payments on notes receivable 521 530 Capital expenditures (3,792) (10,824) Lease termination payments (840) (695) Other divestment expenditures (1,272) (1,583) Proceeds from (cash required for) the El Torito Sale, net (1,154) 113,572 Increase in restricted cash, net (9,448) - Other (2,233) (1,597) ----------- ----------- Net cash provided by (used in) investing activities (18,003) 100,478 ----------- ----------- Cash flows from financing activities: Repayments of working capital borrowings, net - (21,850) Proceeds from equipment financing - 2,672 Payment of debt issuance costs (150) - Reductions of long-term debt, including capitalized lease obligations (922) (2,424) ----------- ----------- Net cash used in financing activities (1,072) (21,602) ----------- ----------- Net increase (decrease) in cash and cash equivalents (26,236) 64,504 Cash and cash equivalents at beginning of period 53,505 3,600 ----------- ----------- Cash and cash equivalents at end of period $ 27,269 $ 68,104 =========== =========== Reconciliation of net income (loss) to net cash used in operating activities: Net income (loss) $ (45,291) $ 32,533 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 12,154 18,526 Amortization of debt issuance costs and deferred gain 270 997 Loss on disposition of properties 1,101 1,036 Provision for divestitures and write-down of long-lived assets 9,417 1,730 Gain on sale of division - (60,978) (Increase) decrease in receivables, inventories and other current assets (240) 1,751 Increase (decrease) in accounts payable, self- insurance reserves, other accrued liabilities and income taxes payable 15,428 (9,967) ----------- ----------- Net cash used in operating activities $ (7,161) $ (14,372) =========== ===========
See accompanying notes to condensed consolidated financial statements -5- PRANDIUM, INC. -------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. Company. Prandium, Inc. (together with its subsidiaries, the ------- "Company"), was incorporated in Delaware in 1986. The Company, through its subsidiaries, is primarily engaged in the operation of restaurants in the full- service and fast-casual segments. At September 30, 2001, the Company operated 191 restaurants in 21 states, approximately 65% of which are located in California, Ohio, Pennsylvania, Indiana and Michigan, and franchised and licensed 7 restaurants outside the United States. 2. Financial Statements. The Condensed Consolidated Financial Statements -------------------- in this Form 10-Q have been prepared in accordance with Securities and Exchange Commission Regulation S-X. Reference is made to the Notes to the Consolidated Financial Statements for the Fiscal Year Ended December 31, 2000 included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "Form 10-K") for information with respect to the Company's significant accounting and financial reporting policies, as well as other pertinent information. The Company believes that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the quarter and nine months ended September 30, 2001 and September 24, 2000 are not necessarily indicative of those for the full year. 3. Going Concern Matters and Recapitalization Plan. The Company's ----------------------------------------------- consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in its Consolidated Financial Statements included in the Form 10-K, the Company incurred losses of $41,772,000, $36,491,000 and $63,133,000 for the fiscal years ended December 31, 2000, December 26, 1999 and December 27, 1998, respectively. As further shown in the Condensed Consolidated Financial Statements in this Form 10-Q, the Company incurred an additional loss of $45,291,000 for the nine months ended September 30, 2001 and had a stockholders' deficit of $144,668,000 on September 30, 2001. During 1999 and the first half of fiscal 2000, the Company explored several financing transactions and other strategic alternatives in an effort to meet its debt service requirements. This process culminated in the sale to Acapulco Acquisition Corp. ("Acapulco") of the El Torito restaurant division on June 28, 2000 (the "El Torito Sale"). A portion of the net cash proceeds from that transaction was used to pay indebtedness of $25.9 million outstanding under the Company's credit facility (the "Foothill Credit Facility") with Foothill Capital Corporation ("Foothill"). In addition, Acapulco assumed $9.8 million of long- term debt, consisting primarily of capitalized lease obligations, as part of the El Torito Sale. After completion of the El Torito Sale, however, the Company has continued to be highly leveraged and has significant annual debt service requirements. During the second half of fiscal 2000, the Company began considering other alternatives to address its debt service requirements. As a result of discussions and deliberation among the Company and its legal and financial advisors during January 2001, the Company's subsidiary FRI-MRD Corporation ("FRI-MRD") elected not to pay the semi-annual interest payments due January 31, 2001 and July -6- 31, 2001 on its outstanding long-term debt (the "FRI-MRD Notes"). The Company also elected not to pay the semi-annual interest payments due February 1, 2001 and August 1, 2001 on its outstanding long-term debt (the "Prandium Notes"). Under the terms of the note agreements governing the FRI-MRD Notes and the indentures governing the Prandium Notes, these non-payments became "Events of Default" and the holders of all such debt have become entitled to certain rights, including the right to accelerate the debt. In addition, the vesting of the right (whether or not exercised) of the noteholders to accelerate the debt caused an "Event of Default" to occur under the Foothill Credit Facility, and Foothill became entitled to certain additional rights. As a result of these "Events of Default," the Company has classified all debt outstanding under the FRI-MRD Notes and the Prandium Notes (approximately $233.4 million at September 30, 2001) as current in the condensed consolidated balance sheet. The Company is currently negotiating with certain of its creditors, including Foothill and the holders of the FRI-MRD Notes and some of the holders of Prandium Notes, to reach agreement on an acceptable capital restructuring of the Company and its subsidiaries and to that end has negotiated and executed a term sheet (the "Note Term Sheet") with an authorized representative of holders of a majority of the FRI-MRD Notes. As currently contemplated, the restructuring would involve a prearranged or prepackaged plan of reorganization to be implemented through the commencement of cases by the Company and FRI-MRD under chapter 11 of the United States Bankruptcy Code (such cases, a "Reorganization Case"). In light of the amount that the Company owes to creditors and the size of the Company's operations, the Company does not anticipate that, under such a prearranged or prepackaged plan, there will be value available for distribution to its current stockholders or the holders of the subordinated Prandium Notes. The Company does not currently contemplate that the Reorganization Case would involve any of the Company's operating subsidiaries. The Company cannot provide any assurance it will be able to reach an acceptable agreement with its creditors on a capital restructuring, on the terms of such an agreement, or on such an agreement's effect on the Company's operations. If the Company cannot reach such an agreement, it will need to consider other alternatives, including, but not limited to, a federal bankruptcy filing without a prearranged or prepackaged reorganization plan. There can be no assurance that the Company would be able to reorganize successfully in such a proceeding. Under any such circumstances, the Company does not anticipate that there will be value available for distribution to its current stockholders or the holders of the subordinated Prandium Notes. These factors raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. The accompanying Condensed Consolidated 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 continue as a going concern. The Company's continuation as a going concern is dependent on a successful restructuring of its obligations and its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain modifications in its financial and capital structure, to comply with the terms of any new financing agreements and ultimately to attain profitable operations. 4. Sale of Hamburger Hamlet Restaurants. On October 23, 2001, FRI-MRD ------------------------------------ entered into a definitive agreement (the "Hamlet Agreement") to sell its chain of 14 Hamburger Hamlet -7- restaurants to Othello Holding Corporation ("Othello"). Under the terms of the Hamlet Agreement, the Company will receive, subject to certain post-closing adjustments based on closing financial statements, cash of $16.1 million ($1.0 million of which will be placed in escrow for a designated period following consummation of the sale). It is intended that the proceeds from the sale will be used to repay certain indebtedness under the FRI-MRD Notes. The Hamlet Agreement contemplates that the sale will occur after FRI-MRD has commenced a Reorganization Case and will be subject to approval by the court in which the Reorganization Case is pending. The sale is also subject to Othello receiving adequate financing to pay the purchase price and customary terms and conditions. There can be no assurances that the sale will be successfully completed. At September 30, 2001, the assets and liabilities of the Hamburger Hamlet restaurants have been written down to their net realizable value of $15,866,000 and classified as property held for sale in the accompanying condensed consolidated balance sheet. The related write-down of $8,149,000 is reported in provision for divestitures and write-down of long-lived assets in the accompanying condensed consolidated statements of operations. In addition, property held for sale includes $3,125,000 which represents the net realizable value of another restaurant property under contract for sale. The Hamburger Hamlet restaurants generated sales of $24,582,000 and $24,525,000 for the nine months ended September 30, 2001 and September 24, 2000, respectively, and related operating income of $1,496,000 and $1,703,000 for the same periods, respectively. Such operating income includes charges for allocated general and administrative expenses of $559,000 and $515,000 for the nine months ended September 30, 2001 and September 24, 2000, respectively. 5. Strategic Divestment Programs. In the fourth quarter of 1999, three ----------------------------- non-strategic Koo Koo Roo restaurants were designated for divestment (the "KKR Strategic Divestment Program"). In conjunction with the KKR Strategic Divestment Program, the Company recorded a provision for divestitures of $904,000. This provision consisted of costs associated with lease terminations, subsidized subleases, brokerage fees and other divestment costs. During 2000, two of the restaurants were subleased and the third restaurant's lease was terminated. In the fourth quarter of 2000, ten additional non-strategic Koo Koo Roo restaurants were designated for divestment. In conjunction with the KKR Strategic Divestment Program, the Company recorded a provision for divestitures of $4,510,000 in 2000. This provision consisted of (i) $2,765,000 for the write-down to net realizable value of the property and equipment associated with such restaurants and (ii) $1,745,000 for costs associated with lease terminations, subsidized subleases, brokerage fees and other divestment costs. In the first quarter of 2001, the Company recorded a provision for severance costs of $189,000 associated with certain restaurant managers in connection with the restaurants to be divested. During the nine months ended September 30, 2001, these restaurants (including eight restaurants divested or closed in 2001) had sales of $3,312,000 and restaurant level operating losses of $719,000. For the nine months ended September 30, 2001, the Company paid (i) $127,000 for severance costs associated with certain restaurant managers who were terminated in connection with the restaurants divested and (ii) $638,000 for net costs associated with lease terminations, brokerage fees and other divestment costs. For the nine months ended September 24, 2000, the Company paid $55,000 for such costs. The KKR Strategic Divestment Program is scheduled to be completed by the end of fiscal 2001, and the designated restaurants' operating results will be included in the Company's consolidated statement of operations until the divestments are completed. -8- In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were designated for divestment (the "CC Strategic Divestment Program"). In conjunction with the CC Strategic Divestment Program, the Company recorded a provision for divestitures of $22,884,000, including divestment reserves of $12,256,000. During the fourth quarter of 1999, the Company determined that it would not be able to satisfactorily negotiate lease terminations or subleases for 20 operating restaurants of the 48 Chi-Chi's restaurants designated for divestment. As a result, these 20 restaurants were removed from the CC Strategic Divestment Program, and $1,048,000 previously recorded in conjunction with the provision for divestitures was reversed during the fourth quarter of 1999. After this reversal, the eight restaurants remaining in the CC Strategic Divestment Program were divested during 2000. For the nine months ended September 30, 2001 and September 24, 2000, the Company paid (i) $33,000 and $203,000, respectively, for severance costs associated with certain restaurant and regional managers who were terminated in connection with the restaurants divested and (ii) $1,284,000 and $1,689,000, respectively, for net costs associated with lease terminations, subsidized subleases, brokerage fees and other divestment costs. Three other non-strategic restaurants were identified for divestment during 2000. The Company recorded a provision for divestitures with respect to such restaurants of $1,805,000 in 2000. This provision consisted of (i) $1,730,000 for the write-down to fair value of the property and equipment associated with such restaurants and (ii) $75,000 for costs associated with broker commissions and other divestment costs. During the quarter ended April 1, 2001, these restaurants were divested and had sales of $99,000 and restaurant level operating losses of $99,000. For the nine months ended September 30, 2001, the Company (i) paid $2,000 for severance costs associated with certain restaurant managers who were terminated in connection with these divested restaurants and (ii) paid $14,000 in net divestment costs. In the second quarter of 2001, the Company announced an organizational restructuring that resulted in the elimination of approximately 40 positions in the Company's support center. The Company recorded a provision of $1,607,000 for severance and outplacement services and the amount is included in restructuring costs on the accompanying 2001 condensed consolidated statements of operations. Through the quarter ended September 30, 2001, a total of $1,162,000 was paid for severance and outplacement services. 6. Segment Information. The Company operates exclusively in the food- ------------------- service industry. Substantially all revenues result from the sale of menu products at restaurants operated by the Company. The Company's reportable segments are based on restaurant operating divisions. Operating income (loss) includes the operating results before interest. The corporate component of sales, depreciation and amortization and operating income (loss) represents operating results of the two full-service and four fast-casual restaurants not included in the El Torito Sale, as well as corporate general and administrative expenses. Corporate assets include corporate cash, restricted cash, investments, receivables, asset portions of financing instruments and the two full-service and four fast-casual restaurants not included in the El Torito Sale. Fiscal year 2000 segment information for the El Torito restaurant division has been restated to exclude the results of the two full-service and four fast-casual restaurants not included in the El Torito Sale. -9-
For the Quarters Ended For the Nine Months Ended ------------------------------------ --------------------------------------- September 30, September 24, September 30, September 24, 2001 2000 2001 2000 --------------- --------------- --------------- ----------------- (Unaudited) ($ in thousands) Sales El Torito Division $ - $ 910 $ - $ 112,409 Chi-Chi's Division 50,624 54,195 156,683 166,050 Koo Koo Roo Division 19,041 21,272 60,909 65,389 Corporate 1,199 1,663 3,782 5,161 --------------- --------------- --------------- ----------------- Total Sales $ 70,864 $ 78,040 $ 221,374 $ 349,009 =============== =============== =============== ================= Depreciation and Amortization El Torito Division $ - $ 76 $ - $ 5,367 Chi-Chi's Division 2,655 2,635 8,067 8,005 Koo Koo Roo Division 1,086 1,368 3,089 4,028 Corporate 336 397 998 1,126 --------------- --------------- --------------- ----------------- Total Depreciation and $ 4,077 $ 4,476 $ 12,154 $ 18,526 Amortization =============== =============== =============== ================= Operating Income (Loss) El Torito Division $ - $ (2,280) $ - $ 5,411 Chi-Chi's Division (491) (2,318) (5,308) (5,166) Koo Koo Roo Division (8,577) (981) (10,340) (1,481) Corporate (3,047) (897) (8,582) (1,403) --------------- --------------- --------------- ----------------- Total Operating Income (Loss) $ (12,115) $ (6,476) $ (24,230) $ (2,639) =============== =============== =============== ================= Interest Expense, net El Torito Division $ - $ 7 $ - $ 1,227 Chi-Chi's Division 84 115 290 945 Koo Koo Roo Division 39 52 128 129 Corporate 6,975 6,957 20,392 21,979 --------------- --------------- --------------- ----------------- Total Interest Expense, net $ 7,098 $ 7,131 $ 20,810 $ 24,280 =============== =============== =============== ================= Capital Expenditures El Torito Division $ - $ - $ - $ 934 Chi-Chi's Division 484 3,990 1,686 6,144 Koo Koo Roo Division 253 1,038 1,841 2,226 Corporate 61 650 265 1,520 --------------- --------------- --------------- ----------------- Total Capital Expenditures $ 798 $ 5,678 $ 3,792 $ 10,824 =============== =============== =============== ================= September 30, December 31, 2001 2000 --------------- ----------------- (Unaudited) ($ in thousands) Total Assets Chi-Chi's Division $ 98,013 $ 104,387 Koo Koo Roo Division 34,339 46,202 Corporate 50,518 69,923 --------------- ----------------- Total Assets $ 182,870 $ 220,512 =============== =================
-10- Item 2. Management's Discussion and Analysis of Financial Condition and ------ Results of Operations Certain information and statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words "believes," "anticipates," "expects," "intends," "plans," "estimates" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks and uncertainties that could cause actual results of the Company or the restaurant industry to differ materially from expected results expressed or implied by such forward-looking statements. Although it is not possible to itemize all of the factors and specific events that could affect the outlook of a restaurant company operating in a competitive environment, factors that could significantly impact expected results include: . the ability of the Company to reach agreement with its creditors on an acceptable capital structure; . determinations of any judicial court involved in the restructuring of the Company; . the continuing development of successful marketing strategies for each of the Company's concepts; . the effect of national and regional economic conditions; . the availability of adequate working capital; . competitive products and pricing; . changes in legislation; . demographic changes; . the ability to attract and retain qualified personnel; . changes in business strategy or development or divestment plans; . business disruptions; . changes in consumer preferences, tastes and eating habits; . increases in food and labor costs; and . increases in utility costs and the impact of potential utility interruptions. -11- The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. The following should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in the Form 10-K. As used herein, "comparable restaurants" means restaurants operated by the Company for at least eighteen months and that continued in operation through the end of the third quarter of 2001. Liquidity and Capital Resources - ------------------------------- A. Liquidity The Company reported net cash used in operating activities of $7.2 million for the nine months ended September 30, 2001 and net cash used in operating activities of $14.4 million for the nine months ended September 24, 2000. Cash needs are being funded by available cash balances which resulted from the El Torito Sale. The Company's viability is dependent upon its ability to restructure its debt and/or capital structure. As described below, the Company is currently negotiating with certain of its creditors to reach agreement on an acceptable capital restructuring of the Company and its subsidiaries which, as currently contemplated, would involve a Reorganization Case. The Company cannot provide any assurance that an agreement can be reached or on the terms of an agreement or its effects on the Company's operations and interests. In light of the amount owed to creditors and the size of the Company's operations, the Company does not anticipate that, in such a restructuring, there will be value available for recovery by the current stockholders or the holders of the subordinated Prandium Notes. If the Company cannot reach agreement with Foothill, the holders of the FRI-MRD Notes and the holders of the Prandium Notes, the Company will need to consider other alternatives, including but not limited to, a federal bankruptcy filing without a prearranged or prepackaged reorganization plan. Assuming the Company is able to work out an acceptable capital structure, its continuing viability will be dependent upon its ability to generate sufficient operating cash flow or cash flow from other sources to meet its obligations on a timely basis and to comply with the terms of any new financing agreements or to be able to renegotiate such obligations and terms. Statement of Cash Flows. For the nine months ended September 30, 2001, net cash used in operating activities was $7.2 million compared to $14.4 million for the same period in 2000. This change was primarily due to a $30.9 million reduction in interest paid, partially offset by a $21.5 million decline in cash received from customers, franchisees and licensees net of cash paid to suppliers and employers and $2.6 million in restructuring costs. For the first nine months of 2001, net cash used in investing activities was $18.0 million compared to $100.5 million provided by investing activities for the same period in 2000. This change was primarily due to $113.6 million in net proceeds from the sale of the El Torito Division in 2000, partially offset by an increase in restricted cash, net of $9.4 million and a $7.0 million reduction in capital expenditures in 2001. For the first nine months of 2001, net cash used in financing activities was $1.1 million compared to $21.6 million for the same period in 2000. During the first nine months of 2000, $21.9 million in net working capital borrowings were repaid. -12- EBITDA. For the first nine months of 2001, the Company reported EBITDA (defined as earnings (loss) before opening costs, loss (gain) on disposition of properties, provision for divestitures, restructuring costs, interest, taxes, and depreciation and amortization) of $1.8 million, compared to $19.1 million in the same period of 2000. After reporting negative EBITDA in both the first and second quarters of 2001, the Company reported EBITDA of $2.2 million for the third quarter of 2001, compared to $0.6 million in the same period of 2000. The $17.3 million decrease for the first nine months of 2001 was composed of (i) a $13.0 million decrease as the result of the sale of the El Torito Division on June 28, 2000; (ii) a $0.8 million decrease in the Chi-Chi's Division; (iii) a $1.1 million decrease in the Koo Koo Roo Division; and (iv) $2.4 million of incremental general and administrative expenses that were previously allocated to the El Torito Division which have not been eliminated. As a result of the sale of the El Torito Division and, if completed, the sale of the Hamburger Hamlet restaurants, the Company will be operating at lower EBITDA levels for the foreseeable future. The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, operating income (loss) as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. Furthermore, other companies may compute EBITDA differently, and therefore, EBITDA amounts among companies may not be comparable. Working Capital Deficiency. The Company normally operates with a working capital deficiency because: . restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable; . rapid turnover allows a limited investment in inventories; and . cash from sales is applied to the payment of related accounts payable for food, beverages and supplies which are generally purchased on trade credit terms. The Company had a working capital deficiency of $250.3 million on September 30, 2001. This amount includes property held for sale of approximately $19.0 million and the classification of approximately $233.4 million in debt outstanding under the FRI-MRD Notes and Prandium Notes as current. Debt and Negotiations with Creditors. 1. Credit Facility. On January 10, 1997, the Company entered into the --------------- Foothill Credit Facility which provided for a five-year, $35 million credit facility for the ongoing working capital needs of the Company. As a result of the acquisition of Koo Koo Roo, Inc. and The Hamlet Group, Inc. ("Hamlet") on October 30, 1998, the Company increased the Foothill Credit Facility to $55 million. In connection with the El Torito Sale, (i) the Company used a portion of the cash proceeds from the sale to repay $25.9 million outstanding under the Foothill Credit Facility and (ii) the Foothill Credit Facility was amended and restated to adjust all restrictive covenants to reflect the El Torito Sale and reduce the credit facility to a maximum of $20 million (subject to certain limitations) of letters of credit and revolving cash borrowings. The Foothill Credit Facility: -13- . is secured by substantially all of the personal property of the Company (other than the capital stock of Hamlet) along with the cash collateral discussed below; . contains covenants which restrict, among other things, the Company's ability to incur debt, pay dividends on or redeem capital stock, make certain types of investments, make dispositions of assets and engage in mergers and consolidations; and . expires on January 10, 2002. The Company was not in compliance with certain financial ratios at September 30, 2001, July l, 2001, April 1, 2001 and December 31, 2000. In addition, the vesting of the FRI-MRD noteholders' right to accelerate the debt caused an Event of Default to occur under the provisions of the Foothill Credit Facility. The Company has notified Foothill of all such Events of Default. Letters of credit are issued under the Foothill Credit Facility in large part to provide security for future amounts payable under the Company's workers' compensation insurance program ($9.4 million of letters of credit were outstanding as of November 9, 2001, all of which were cash collateralized as described below). No working capital borrowings were outstanding as of September 30, 2001 and November 9, 2001. On March 29, 2001, May 15, 2001 and June 18, 2001, Foothill, FRI-MRD and Chi-Chi's entered into a series of letter agreements whereby FRI-MRD and Chi- Chi's acknowledged certain specified events of default and that as a result of such events of default, Foothill has no further obligation to make advances under the Foothill Credit Facility, and Foothill agreed that, subject to certain conditions, it would forbear from exercising its remedies relative to such events of default. Pursuant to the May 15, 2001 letter agreement, FRI-MRD paid a forbearance fee in the amount of $100,000 and transferred $4,000,000 in cash to Foothill to be held as cash collateral and as additional security for the outstanding letters of credit. Pursuant to the June 18, 2001 letter agreement, in which FRI-MRD and Chi-Chi's agreed to cash collateralize all letters of credit outstanding under the Foothill Credit Facility in an amount equal to 105% of face value, FRI-MRD transferred approximately $8,068,000 to Foothill, bringing the total amount held by Foothill for that purpose to approximately $12,068,000. This amount is included in restricted cash on the Company's September 30, 2001 condensed consolidated balance sheet. After receiving this amount, Foothill released its liens on the real property of the Company and its subsidiaries. On October 18, 2001, the Company, FRI-MRD, Chi-Chi's and certain other subsidiaries of the Company entered into a subsequent letter agreement with Foothill whereby the Company acknowledged that certain specified events of default had occurred and reacknowledged that Foothill has no further obligation to make advances or otherwise extend credit under the Foothill Credit Facility. Foothill agreed that, subject to certain conditions including the reaffirmation and consent by the Company, FRI-MRD and certain other subsidiaries of the Company of their obligations under the Foothill Credit Facility and the payment of a forbearance fee in the amount of $50,000 (which was paid to Foothill by the Company on October 18, 2001), it would forbear from exercising its remedies relative to the events of default specified in the letter agreement until the earliest to occur of: (i) January 10, 2002 (or such later date as Foothill may designate in writing in its sole discretion); (ii) the occurrence of any Event of Default under the Foothill Credit Facility (other than those defaults set forth in, and certain future defaults contemplated by, the letter agreement); and (iii) the failure of the Company to comply with certain covenants set forth in the letter agreement. The Company also (A) released Foothill from any claims they may have arising under the Foothill Credit Facility, (B) agreed not to seek authority from any bankruptcy court to obtain the use of any cash Foothill holds as cash collateral and additional security for letters of credit outstanding under the -14- Foothill Credit Facility and (C) agreed, prior to the commencement of any bankruptcy proceeding, to provide a copy of a commitment letter that either secures a letter of credit in favor of Foothill in an amount equal to 105% of the outstanding letters of credit or replaces and releases all such letters of credit. The fee on undrawn letters of credit was also increased from 3% to 5% per annum. As of November 9, 2001, Foothill currently continues to hold approximately $10 million as cash collateral for the outstanding letters of credit. The Company is currently negotiating with a different lender to replace the Foothill Credit Facility with a new credit facility. The new credit facility would provide for letters of credit and a line of credit for the ongoing working capital needs of the Company and would provide for the release of the cash collateral held by Foothill. There can be no assurance that an agreement can be reached with a different lender or on the terms of such an agreement. 2. FRI-MRD and Prandium Notes. After completion of the El Torito Sale, -------------------------- the Company continues to be highly leveraged and has significant annual debt service requirements. During the second half of fiscal 2000, the Company began considering various alternatives to address its debt service requirements. As a result of discussions and deliberations among the Company and its legal and financial advisors during January 2001, the Company's subsidiary FRI-MRD elected not to pay the semi-annual interest payments due January 31, 2001 and July 31, 2001 on the FRI-MRD Notes. The Company also elected not to pay the semi-annual interest payments due February 1, 2001 and August 1, 2001 on the Prandium Notes. Under the terms of the note agreements governing the FRI-MRD Notes and the indentures governing the Prandium Notes, these non-payments became "Events of Default" and the holders of all such debt have become entitled to certain rights, including the right to accelerate the debt. In addition, the vesting of the right (whether or not exercised) of the noteholders to accelerate the debt caused an "Event of Default" to occur under the Foothill Credit Facility and Foothill became entitled to certain additional rights. On November 7, 2001, the Company executed the Note Term Sheet with an authorized representative of the holders of the FRI-MRD Notes. The Note Term Sheet contemplates restructuring the terms of the FRI-MRD Notes in a Reorganization Case, which restructuring would be effective on the effective date of a reorganization plan confirmed in the Reorganization Case (the "Closing"). Under the Note Term Sheet, the maturity date of the FRI-MRD Notes would be extended from January 24, 2002 to January 31, 2005, the interest rates of both the 14% FRI-MRD Notes and the 15% FRI-MRD Notes would be reset at 12%, and all existing and prior defaults as well as accrued interest as of the effective date would be waived. While no cash interest payments would be required, prepayments would be encouraged by an extra reduction in principal of up to 33.33% of the prepaid amount, depending on how quickly the prepayment is made. Concurrently with the Closing, the proceeds of the sale of the Hamburger Hamlet restaurants would be used to prepay a portion of the 14% FRI-MRD Notes. In addition, at the Closing, the Company would pay an additional $30 million in cash to the holders of the FRI-MRD Notes. The Company would also become subject to additional limitations on indebtedness and capital expenditures. The restructuring contemplated by the Note Term Sheet is conditioned on, among other things, the Company entering into a replacement for the Foothill Credit Facility and the confirmation of a reorganization plan in the Reorganization Case on terms consistent with the Note Term Sheet. -15- The Company has been negotiating with some of the holders of its 9 3/4% Prandium Notes and 10 7/8% Prandium Notes with respect to the restructuring of the Company. While no definitive agreement has been reached, in light of the amount that the Company owes to creditors, the size of the Company's operations, and the structural subordination of the Prandium Notes to the FRI-MRD Notes, the Company does not anticipate that, under a prearranged or prepackaged plan of reorganization or otherwise, there will be value available for distribution to the holders of the 10 7/8% Prandium Notes. 3. Equity Holders. In light of the amount owed to creditors and the -------------- size of the Company's operations, the Company does not anticipate that there will be value available for recovery by the current stockholders. 4. Other. On October 23, 2001, FRI-MRD entered into the Hamlet Agreement to ----- sell its chain of 14 Hamburger Hamlet restaurants to Othello. Under the terms of the Hamlet Agreement, the Company will receive, subject to certain post-closing adjustments based on closing financial statements, cash of $16.1 million ($1.0 million of which will be placed in escrow for a designated period following the consummation of the sale). The proceeds of the sale will be used to prepay the 14% FRI-MRD Notes, and to the extent cash remains, to prepay the 15% FRI-MRD Notes. In connection with the sale, the Company and FRI-MRD have agreed, subject to certain limitations, to indemnify Othello against certain potential losses, primarily related to events prior to the closing of the sale. Othello has agreed, subject to certain limitations, to indemnify the Company against certain potential losses, primarily related to events occurring after the closing of the sale. The Hamlet Agreement contemplates that the sale will occur after FRI-MRD has commenced a Reorganization Case and will be subject to approval by the court in which the Reorganization Case is pending. The sale is also subject to Othello receiving adequate financing to pay the purchase price and customary terms and conditions. There can be no assurances that the sale will be successfully completed. B. Capital Expenditures Net cash used in investing activities was $18.0 million for the first nine months of 2001, including $3.8 million used for capital expenditures, as compared to net cash provided by investing activities of $100.5 million for the same period in 2000. The change in net cash used in investing activities for the first nine months of 2001 was primarily due to $113.6 million in net proceeds from the sale of the El Torito Division in 2000, partially offset by an increase in restricted cash of $9.4 million and a $7.0 million reduction in capital expenditures in 2001. Capital expenditures of up to approximately $8.4 million have been identified for fiscal 2001. In fiscal 2001, the Company opened one new Koo Koo Roo restaurant and anticipates expanding a new Koo Koo Roo test menu to up to seven restaurants. Actual capital expenditures for 2001 will be dependent on the availability of required funds. During the first nine months of 2001, total capital expenditures were $3.8 million, which were used to construct a new Koo Koo Roo in Woodland Hills, California and to repair and replace equipment in the normal course of business. -16- Recent Accounting Pronouncements - -------------------------------- In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria for intangible assets acquired in a purchase method business combination to meet in order to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately and the provisions of Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. As a result of the anticipated sale of the Company's Hamburger Hamlet restaurant chain, the Company will no longer have goodwill or intangible assets to analyze in connection with the adoption of Statement 141 and Statement 142. The FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations," in September 2001. Statement No. 143 is effective for fiscal years beginning after June 15, 2002 and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Management does not believe that the application of this standard will have any impact on the Company's financial position, results of operations or liquidity. The FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," in October 2001. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Management does not believe that the application of this standard will cause a material variation from the Company's current accounting policies. Results of Operations. - --------------------- The Company's total sales of $70,864,000 for the third quarter of 2001 decreased by $7,176,000 or 9.2% as compared to the same period in 2000. For the first nine months of 2001, total Company sales of $221,374,000 decreased by $127,635,000 or 36.6% as compared to the same period in 2000. These decreases were the result of (i) the sale of the El Torito Division on June 28, 2000; (ii) sales decreases for restaurants sold or closed, other than those included in the sale of the El Torito Division; and (iii) declines in comparable restaurant sales for Chi-Chi's and Koo Koo Roo, partially offset by an increase in comparable restaurant sales for Hamburger Hamlet, with all such decreases partially offset by sales from new Koo Koo Roo restaurants. The breakdown of the sales decreases for the third quarter and first nine months of 2001 is shown in the following table: -17-
Change in Change in Third Quarter First Nine Months 2001 Sales 2001 Sales ------------------- ------------------- ($ in thousands) Decrease in Sales From the Sale of the El Torito Division $ (909) $(112,409) Decrease in Sales from Restaurants Sold or Closed Other Than Those Included in the Sale of the El Torito Division (2,895) (9,115) Net Decrease in Sales of Comparable Restaurants (3,724) (7,679) Sales from New Restaurants 352 1,568 ------- --------- Total $(7,176) $(127,635) ======= =========
Overall, sales for comparable restaurants were $68,707,000 for the third quarter of 2001, a $3,724,000 or 5.1% decline from the same period in 2000. For the first nine months of 2001, sales of comparable restaurants of $212,681,000 decreased by $7,679,000 or 3.5% as compared to the same period in 2000. As shown in the following table, these declines resulted from decreased sales in comparable Chi-Chi's and Koo Koo Roo restaurants, partially offset by increased sales in comparable Hamburger Hamlet restaurants.
Change in Third Change in First Nine Quarter 2001 Sales Months 2001 Sales ------------------------------ ---------------------------- Amount Percent Amount Percent -------------- -------------- ------------- ------------- ($ in thousands) Comparable Chi-Chi's $(2,655) (5.0)% $(4,930) (3.1)% Comparable Koo Koo Roo (1,079) (9.7) (2,806) (8.1) Comparable Hamburger Hamlet 10 0.1 57 0.2 ------- ------- Total $(3,724) (5.1)% $(7,679) (3.5)% ======= ===== ======= =====
Sales for comparable Chi-Chi's restaurants declined 5.0% in the third quarter of 2001 compared to the same period in 2000. The major promotions during the third quarter were All You Can Eat Enchiladas, which ran from July 14 through September 9 and Grilled Tacos Baja Style, which began September 17 and continues into the fourth quarter. Both promotions were supported by broadcast media and in-store merchandising. The Grilled Tacos Baja Style promotion was also supported with print advertising. The events of September 11 had a negative impact on sales, particularly in the Baltimore and Washington D.C. markets where certain restaurants were closed for one or more days. However, the media promotion of the Grilled Tacos Baja Style began the following week and sales improved significantly for the last two weeks of the quarter. During the third quarter of 2001, sales of comparable Koo Koo Roo restaurants were 9.7% lower than the same period in 2000. Koo Koo Roo continues to test and refine new menu items that may have an appeal to a broader audience. Third quarter 2001 comparable sales for -18- Hamburger Hamlet were 0.1% higher than the third quarter of 2000. During this quarter, Hamburger Hamlet featured new dinner specials including the Asian Sampler Platter, Orange Chicken and the Santa Fe Steak Platter. These new menu items were supported by print advertising and in-store merchandising. The impact of the events of September 11 were seen more in Hamburger Hamlet than the other concepts because several of their highest volume restaurants are in the Washington, D.C. market. Additionally, the restaurant near Ronald Reagan National Airport suffered significant sales declines from the extended closure of the airport. In the following discussion of the Company's operating results, one of the major components of the variance of 2001 versus 2000 was the El Torito Sale. Reported results for 2001 included no operations for El Torito, while results for 2000 included six months of operations for El Torito. Therefore, when the discussion references the impact of the El Torito Sale, the impact to which it refers is this absence of the El Torito restaurant division's operating results in 2001. Product costs of $18,535,000 for the third quarter of 2001 decreased $3,121,000 or 14.4% compared to the same period in 2000. For the first nine months of 2001, product costs of $58,842,000 decreased by $33,168,000 or 36.0% as compared to the same period in 2000. Product costs as a percentage of sales for the third quarter of 2001 decreased 1.5% points from 27.7% in 2000 to 26.2% in 2001. For the first nine months of 2001, product costs as a percentage of sales increased 0.2% point from 26.4% in 2000 to 26.6% in 2001. The sale of the El Torito Division accounted for $27,851,000 (84.0%) of the nine-month decrease. The remainder of the product costs decreases were related to the sales declines from comparable and closed restaurants and favorable cheese prices, particularly in the first quarter of 2001. If the results of the El Torito Division were excluded from 2000, product costs as a percentage of sales decreased 0.5% point, from 27.1% to 26.6% for the first nine months of 2001. Payroll and related costs of $25,266,000 decreased $2,719,000 or 9.7% for the third quarter of 2001 as compared to the third quarter of 2000. For the first nine months of 2001, payroll and related costs of $79,382,000 decreased $44,619,000 or 36.0% as compared to the same period in 2000. As a percentage of sales, payroll and related costs were 35.7% in the third quarter of 2001, 0.2% point lower than the same period in 2000. For the first nine months of 2001, payroll and related costs were 35.9% of sales, 0.4% point higher than the same period in 2000. The sale of the El Torito Division accounted for $39,278,000 (88.0%) of the total nine-month variance and 0.3% point of the first nine months variance related to payroll and related costs as a percentage of sales. The remainder of the payroll and related costs decreases were related to the sales declines from comparable and closed restaurants. The primary component of the remaining increases as a percentage of sales was increased claims expense in employee health insurance. The Company is subject to Federal and state laws governing matters such as minimum wages, overtime and other working conditions. Approximately half of the Company's employees are paid at rates related to the minimum wage. Therefore, increases in the minimum wage or decreases in the allowable tip credit (tip credits reduce the minimum wage that must be paid to tipped employees in certain states) increase the Company's labor costs. This is especially true in California, where there is no tip credit. In October 2000, the California Industrial Welfare Commission voted to increase the state's minimum wage by 50c to $6.25 on January 1, 2001 with another 50c increase to occur on January 1, 2002. No increases to the $5.15 Federal minimum wage are currently scheduled for 2001. In response to previous minimum wage increases, the Company -19- has implemented various menu price increases, and each of the Company's concepts raised prices in early 2001. Occupancy and other operating expenses were $19,822,000 for the third quarter of 2001, $2,462,000 or 11.0% lower than the same period in 2000. For the first nine months of 2001, occupancy and other operating expenses of $64,612,000 decreased by $28,368,000 or 30.5% as compared to the same period in 2000. As a percentage of sales, occupancy and other operating expenses were 28.0% in the third quarter of 2001, 0.6% point lower than the same period in 2000. For the first nine months of 2001, occupancy and other operating expenses were 29.2% as a percentage of sales, 2.6% points higher than the same period in 2000. The sale of the El Torito Division contributed $26,612,000 (93.8%) of the nine-month variance and 1.5% points of the nine-month percentage of sales variance. Historically, the Company accrued utility expense based on the latest utility bill received. In the second quarter of 2001, the volatile cost of natural gas and uncertainty related to the California electricity crisis caused the Company to accrue at higher rates than had been experienced theretofore. As natural gas prices decreased and stabilized and as California electric providers implemented new rate structures, the Company reassessed its utility liability. Consequently, the third quarter includes a credit to utility expense of approximately $460,000. For the third quarter, the remainder of the variance was primarily related to the implementation of Menu 2000 in the prior year at Chi-Chi's. For the first nine months of 2001, the remainder of the variance is related to the closure of restaurants and the implementation of Menu 2000 in the prior year at Chi-Chi's. Depreciation and amortization of $4,077,000 for the third quarter of 2001 decreased by $399,000 or 8.9% as compared to the same period in 2000. For the first nine months of 2001, depreciation and amortization of $12,154,000 decreased by $6,372,000 or 34.4% as compared to the same period in 2000. The nine-month decrease was primarily due to the El Torito Sale which accounts for $5,367,000 (84.2%) of the decrease. General and administrative expenses for the third quarter of 2001 were $5,069,000, $408,000 or 7.4% lower than the same period in 2000. For the first nine months of 2001, general and administrative expenses were $16,784,000, $4,169,000 or 19.9% lower than the first nine months of 2000. As a percentage of sales, general and administrative expenses were 7.2% in the third quarter 2001, 0.2% point higher than the same period in 2000, and 7.6% in the first nine months of 2001, 1.6% points higher than the first nine months of 2000. The sale of the El Torito Division accounted for $5,684,000 or 136.3% of the first nine months variance, offset by approximately $2.4 million in the first nine months of 2001 of certain incremental general and administrative expenses which were previously allocated to the El Torito Division and have not been eliminated. The reduction in general and administration expenses reflects the elimination of approximately 97 positions in the Company's support center since the end of 1999. Opening costs of $130,000 in the third quarter of 2001 decreased $196,000 or 60.1% from 2000, and opening costs of $237,000 in the first nine months of 2001 decreased $175,000 or 42.5% from 2000 as the Company opened one new Koo Koo Roo restaurant in Woodland Hills, California and began a test of a new, expanded menu in certain restaurants. Opening costs are incurred in connection with the opening or remodeling of a restaurant and are principally related to stocking the restaurant and training its staff. -20- The Company reported a loss on disposition of properties of $330,000 in the third quarter of 2001 as compared to a loss of $582,000 for the third quarter in 2000. For the first nine months of 2001, the Company reported a loss on disposition of properties of $1,101,000 as compared to a loss on disposition of properties of $1,036,000 for the same period in 2000. The Company reported a provision for divestitures and write-down of long- lived assets of $9,228,000 for the quarter ended September 30, 2001 and $9,417,000 for the nine months ended September 30, 2001. These costs are primarily comprised of the $8,149,000 write-down related to the Company's planned sale of its 14 Hamburger Hamlet restaurants and the $1,079,000 write- down related to the sale of another restaurant property. The Company reported restructuring costs of $522,000 in the third quarter of 2001 and $3,075,000 in the first nine months of 2001. These costs are primarily related to amounts paid to legal and financial advisors in connection with the Company's proposed debt and capital restructuring and accrued severance and related costs due to the second quarter organizational restructuring designed to centralize certain divisional functions, reduce corporate support center costs and gain efficiencies for the Company going forward. Interest expense, net for the third quarter of 2001 of $7,098,000 decreased by $33,000 or 0.5% as compared to the same period in 2000. For the first nine months of 2001, interest expense, net of $20,810,000 decreased by $3,470,000 or 14.3% as compared to the same period in 2000. The decrease for the nine-month period is primarily the result of no working capital borrowings required during the first nine months of 2001 and increased interest income on invested cash balances. The Company recorded a pretax gain of $60,978,000 in the third quarter of 2000 as a result of the sale of the El Torito Division. Seasonality. - ----------- The Company, as a whole, does not experience significant seasonal fluctuations in sales. However, the Company's sales tend to be slightly greater during the spring and summer months. Selected Division Operating Data. - -------------------------------- The following table sets forth certain information regarding (i) the Company; (ii) its ongoing Chi-Chi's restaurant division, Koo Koo Roo restaurant division and other operating restaurants; and (iii) the El Torito restaurant division divested on June 28, 2000. At September 30, 2001, the Company's Chi- Chi's restaurant division operated 139 full-service restaurants, the Company's Koo Koo Roo restaurant division operated 50 fast-casual and full-service restaurants and the Company also operated two other restaurants for a total of 191. -21-
For the Quarters Ended ----------------------------------------------- Sept. 30, Sept. 24, Sept. 26, 2001 2000 1999 ------------ ----------- ---------- ($ in thousands, except average check amount) Chi-Chi's Restaurant Division - ----------------------------- Restaurants Open at End of Period: Owned/operated 139 143 152 Franchised and Licensed 7 13 13 Sales $50,624 $54,195 $ 56,894 Restaurant Level Cashflow (a) 5,227 4,156 5,290 Divisional EBITDA (b) 2,337 999 1,900 Percentage increase (decrease) in comparable restaurant sales (5.0)% (0.2)% (1.0)% Average check (excluding alcoholic beverage sales) $ 10.86 $ 10.00 $ 9.24 Koo Koo Roo Restaurant Division (c) - ------------------------------------- Restaurants Open at End of Period: Owned/operated 50 57 56 Franchised and Licensed - - 1 Sales $19,041 $21,272 $ 21,677 Restaurant Level Cashflow (a) 1,962 2,083 2,335 Divisional EBITDA (b) 757 571 927 Percentage decrease in comparable restaurant sales (5.6)% (4.3)% N.A. Average check (Koo Koo Roo restaurants only) $ 9.70 $ 9.37 $ 9.11 Other Operating Restaurants - --------------------------- Restaurants Open at End of Period: Owned/operated 2 6 5 Franchised and Licensed - - - Sales $ 1,199 $ 1,663 $ 1,635 Restaurant Level Cashflow (a) 52 (1) 62 Divisional EBITDA (b) (860) (657) (23) Ongoing Operations - ------------------ Restaurants Open at End of Period: Owned/operated 191 206 213 Franchised and Licensed 7 13 14 Sales $70,864 $77,130 $ 80,206 Restaurant Level Cashflow (a) 7,241 6,288 7,687 Divisional EBITDA (b) 2,234 913 2,804 Divested Operations (d) - ----------------------- Restaurants Open at End of Period: Owned/operated - - 94 Franchised and Licensed - - 8 Sales $ - $ 910 $ 54,058 Restaurant Level Cashflow (a) - (123) 8,278 Divisional EBITDA (b) - (256) 5,592 Total Company - ------------- Restaurants Open at End of Period: Owned/operated 191 206 307 Franchised and Licensed 7 13 22 Sales $70,864 $78,040 $134,264 EBITDA (e) 2,172 638 8,328 For the Nine Months Ended ----------------------------------------------- Sept. 30, Sept. 24, Sept. 26, 2001 2000 1999 ---------- --------- --------- ($ in thousands, except average check amount) Chi-Chi's Restaurant Division - ----------------------------- Restaurants Open at End of Period: Owned/operated 139 143 152 Franchised and Licensed 7 13 13 Sales $156,683 $166,050 $174,599 Restaurant Level Cashflow (a) 12,442 13,727 16,189 Divisional EBITDA (b) 3,194 3,964 5,319 Percentage increase (decrease) in comparable restaurant sales (3.1)% 0.4 % 0.5 % Average check (excluding alcoholic beverage sales) $ 10.85 $ 9.68 $ 9.17 Koo Koo Roo Restaurant Division (c) - ------------------------------------- Restaurants Open at End of Period: Owned/operated 50 57 56 Franchised and Licensed - - 1 Sales $ 60,909 $ 65,389 $ 66,445 Restaurant Level Cashflow (a) 5,996 7,451 7,895 Divisional EBITDA (b) 1,753 2,825 3,578 Percentage decrease in comparable restaurant sales (4.6) % (3.7)% N.A. Average check (Koo Koo Roo restaurants only) $ 9.69 $ 9.28 $ 8.98 Other Operating Restaurants - --------------------------- Restaurants Open at End of Period: Owned/operated 2 6 5 Franchised and Licensed - - - Sales $ 3,782 $ 5,161 $ 4,307 Restaurant Level Cashflow (a) 100 172 236 Divisional EBITDA (b) (3,049) (621) (43) Ongoing Operations - ------------------ Restaurants Open at End of Period: Owned/operated 191 206 213 Franchised and Licensed 7 13 14 Sales $221,374 $236,600 $245,351 Restaurant Level Cashflow (a) 18,538 21,350 24,320 Divisional EBITDA (b) 1,898 6,208 8,854 Divested Operations (d) - ----------------------- Restaurants Open at End of Period: Owned/operated - - 94 Franchised and Licensed - - 8 Sales $ - $112,409 $163,486 Restaurant Level Cashflow (a) - 18,668 26,602 Divisional EBITDA (b) - 12,984 17,742 Total Company - ------------- Restaurants Open at End of Period: Owned/operated 191 206 307 Franchised and Licensed 7 13 22 Sales $ 221,374 $349,009 $408,837 EBITDA (e) 1,754 19,065 26,414
(a) Restaurant Level Cashflow with respect to any operating division represents Divisional EBITDA (as defined below) before general and administrative expenses and any net franchise profit or miscellaneous income (expense) reported by the respective division. (b) Divisional EBITDA with respect to any operating division is defined as earnings (loss) before opening costs, gain (loss) on disposition of properties, interest, taxes, depreciation and amortization. Corporate general and administrative expenses that would have been allocated to the El Torito Division prior to the sale of that division are being charged to Other Operating Restaurants subsequent to the sale so as not to distort the year-over-year comparisons of the Chi-Chi's and Koo Koo Roo Restaurant Divisions. (c) Includes both Koo Koo Roo and Hamburger Hamlet restaurant operations which were acquired on October 30, 1998. On October 23, 2001, FRI-MRD entered into an agreement to sell the Hamburger Hamlet restaurant operations. See "--A. Liquidity. 4. Other." (d) Divested Operations represents the results of the El Torito Division until it was divested on June 28, 2000. (e) EBITDA is defined as earnings (loss) before opening costs, gain (loss) on disposition of properties, gain on sale of division, provision for divestitures and write-down of long-lived assets, restructuring costs, interest, taxes, depreciation and amortization and extraordinary items. The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, operating income (loss) as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. Furthermore, other companies may compute EBITDA differently, and therefore, EBITDA amounts among companies may not be comparable. -22- Item 3. Quantitative and Qualitative Disclosure about Market Risk - ------ Interest Rate Risk - ------------------ The Company's primary exposure to financial market risks is the impact that interest rate changes could have on the Foothill Credit Facility, under which no working capital borrowings were outstanding as of September 30, 2001 and November 9, 2001. Borrowings under the Foothill Credit Facility bear interest at the prime rate as announced by Wells Fargo Bank plus 1.875% for borrowings less than or equal to $10 million and at the prime rate plus 2.875% for borrowings greater than $10 million. -23- PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings - ------ On January 26, 2001, a purported stockholder of the Company initiated a stockholder derivative suit against the Company and Mr. Relyea, in the Superior Court of the State of California for the County of Orange, seeking, among other things, compensatory damages, a constructive trust, punitive damages and attorneys' fees. The suit arose out of the sale by AIF II, L.P. on December 29, 2000, of 95,831,997 shares of the Company's common stock to Mr. Relyea for a cash purchase price of $15,000. Mr. Relyea is the Company's Chief Executive Officer, President and Chairman of the Board of Directors. The suit alleged that Mr. Relyea improperly usurped the stock purchase opportunity from the Company and also alleges constructive fraud. On February 13, 2001, a similar stockholder derivative suit was filed in the Superior Court of the State of California for the County of Orange by another purported stockholder against the Company and Mr. Relyea. This suit arose out of the same set of facts as the suit filed on January 26, 2001 and sought similar damages and fees. On April 25, 2001, the court ruled that the two cases were related and would proceed before the same judge. However, on June 28, 2001, the court in the case filed on February 13, 2001 granted the plaintiff's request to dismiss his complaint without prejudice. While the Company and Mr. Relyea believe that there exist valid defenses to each of the claims asserted, it was determined that a potentially successful defense of the suit would likely be more expensive than settlement. The Company, Mr. Relyea, and the plaintiff in the suit filed on January 26, 2001 recently agreed to a settlement in principal, by which Mr. Relyea will agree to certain restrictions on the sale of the block of the Company's stock purchased on December 29, 2000. Without admitting liability, the Company and Mr. Relyea would agree not to oppose an application for attorney's fees by plaintiff's counsel of $99,000 as part of the contemplated settlement. Approval of the Superior Court will be sought for the settlement. It is expected that the cost of the settlement will be covered by insurance. The Company is involved in various other litigation matters incidental to its business. The Company does not believe that any of the existing claims or actions will have a material adverse effect upon the consolidated financial position or results of operations of the Company. Item 2. Changes in Securities and Use of Proceeds - ------ None. Item 3. Defaults Upon Senior Securities - ------ The Company has failed to pay the interest that came due February 1, 2001 and August 1, 2001 with respect to the Prandium Notes. Under the terms of the Prandium Notes, the grace periods for the payment of interest due February 1, 2001 and August 1, 2001 has expired. In addition, the Company's subsidiary FRI- MRD Corporation has failed to pay the interest due January 31, 2001 and -24- July 31, 2001 with respect to the FRI-MRD Notes. Under the terms of the FRI-MRD Notes, the grace periods for the payment of interest due January 31, 2001 and July 31, 2001 have expired. Under the terms of the note agreements governing the FRI-MRD Notes and the indentures governing the Prandium Notes, these non- payments became "Events of Default" and the holders of all such debt have become entitled to certain rights, including the right to accelerate the debt. The unpaid principal amount on the FRI-MRD Notes as of November 14, 2001 amounted to $99,000,000 and the amount of interest due and not paid on the FRI-MRD Notes as of November 14, 2001 amounted to $18,912,000. The unpaid principal amount on the Prandium Notes as of November 14, 2001 amounted to $134,356,000 and the amount of interest due and not paid on the Prandium Notes as of November 14, 2001 amounted to $17,407,000. The effect of these Events of Default on the Company will depend on the results of the negotiations described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Liquidity" including a successful capital restructuring of the Company and its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders - ------ None. Item 5. Other Information - ------ None. Item 6. Exhibits and Reports on Form 8-K - ------ (a) Exhibits 2 (a) Agreement and Plan of Merger, dated as of June 9, 1998 by and among the Company, Fri-Sub, Inc. and Koo Koo Roo, Inc. (Filed as Exhibit 2.1 to the Company's Form S-4 filed with the SEC on July 1, 1998.) 2 (b) Stock Purchase Agreement dated as of March 27, 2000, by and among the Company, FRI-MRD Corporation and Acapulco Acquisition Corp. (Filed as Exhibit 2(b) to the Company's Form 10-K filed with the SEC on March 29, 2000.) 2 (c) Amendment No. 1 to Stock Purchase Agreement dated as of June 28, 2000, by and among the Company, FRI-MRD Corporation and Acapulco Acquisition Corp. (Filed as Exhibit 2.2 to the Company's Form 8-K filed with the SEC on July 5, 2000.) *2 (d) Stock Purchase Agreement dated as of October 23, 2001, by and between FRI-MRD Corporation and Othello Holding Corporation. 3 (a) Sixth Restated Certificate of Incorporation of the Company. (Filed as Exhibit 3(a) to the Company's Form 10-Q filed with the SEC on May 12, 1999.) -25- 3 (b) Second Amended and Restated Bylaws of the Company. (Filed as Exhibit 3(c) to the Company's Form 10-K filed with the SEC on March 29, 1999.) 4 (a) Indenture Dated as of January 27, 1994 Re: $300,000,000 9-3/4% Senior Notes Due 2002. (Filed as Exhibit 4(a) to the Company's Form 10-K filed with the SEC on March 28, 1994.) 4 (b) Indenture Dated as of January 27, 1994 Re: $150,000,000 10-7/8% Senior Subordinated Discount Notes Due 2004. (Filed as Exhibit 4(b) to the Company's Form 10-K filed with the SEC on March 28, 1994.) 4 (c) First Supplemental Indenture, dated as of July 3, 1996, between the Registrant and IBJ Schroder Bank & Trust Company, a New York Banking corporation, as Trustee. (Filed as Exhibit 10.1 to the Company's Form 8-K filed with the SEC on July 9, 1996.) 4 (d) First Supplemental Indenture, dated as of July 3, 1996, between the Registrant and Fleet National Bank, as successor by merger to Fleet National Bank of Massachusetts, formerly known as Shawmut Bank, N.A., as Trustee. (Filed as Exhibit 10.2 to the Company's Form 8-K filed with the SEC on July 9, 1996.) 4 (e) Note Agreement Dated as of August 12, 1997 Re: Up to $75,000,000 FRI-MRD Corporation Senior Discount Notes Due January 24, 2002. (Filed as Exhibit 4(e) to the Company's Form 10-Q filed with the SEC on November 12, 1997.) 4 (f) Joinder Agreement Dated as of January 14, 1998 Re: FRI-MRD Corporation Senior Discount Notes due January 24, 2002. (Filed as Exhibit 4(f) to the Company's Form 10-K filed with the SEC on March 30, 1998.) 4 (g) First Amendment dated as of June 9, 1998 to the Note Agreement dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's Form S-4 filed with the SEC on July 1, 1998.) 4 (h) Note Agreement dated as of June 9, 1998 Re: $24,000,000 FRI- MRD Corporation Senior Secured Discount Notes due January 24, 2002. (Filed as Exhibit 4.8 to the Company's Form S-4 filed with the SEC on July 1, 1998.) -26- 4 (i) First Amendment dated as of October 30, 1998 to the Note Agreement dated as of June 9, 1998. (Filed as Exhibit 4(i) to the Company's Form 10-Q filed with the SEC on November 12, 1998.) 4 (j) Waiver dated as of January 29, 1999 to the Note Agreements dated as of August 12, 1997 and June 9, 1998. (Filed as Exhibit 4(j) to the Company's Form 10-K filed with the SEC on March 29, 1999.) 10 (a) Letter Agreement, effective as of March 29, 2001 by and among Foothill Capital Corporation, FRI-MRD Corporation and Chi- Chi's, Inc. (Filed as Exhibit 10 (x) to the Company's Form 10- K filed with the SEC on April 2, 2001.) 10 (b) Letter Agreement, effective as of May 15, 2001 by and among Foothill Capital Corporation, FRI-MRD Corporation and Chi- Chi's, Inc. (Filed as Exhibit 10 (b) to the Company's Form 10-Q filed with the SEC on May 16, 2001.) 10 (c) Letter Agreement, effective as of June 15, 2001 by and among Foothill Capital Corporation, FRI-MRD Corporation and Chi- Chi's, Inc. (Filed as Exhibit 99.1 to the Company's Form 8-K filed with the SEC on June 20, 2001.) *10 (d) Letter Agreement, effective as of October 18, 2001 by and among Foothill Capital Corporation, the Company, FRI-MRD Corporation and certain of its subsidiaries. *10 (e) Letter Agreement, dated as of November 7, 2001 by and among the Company, FRI-MRD Corporation and MacKay Shields Financial Corporation. (b) Reports on Form 8-K. On August 3, 2001, the Company filed a report on Form 8-K announcing that it had elected not to make interest payments on certain of its debt and the debt of FRI-MRD Corporation. ______________ * Filed herewith. -27- SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Prandium, Inc. (Registrant) By: /S/ Robert T. Trebing, Jr. -------------------------- Robert T. Trebing, Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Date: November 14, 2001 -28- EX-2.(D) 3 dex2d.txt STOCK PURCHASE AGREEMENT EXHIBIT 2(d) STOCK PURCHASE AGREEMENT by and between FRI-MRD CORPORATION and OTHELLO HOLDING CORPORATION Dated as of October 23, 2001 TABLE OF CONTENTS
Page ---- ARTICLE I PURCHASE AND SALE OF STOCK............................................1 SECTION 1.1 Purchase and Sale................................1 SECTION 1.2 Purchase Price...................................2 ARTICLE II THE CLOSING...........................................................4 SECTION 2.1 Closing Date.....................................4 SECTION 2.2 Transactions To Be Effected at the Closing.......5 ARTICLE III REPRESENTATIONS AND WARRANTIES........................................6 SECTION 3.1 Representations and Warranties of Seller.........6 SECTION 3.2 Representations and Warranties of Purchaser.....18 ARTICLE IV COVENANTS............................................................19 SECTION 4.1 Conduct of Business.............................19 SECTION 4.2 Access to Information...........................20 SECTION 4.3 Consents........................................21 SECTION 4.4 Further Assurances..............................22 SECTION 4.5 Employee Benefit Plans..........................22 SECTION 4.6 Employees.......................................24 SECTION 4.7 Cooperation With Respect to Tax Matters.........24 SECTION 4.8 Tax Indemnity...................................26 SECTION 4.9 Financial Information...........................27 SECTION 4.10 Expenses.......................................28 SECTION 4.11 Insurance......................................28 SECTION 4.12 Publicity......................................28 SECTION 4.13 Certain Understandings.........................28 SECTION 4.14 Cooperation with Respect to Insurance Matters........................................29 SECTION 4.15 Closing Deliveries.............................30 SECTION 4.16 Notice and Cure................................30 SECTION 4.17 Exclusivity....................................31 SECTION 4.18 Financing......................................31 ARTICLE V SALE ORDER; TERMINATION FEE..........................................31 SECTION 5.1 Approval of this Agreement......................31 ARTICLE VI CONDITIONS PRECEDENT.................................................36
i SECTION 6.1 Conditions Precedent to Obligations of Purchaser.......................................36 SECTION 6.2 Conditions Precedent to Obligations of Seller..........................................38 ARTICLE VII TERMINATION AND AMENDMENT..............................................39 SECTION 7.1 Termination.....................................39 SECTION 7.2 Effect of Termination...........................40 SECTION 7.3 Termination Fee.................................40 SECTION 7.4 Amendment.......................................41 ARTICLE VIII INDEMNIFICATION.......................................................41 SECTION 8.1 Indemnification Generally.......................41 SECTION 8.2 Indemnification of Purchaser Indemnitees........41 SECTION 8.3 Indemnification of Seller Indemnitees...........42 SECTION 8.4 Limitation on Indemnification Obligations.......42 SECTION 8.5 Cooperation.....................................43 SECTION 8.6 Third Party Claims Procedure....................43 SECTION 8.7 General.........................................45 ARTICLE IX MISCELLANEOUS...........................................................46 SECTION 9.1 Notices.........................................46 SECTION 9.2 Interpretation..................................47 SECTION 9.3 Severability....................................47 SECTION 9.4 Counterparts....................................47 SECTION 9.5 Entire Agreement................................47 SECTION 9.6 Governing Law; Forum............................48 SECTION 9.7 Survival of Representations.....................48 SECTION 9.8 Assignment......................................48 SECTION 9.9 No Third-Party Beneficiaries....................48
ii EXHIBITS Exhibit A Escrow Agreement Exhibit B Estoppel Certificate SCHEDULES Schedule 3.1(b) Subsidiaries Schedule 3.1(d) Capital Stock Schedule 3.1(e)-1 No Conflict Schedule 3.1(e)-2 No Conflict Schedule 3.1(f) Financial Statements Schedule 3.1(h) Absence of Certain Changes or Events Schedule 3.1(i) Compliance with Applicable Laws Schedule 3.1(j) Litigation; Decrees Schedule 3.1(k)-1 Title to Properties; Assets Schedule 3.1(k)-2 Title to Properties; Assets Schedule 3.1(l) Applicable Contracts Schedule 3.1(m) Taxes Schedule 3.1(n) Employee Benefit Plans Schedule 3.1(o)-1 Employees and Labor Matters Schedule 3.1(o)-2 Employees and Labor Matters Schedule 3.1(p) Intellectual Property Schedule 3.1(q) Insurance Schedule 3.1(r) Environment Matters Schedule 3.1(t) Brokers, Finders, etc. Schedule 3.2(c)-1 No Conflict Schedule 3.2(c)-2 No Conflict Schedule 4.1 Conduct of Business Schedule 4.5-1 Prandium Severance Plan Schedule 4.5-2 Severance Benefits Schedule 4.6 Resignations Schedule 6.1(b) Required Consents Schedule 6.1(f) Estoppel Certificates iii TABLE OF DEFINITIONS
Defined Term Initial Section Reference - ------------ ------------------------- Acquired Companies................................ Recitals Acquisition....................................... 1.1 Affected Persons.................................. 3.1(n)(i) Affiliates........................................ 8.2 Agreement......................................... First Paragraph Applicable Contracts.............................. 3.1(l) Auction........................................... 5.1(b)(v) Audit............................................. 4.7(g) Balance Sheet Date................................ 3.1(f) Bankruptcy Code................................... Recitals Bankruptcy Court.................................. Recitals Bid Deadline...................................... 5.1(b)(i) Business.......................................... 3.1(h) Closing........................................... 2.1 Closing Date...................................... 2.1 Code.............................................. 3.1(n)(i) Competing Agreement............................... 5.1(b)(l) Confidentiality Agreement......................... 4.2(b) Contracts......................................... 3.1(e) Current Employees................................. 4.5(a) Damages........................................... 8.6(d) Eligible Receivables.............................. 1.3(a)(iii) Employee Benefit Plans............................ 3.1(n)(i) Employees......................................... 3.1(o) Environmental Laws................................ 3.1(r) ERISA............................................. 3.1(n)(i) Escrow Agent...................................... 2.2(c) Escrow Agreement.................................. 2.2(c) Escrowed Amount.................................. 1.2 Final Order....................................... 6.1(g) Financial Statements.............................. 3.1(f) GAAP.............................................. 3.1(f) Going Forward Tax Issues.......................... 4.7(b) Hamlet............................................ Recitals Indemnified Party................................. 8.5 Indemnifying Party................................ 8.5 Initial Bid....................................... 5.1(b)(i) Initial Purchase Price............................ 1.2 Intellectual Property............................. 3.1(p) Liens............................................. 3.1(k) Liquidated Damages................................ 7.3(b)
iv Material Adverse Effect........................... 3.1(a) Objection Letter.................................. 1.3(c) Overbidder's Deposit.............................. 5.1(b)(i)(7) Overbidder........................................ 5.1(b)(i) Pension Plan...................................... 3.1(n)(vi) Permitted Liens................................... 3.1(k) Post-Closing Employee Benefits.................... 4.5(b) Post-Closing Period............................... 4.7(a) PP&E.............................................. 1.3(a)(v) Prandium.......................................... 2.1 Pre-Closing Period................................ 4.7(a) Procedures Order.................................. 5.1(b) Prohibited Transaction............................ 3.1(n)(vi) Projections....................................... 4.13(a) Purchase Price.................................... 1.2 Purchase Price Adjustments........................ 1.3(a) Purchaser......................................... First Paragraph Purchaser Indemnitee.............................. 8.2 Purchaser Threshold Amount........................ 8.4(b) Qualified Overbidder.............................. 5.1(b)(ii) Related Company................................... 3.1(n)(i) Reorganization Case............................... Recitals Replacement Period................................ 7.1(f) Sale Hearing...................................... 5.1(b) Sale Motion....................................... 5.1(a) Sale Order........................................ 5.1(a) Sales Procedures.................................. 5.1(b) Securities Act.................................... 3.2(e) Seller............................................ First Paragraph Seller Indemnitee................................. 8.3 Seller Threshold Amount........................... 8.4(c) Seller's Insurance Policies....................... 3.1(q) Seller's Pre-Closing Liabilities.................. 4.14(a) Seller's Pre-Closing Claims....................... 4.14(a) Social Security Taxes............................. 4.7(g) Stock............................................. Recitals Straddle Tax Returns.............................. 4.7(a) Sub 1............................................. Recitals Sub 2............................................. Recitals Tax or Taxes...................................... 4.7(g) Tax Returns....................................... 4.7(g) Termination Fee................................... 7.3(a) Third Party Claim................................. 8.6(e) WARN ACT.......................................... 4.6
v STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of October 23, 2001, by and between FRI-MRD Corporation, a Delaware corporation ("Seller") and Othello Holding Corporation, a Delaware corporation ("Purchaser"). WHEREAS, Seller owns all of the outstanding shares of capital stock (the "Stock") of The Hamlet Group, Inc., a California corporation ("Hamlet") and Hamlet owns all of the outstanding shares of capital stock of H.H. of Maryland, Inc., a Maryland corporation ("Sub 1") and H.H.K. of Virginia, Inc., a Virginia corporation ("Sub 2") (Hamlet together with Sub 1 and Sub 2, the "Acquired Companies"); WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, all of the shares of Stock owned by Seller, upon the terms and subject to the conditions set forth herein; WHEREAS, it is a condition precedent to the Acquisition (as defined below) that Seller commence a case (the "Reorganization Case") under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. (S)(S) 101 et seq. ------ (the "Bankruptcy Code") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") and obtain a Bankruptcy Court order in the Reorganization Case approving the Acquisition under Bankruptcy Code (S) 363, as set forth in Section 5.1(a) below. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF STOCK SECTION I.1 Purchase and Sale. Upon the terms and subject to the ----------------- conditions set forth herein, Seller agrees to sell, assign, transfer, convey and deliver to Purchaser, and Purchaser agrees to purchase and accept from Seller, on the Closing Date (as defined below), all of Seller's rights, title and interest in and to the Stock (the "Acquisition"). SECTION I.2 Purchase Price. In consideration for the purchase by -------------- Purchaser of the Stock, Purchaser shall pay to Seller on the Closing Date an aggregate of 1 $16,100,000 (the "Initial Purchase Price"). The Initial Purchase Price shall be paid as follows: $1,000,000 (the "Escrowed Amount") in accordance with Section 2.2(c) hereof and the balance of the Initial Purchase Price by wire transfer of immediately available funds to such account or accounts as Seller shall have designated at least two business days prior to the Closing Date. The Initial Purchase Price shall be subject to the Purchase Price Adjustments determined pursuant to Section 1.3(a). The Initial Purchase Price, as adjusted by the Purchase Price Adjustments, shall be referred to herein as the "Purchase Price." SECTION 1.3 Purchase Price Adjustments. -------------------------- (a) Subject to the thresholds set forth in Section 1.3(d), the Initial Purchase Price shall be subject to the following adjustments in the aggregate (collectively, the "Purchase Price Adjustments"): (i) The Initial Purchase Price shall be decreased by the amount by which the accounts payable of the Acquired Companies as of the Closing Date exceeds $785,000 and increased by the amount by which the accounts payable of the Acquired Companies as of the Closing Date is less than $785,000; provided, however, to the extent that the accounts payable of the Acquired Companies have been reduced as a result of settlement of amounts due on a discounted basis, any increase of the Initial Purchase Price pursuant to this Section 1.3(a)(i) shall only be equal to the actual discounted amount paid to reduce such accounts payable; (ii) The Initial Purchase Price shall be decreased by the amount by which the value of the inventory of the Acquired Companies as of the Closing Date is less than $250,000 and increased by the amount by which the value of the inventory of the Acquired Companies as of the Closing Date exceeds $250,000; (iii) The Initial Purchase Price shall be decreased by the amount by which Eligible Receivables as of the Closing Date is less than $300,000 and increased by the amount by which Eligible Receivables as of the Closing Date exceeds $300,000 (for purposes of this Section 1.3, "Eligible Receivables" are those receivables of the Acquired Companies that have been outstanding for not more than two (2) business days); (iv) The Initial Purchase Price shall be decreased by the amount by which Other Accrued Liabilities (as such term is defined in the Financial Statements) as of the Closing Date exceeds $1,143,000 and increased by 2 the amount by which Other Accrued Liabilities as of the Closing Date is less than $1,143,000; provided, however, to the extent that the Other Accrued Liabilities of the Acquired Companies have been reduced as a result of settlement of amounts due on a discounted basis, any increase of the Initial Purchase Price pursuant to this Section 1.3(a)(iv) shall only be equal to the actual discounted amount paid to reduce such Other Accrued Liabilities; (v) The Initial Purchase Price shall be decreased by the amount by which the value of gross Plant, Property, and Equipment ("PP&E") as of the Closing Date is less than $12,041,000 and increased by the amount by which the value of PP&E as of the Closing Date exceeds $12,041,000; (vi) The Initial Purchase Price shall be decreased by the amount by which the Other Current Assets (as such term is defined in the Financial Statements) of the Acquired Companies as of the Closing Date is less than $101,000 and increased by the amount by which the Other Current Assets of the Acquired Companies as of the Closing Date exceeds $101,000; and (vii) The Initial Purchase Price shall be decreased by the amount by which the Cash (as such term is defined in the Financial Statements) of the Acquired Companies as of the Closing Date is less than $50,000 and increased by the amount by which the Cash of the Acquired Companies as of the Closing Date exceeds $50,000. (b) As promptly as practicable after the Closing Date, but not later than 60 calendar days thereafter, Purchaser shall deliver to Seller a schedule setting forth in reasonable detail Purchaser's calculation of the Purchase Price Adjustments, determined on a consistent basis with the Financial Statements, as of the Closing Date based on actual results. (c) Within 30 calendar days after its receipt of Purchaser's calculation of the Purchase Price Adjustments, Seller may deliver to Purchaser a letter describing its exceptions to Purchaser's calculation of the Purchase Price Adjustments (an "Objection Letter"). If Seller fails to submit an Objection Letter within such period, the Purchase Price Adjustments shall be conclusive and binding on Purchaser and Seller. If Seller submits an Objection Letter within such period, then (i) if both Purchaser's initial calculation of the Purchase Price Adjustments and the Objection Letter contemplate a payment by the same party, then within five business days following receipt of the Objection Letter, such party shall pay to the other party the lesser of the payments contemplated by Purchaser's initial calculation of the Purchase Price Adjustments and the 3 Objection Letter subject to the thresholds set forth in Section 1.3(d), (ii) for 20 days following the date Purchaser receives such letter, Seller and Purchaser shall use their commercially reasonable efforts to agree on the calculation of the Purchase Price Adjustments under dispute and (iii) lacking such agreement, the Purchase Price Adjustments that remain under dispute shall be referred to an independent "Big 5" accounting firm, who shall determine the correct Purchase Price Adjustments within 30 days following such referral, which determination shall be final and binding on Purchaser and Seller for all purposes. The costs and expenses of the chosen independent accounting firm shall be borne by Purchaser and Seller in proportion to the difference between such parties proposed Purchase Price Adjustment and the binding Purchase Price Adjustment determined by such accounting firm; provided, however, if the binding Purchase Price Adjustment is more favorable to a party than such party requested, all of such costs and expenses shall be borne by the other party. (d) No Purchase Price Adjustment shall be made unless the adjustments, in the aggregate, exceed $25,000. If the Purchase Price Adjustments, in the aggregate, exceeds $25,000 and is a reduction to the Initial Purchase Price, then within five business days following the final determination of the Purchase Price Adjustments, Seller shall pay to Purchaser the total amount of such adjustment. If the Purchase Price Adjustments, in the aggregate, exceeds $25,000 and is an increase to the Initial Purchase Price, then within five business days following the final determination of the Purchase Price Adjustments, Purchaser shall pay to Seller the total amount of such adjustment. ARTICLE II THE CLOSING SECTION II.1 Closing Date. The consummation of the Acquisition ------------ (the "Closing") shall take place at the offices of Prandium, Inc. ("Prandium"), 18831 Von Karman Avenue, Suite 300, Irvine, California 92612, or such other place as the parties shall mutually agree, at 10:00 a.m. (local time) on the date on which the conditions set forth in Article VI shall be satisfied or waived, or such other date as the parties shall mutually agree upon (the date of the Closing being herein referred to as the "Closing Date"). The Closing shall be deemed effective as of the end of the business day of the calendar day preceding the Closing Date. SECTION II.2 Transactions To Be Effected at the Closing. At the ------------------------------------------ Closing: 4 (a) Seller shall deliver to Purchaser (i) certificates representing the Stock, duly endorsed in blank, or accompanied by stock powers duly executed in blank, by Seller and (ii) such other documents as provided in Section 4.15(a) and Section 6.1 of this Agreement; (b) Purchaser shall deliver to Seller (i) payment as provided in Section 1.2 and (ii) such other documents as provided in Section 4.15(b) and Section 6.2 of this Agreement; and (c) Seller, Purchaser and Escrow Agent (as defined below) shall enter into an Escrow Agreement, substantially in the form attached hereto as Exhibit A (the "Escrow Agreement"), with a bank, trust company or escrow company as shall be acceptable to Seller and Purchaser as trustee on behalf of the parties as their interest may appear (the "Escrow Agent"), and Purchaser shall deposit the Escrowed Amount in cash with the Escrow Agent at the Closing pursuant to the Escrow Agreement. The Escrowed Amount shall be used as the first, but not the exclusive, source of satisfying Seller's indemnification obligations and Seller's obligations with respect to any amounts payable to Purchaser pursuant to the provisions of Section 1.3. Notwithstanding the foregoing, it is the intent of the parties that the Escrowed Amount be set aside from the estate of Seller in the Reorganization Case and that the Escrowed Amount not be subject to claims from creditors of Seller, Prandium or their Affiliates. Accordingly, if the Bankruptcy Court's Sale Order does not include provisions approving the Escrow Agreement substantially in the form attached hereto as Exhibit A and the findings and directions described in Sections 5.1(a)(iv) and (v), Purchaser may, at its option (i) terminate this Agreement under Section 7.1(g) or (ii) elect to proceed with the Closing and deposit the Escrowed Amount into a separate bank account of Purchaser; provided, however, until, and to the extent, disbursed to Seller, the funds in such account shall be the property of Purchaser. If Purchaser makes the election described in the foregoing clause (ii), Purchaser may apply the Escrowed Amount to Seller's indemnification obligations and obligations under Section 1.3 as otherwise provided herein and in the Escrow Agreement, and Purchaser shall pay to Seller any amount not so applied on the date provided in the Escrow Agreement for the final distribution of amounts held therein. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION III.1 Representations and Warranties of Seller. Seller ---------------------------------------- represents and warrants to Purchaser as follows: 5 (a) Organization, Standing and Power. Subject to the -------------------------------- applicable provisions of the Bankruptcy Code, Seller and each of the Acquired Companies (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) has all requisite power and authority to own, lease or operate the assets it now owns, leases or operates and (iii) is duly qualified or licensed to do business in each jurisdiction in which the ownership or use of its assets or conduct of its business requires it to be so qualified, in each case except for such failures that would not have a material adverse effect on the business, financial condition, or results of operations of the Acquired Companies taken as a whole (a "Material Adverse Effect"). (b) Subsidiaries. Except as set forth on Schedule 3.1(b), ------------ as of the Closing, none of the Acquired Companies will own, directly or indirectly, any of the capital stock or other equity securities of any other person other than holdings of shares of common stock of publicly traded restaurant companies. (c) Authority. Subject to the Bankruptcy Court's entry of --------- the Sale Order as described in Section 5.1 below, the execution and delivery of this Agreement, the performance by Seller of its obligations hereunder, and the execution and delivery by Seller of each of the additional documents contemplated hereby, have been duly authorized by all necessary action on the part of Seller. This Agreement has been duly executed and delivered by Seller and, upon entry of the Sale Order and assuming the due execution and delivery of this Agreement by Purchaser, this Agreement constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. (d) Capital Stock. Seller owns all of the outstanding ------------- capital stock of Hamlet, and Hamlet owns all of the outstanding capital stock of Sub 1 and Sub 2. The entire authorized and issued capital stock of each of the Acquired Companies is set forth on Schedule 3.1(d). The shares of Stock are duly authorized, have been validly issued and are fully paid and nonassessable. The shares of Stock have not been issued in violation of, and are not subject to, any preemptive rights. Upon consummation of the Acquisition, Purchaser will acquire title to the Stock, free and clear of all Liens, other than those arising from the actions of Purchaser. (e) No Conflict. Except for the consents, approvals, ----------- orders, authorizations, registrations, declarations and filings (i) set forth on Schedule 3.1(e)-1, (ii) that become applicable solely as a result of the specific regulatory status of Purchaser and its affiliates, (iii) arising out of the Reorganization Case or (iv) the failure of which to make or obtain would not have a Material Adverse Effect, to the knowledge of Seller, the consummation of the transactions hereunder will not require the consent of any party to 6 any contract, lease, agreement, mortgage or indenture (collectively, "Contracts") to which Seller, or any of its affiliates is a party, including the Applicable Contracts, or the consent, approval, order or authorization of, or the registration, declaration or filing with, any governmental authority. Except as set forth on Schedule 3.1(e)-2, assuming the consents, approvals, orders, authorizations, registrations, declarations and filings contemplated by the immediately preceding sentence are obtained or made, as applicable, the execution, delivery and performance by Seller of this Agreement will not (i) violate any material law applicable to Seller or the Acquired Companies, (ii) result in a breach or violation of any material provision of, or constitute a material default under, any Contract to which Seller or any of the Acquired Companies is a party, or (iii) conflict with any provision of the certificate of incorporation or by-laws of Seller or the Acquired Companies, in each case except for any such violation, breach, default or conflict which would not have a Material Adverse Effect. (f) Financial Statements. Attached hereto as Schedule -------------------- 3.1(f) are copies of the audited consolidated balance sheets of the Acquired Companies at July 1, 2001 (the "Balance Sheet Date"), and at December 31, 2000 and December 26, 1999, and the related statements of income, net consolidated equity and cash flows for the 26 weeks ended July 1, 2001 and the fiscal years ended December 31, 2000 and December 26, 1999 (collectively, the "Financial Statements"). The Financial Statements present fairly, in all material respects, the consolidated financial position and the consolidated results of operations and cash flows of the Acquired Companies as of the dates and periods indicated, in each case in accordance with generally accepted accounting principles ("GAAP") applied on a basis consistent with prior periods (except as otherwise indicated therein or on the notes thereto). (g) No Undisclosed Liabilities. The Acquired Companies do -------------------------- not have any liabilities of a nature required by GAAP to be reflected on a balance sheet or in notes thereto, except (i) as set forth or reflected on the Financial Statements (or described in the notes thereto), (ii) as disclosed in the Schedules hereto, or (iii) for liabilities incurred in the ordinary course of business since the Balance Sheet Date that do not, with respect to Section 3.1(g)(iii), in the aggregate, constitute a Material Adverse Effect. (h) Absence of Certain Changes or Events. Since July 1, ------------------------------------ 2001, except (i) as and to the extent set forth on Schedule 3.1(h), (ii) as would not have a Material Adverse Effect on the Business or (iii) for the transactions contemplated by this Agreement, (A) Seller and the Acquired Companies have operated the fourteen (14) restaurants owned and operated by the Acquired Companies (the "Business") in the 7 ordinary course, (B) Seller and the Acquired Companies have maintained and preserved the assets, relationships and goodwill of the Business, (C) Seller and the Acquired Companies have complied with all applicable legal requirements governing the Business and (D) there has been no physical damage, destruction or loss or other event (taking into account any insurance recoveries payable in respect thereof). (i) Compliance with Applicable Laws; Permits. To the ---------------------------------------- knowledge of Seller, except as set forth on Schedule 3.1(i) and except for environmental matters (which are addressed in Section 3.1(r) of this Agreement), the conduct of the Acquired Companies complies with all statutes, laws, regulations and ordinances applicable thereto, except where the failure to so comply would not have a Material Adverse Effect. Except as set forth on Schedule 3.1(i), each of the Acquired Companies owns and possesses, and has been issued in its name, all material permits, licenses and franchises from governmental authorities necessary to conduct their respective businesses as currently conducted. No material violations exist or, to the knowledge of Seller, have been reported in respect of such permits, licenses and franchises. To the knowledge of Seller, a list of the permits required in the operation of the Business is set forth on Schedule 3.1(i). (j) Litigation; Decrees. Except as set forth on Schedule ------------------- 3.1(j) and except for environmental matters (which are addressed in Section 3.1(r) of this Agreement), as of the date of this Agreement, to the knowledge of Seller, (i) there is no suit, action or proceeding pending against the Acquired Companies in any Federal, state or local court or agency that seeks (A) monetary damages, or (B) any injunctive relief, and Seller has not received written notice that any such suit, action or proceeding is threatened and (ii) the Acquired Companies are not in default under any judgment, order or decree of any governmental authority applicable to their business, except for any such default which would not have a Material Adverse Effect. (k) Title to Properties; Assets. The Acquired Companies --------------------------- (i) have good and marketable title to all the real properties and other assets (tangible, intangible or mixed) reflected in the Financial Statements as owned, free and clear of all liens, pledges and encumbrances (collectively, "Liens") other than Liens (collectively, "Permitted Liens") (w) that will be released in connection with the Closing, (x) that are set forth or described on Schedule 3.1(k)-1 (y) for current Taxes not yet due, or (z) which do not materially detract from the value or impair the use of the property subject thereto, or impair the operation of the Business, which have arisen only in the ordinary course of business and which do not exceed $25,000 in the aggregate and (ii) have a leasehold interest under all leases of property to which any Acquired Company is a lessee. Additionally, to the knowledge of Seller, there are no facts that would give rise to any Liens other than (i) Permitted Liens and (ii) Liens that would not, in the aggregate, 8 constitute a Material Adverse Effect. All of the leases to which any Acquired Company is a party are legal, valid and binding obligations of such Acquired Company. No property or asset, the value of which is reflected in the balance sheets included in the Financial Statements, is held under any lease (other than a capitalized lease) or under any conditional sale or other title retention agreement. The tangible, intangible, and other assets, plants and facilities owned by the Acquired Companies (A) are adequate for the operation of the Business, (B) are adequate for the uses to which they are being put or would be put in the ordinary course of business and (C) are in good working order and condition, ordinary wear and tear excepted, in each case, other than as would not constitute a Material Adverse Effect. Furthermore, there are no deposits, bank accounts, credits or other assets (such other assets include only (i) those assets set forth in the Financial Statements or whose value is included in the Financial Statements, and (ii) those assets located at the premises of the Business) associated with the Business (including unused job tax credits and unemployment reserve funds) that are held or controlled by any entity other than the Acquired Companies. A list of all deposits and bank accounts owned by the Acquired Companies or associated with the Business is set forth in Schedule 3.1(k)-2. (l) Contracts. Except for those Contracts listed on --------- Schedule 3.1(l) (the "Applicable Contracts"), as of the date of this Agreement, the Acquired Companies are not a party to: (i) any Contract relating to the borrowing or lending of $100,000 or more by the Acquired Companies; (ii) any written employment agreement with any person; (iii) any Contract not made in the ordinary course of business; (iv) any Contract for the sale of any of the Acquired Companies' assets (other than inventory sales in the ordinary course of business), or the grant of any preferential rights to purchase any of the Acquired Companies' assets; (v) any Contract that is terminable by the other party thereto upon the occurrence of the transactions contemplated hereby that, if terminated, would have a Material Adverse Effect; or 9 (vi) any material Contract that contains a "change of control", "potential change of control", or other similar provisions or any material Contract for which the Acquisition will accelerate the time or amount of payment or otherwise enhance any benefit due any other person. Except as disclosed in Schedule 3.1(l), to the knowledge of Seller, as of the date of this Agreement, no party is in breach or default in any material respect under any Contract to which an Acquired Company is a party, including but not limited to, any Applicable Contract, except for such breaches and defaults as to which requisite waivers or consents have been or will be obtained prior to the Closing Date or which would not have a Material Adverse Effect. Complete and correct copies of all Applicable Contracts, together with all modifications and amendments thereto, have been delivered or made available to Purchaser; provided, that to the extent any of such Contracts are items -------- susceptible to duplication and are either (i) used in connection with any of Seller's businesses other than those relating to the Acquired Companies or (ii) are required by law to be retained by Seller, Seller may deliver photostatic copies or other reproductions from which Seller may delete information concerning Seller's businesses other than those relating to the Acquired Companies. For purposes of this subsection 3.1(l), the term "Contract" shall not include Employee Benefit Plans referred to in Section 3.1(n). (m) Taxes. ----- (i) All material income Tax Returns (including consolidated federal income tax returns of Seller which include any of the Acquired Companies) required to be filed by any Acquired Company have been filed and all such returns are true, complete, and correct in all material respects. All material Taxes that are due or claimed to be due from any Acquired Company for all periods up to the Closing Date have been paid other than those (A) currently payable without penalty or interest or (B) being contested in good faith and by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP. The liabilities for Taxes, if any (determined in accordance with GAAP), reflected on the Financial Statements are adequate for the payment of all Taxes due and payable as of July 1, 2001. There are no material Liens for Taxes upon the properties or assets of the Acquired Companies, other than Liens for current Taxes not yet due and payable. (ii) Except as provided in Schedule 3.1(m), the Acquired Companies (and Seller in respect of any period that the Acquired Companies were part of its consolidated group for Federal income tax purposes) have not requested any extension of time within which to file any Tax Return in respect of any 10 taxable year which has not since been filed and no outstanding waivers or comparable consents that are still in effect regarding the application of the statutory period of limitations with respect to any Taxes or Tax Returns has been given by or on behalf of the Acquired Companies. (iii) Except as provided in Schedule 3.1(m), no Audits exist or have been initiated with regard to any Taxes or Tax Returns of the Acquired Companies (including consolidated federal income tax returns of Seller which include any of the Acquired Companies) and the Acquired Companies (or Seller, as the case may be) have not received any notice in writing that such an Audit is pending or threatened with respect to any Taxes due from or with respect to the Acquired Companies or any Tax Return filed by or with respect to the Acquired Companies. (iv) Except as provided in Schedule 3.1(m), the Acquired Companies (or Seller in respect of any period that the Acquired Companies were part of Seller's consolidated group for federal income tax purposes) have not requested nor received an adverse ruling from any taxing authority or signed a closing or other agreement with any taxing authority. (v) Except as provided in Schedule 3.1(m), the applicable statute of limitations for the assessment of Taxes for taxable periods ending before December 31, 1997 has expired. (vi) Except as provided in Schedule 3.1(m), the Acquired Companies are not required to include in income any adjustment pursuant to Section 481(a) of the Code, by reason of any voluntary or involuntary change in accounting method (nor has any taxing authority proposed in writing any such adjustment or change in accounting method). (vii) Except as provided in Schedule 3.1(m), the Acquired Companies are not a party to, or bound by, and do not have any obligation under, any Tax sharing agreement, Tax indemnification agreement or similar Contract or arrangement. All such Tax sharing agreements, Tax indemnification agreements or similar Contracts or arrangements have been or will be cancelled effective as of the Closing Date. (viii) The Acquired Companies have not with regard to any assets or property held, acquired or to be acquired by any of them, filed a consent to the application of Section 341(f) of the Code, or agreed to have Section 11 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by any Acquired Company. (ix) Except as provided in Schedule 3.1(m), none of the Acquired Companies has been a member of an affiliated group filing a consolidated federal income Tax Return other than a group a member of which is Seller. (x) The Acquired Companies (or Seller, in respect of any period during which any of the Acquired Companies were part of its consolidated group for federal income tax purposes) have not received notice of any claim made by a governmental authority in a jurisdiction where the Acquired Companies (or Seller, as the case may be), as applicable, do not file a Tax Return, that the Acquired Companies are or may be subject to taxation by that jurisdiction. (xi) The Acquired Companies have previously delivered or made available to Purchaser complete and accurate copies of each of: (A) all Audit reports, letter rulings, technical advice memoranda and similar documents issued by a taxing authority relating to the federal, state, local or foreign Taxes due from or with respect to the Acquired Companies (or Seller, in respect of any period that any Acquired Companies were members of Seller's consolidated group for federal income tax purposes); (B) the federal income Tax Returns, and those state, local and foreign income Tax Returns filed by the Acquired Companies (or Seller, in respect of any period that any Acquired Companies were members of Seller's consolidated group for federal income tax purposes); and (C) any closing agreement entered into by the Acquired Companies (or Seller, in respect of any period that any Acquired Companies were members of Seller's consolidated group for federal income tax purposes) with any taxing authority in each case existing as of the Closing Date. The Acquired Companies shall deliver to Purchaser all materials with respect to the foregoing for all matters arising after the Closing Date. (n) Employee Benefit Plans. ---------------------- (i) Set forth on Schedule 3.1(n) is a list of each bonus, deferred compensation, pension, profit-sharing, retirement, stock purchase or stock option, hospitalization or other medical, life or other insurance plan, including any policy, plan, program or agreement that provides for the payment of severance benefits, salary continuation, salary in lieu of notice or similar benefits 12 and any other employee benefits of any kind, whether formal or informal, funded or unfunded or written or oral, maintained, sponsored or contributed to by the Acquired Companies, or Seller or any business or entity which is a member of a "controlled group of corporations" under "common control" or an "affiliated service group" with any of the Acquired Companies within the meaning of Sections 414(b), (c) or (m) of the Internal Revenue Code of 1986, as amended (the "Code") or required to be aggregated with the Acquired Companies under Code Section 414(o) or is under "common control" with the Acquired Companies within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (each referred as a "Related Company") under which the Acquired Companies, Seller or Related Company has any material (individually or in the aggregate) present or future obligations or liability on behalf of the Acquired Companies' employees or former employees or their dependents or beneficiaries of the Acquired Companies (collectively, the "Affected Persons"). (The benefit arrangements described in the foregoing sentence are collectively referred to as "Employee Benefit Plans.") The Acquired Companies have made available to Purchaser correct and complete copies of all of the Employee Benefit Plans. (ii) The Employee Benefit Plans are in compliance in form and in operation in all material respects with the applicable provisions of ERISA and the Code. All reports and descriptions (including Form 5500 Annual Reports and Summary Plan Descriptions) have been filed or distributed in accordance with the applicable provisions of ERISA and the Code with respect to each Employee Benefit Plan. (iii) All contributions made or required to be made under any Employee Benefit Plan meet the requirements for deductibility under the Code in all material respects, and all contributions that are required but have not been made have been properly recorded on the books of the Acquired Companies or Seller to the extent required under GAAP. All obligations have been performed under the Employee Benefit Plans and all appropriate entries have been made in the financial records and statements for all obligations and liabilities under such Employee Benefit Plans. Any payments required to be made under the Prandium Severance Plan to individuals terminated on or before the Closing Date have been made on or before the Closing Date. (iv) No Employee Benefit Plan is a "multiemployer plan" (within the meaning of section 4001(a)(3) of ERISA), a "multiple employer plan" 13 (within the meaning of section 413(c) of the Code) or "defined benefit plan" (within the meaning of Section 3(35) of ERISA. (v) No event has occurred which could subject the Acquired Companies to any material liability or Lien with respect to any Employee Benefit Plan under ERISA or the Code. (vi) Except with respect to the execution of this Agreement and the transactions contemplated herein, no Employee Benefit Plan that is an "employee pension benefit plan" as defined in ERISA Section 3(2) ("Pension Plan") has been completely or partially terminated. To the extent the transactions contemplated herein result in a termination or partial termination of a Pension Plan, Seller shall comply with all of the applicable requirements of the Code and ERISA in connection with such termination or partial termination. There have been no non-exempt "prohibited transactions" as defined in ERISA Section 406 and Code Section 4975 ("Prohibited Transactions") with respect to any Employee Benefit Plan that could give rise to a material liability under Section 4975 of the Code to the Acquired Companies. No Acquired Company has any material liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Employee Benefit Plan. With respect to any Employee Benefit Plan (other than routine, non material claims or benefits) and with respect to the Prandium Severance Plan, to the knowledge of Seller with respect to amounts to which the Acquired Companies could be liable, (i) no action is pending or demand or statement has been made (orally or in writing), (ii) no notice has been given (orally or in writing) and (iii) no other event has occurred and no other circumstances exist that would lead a prudent person to conclude that a cause of action or other matter is likely to be asserted, commenced, taken or otherwise (and there is no basis therefor) that could result in liability to the Acquired Companies. (vii) Except to the extent required by Code Section 4980B or under the Prandium Severance Plan and Section 4.5 hereof, the Acquired Companies, Seller or any Related Companies (i) do not maintain or contribute to any Employee Benefit Plan that provides, or has any Liability to provide, life insurance, medical, severance or other employee welfare benefits to any Affected Person or any dependant of any Affected Person upon his or her retirement or termination of employment or (ii) have never represented, promised or contracted (whether in oral or written form) to any Affected Person (either individually or to Affected Person as a group) that such Affected Person or dependents would be 14 provided with life insurance, medical, severance or other employee welfare benefits upon their retirement or termination of employment. (viii) Except with respect to the Prandium Severance Plan, or as otherwise required by law, the execution of this Agreement and the transactions contemplated herein will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Employee Benefit Plan, employment agreement, trust or loan that will or may result in any payment (whether severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Affected Person, or (ii) result in the triggering or imposition of any restrictions or limitations on the right of the Acquired Companies to amend or terminate any Employee Benefit Plan and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to the terms of such plans and applicable law and/or Taxes. (o) Employees and Labor Matters. Schedule 3.1(o)-1 sets --------------------------- forth the total compensation (including, but not limited to, salary, bonus and otherwise) being paid by, or on behalf of, the Acquired Companies (or to whom the Acquired Companies have agreed or are obligated to pay) to each officer, director and employee of the Acquired Companies other than those persons set forth on Schedule 4.6 whose resignations are required to be tendered in connection with the Closing ("Employees"). The above definition of "Employees" shall not be affected by the fact that Seller utilized FRI-Admin Corporation as a common paymaster for certain of the Employees. Set forth on Schedule 3.1(o)-2 are all agreements with labor unions or associations representing Employees in effect as of the date of this Agreement. As of the date of this Agreement, no material work stoppage against the Acquired Companies is actually pending or, to the knowledge of Seller, threatened. There are no pending, or, to the knowledge of Seller, threatened, labor disputes, arbitrations, lawsuits or administrative proceedings relating to labor matters involving the Employees (excluding routine workers' compensation claims) that would have a Material Adverse Effect. (p) Intellectual Property. Set forth on Schedule 3.1(p) is --------------------- all Intellectual Property (as defined below) except for know-how and trade secrets. The Acquired Companies own, or possess adequate rights to use, all Intellectual Property used in the Business. No consent of any person is required as a result of the transactions contemplated herein for the continued use by the Acquired Companies of the Intellectual Property after the Closing. There are no existing, or, to the knowledge of Seller, threatened, claims based on the use by, or challenging the ownership of, the Acquired Companies of any Intellectual Property that would have a Material Adverse Effect. 15 Except as set forth on Schedule 3.1(p), Seller does not have any knowledge of any infringing use of any Intellectual Property by any other person. "Intellectual Property" shall mean all material trademarks, copyrights and other intellectual property rights used or held for use including, but not limited to all know-how and trade secrets (trade secrets including, without limitation, all recipes, procedures and processes of the Acquired Companies necessary to operate the Business). (q) Insurance. Set forth on Schedule 3.1(q) is a list of --------- all insurance policies held by or otherwise protecting the assets of the Acquired Companies (the "Seller's Insurance Policies"). Copies of all material insurance policies held by the Acquired Companies or by Seller or Prandium for the benefit of the Acquired Companies have been made available to Purchaser. Such policies (together with self-insurance programs in effect) provide coverage for the Acquired Companies' business in amounts and against risks consistent with past practice. No representation or warranty is made by Seller hereunder that any such policy will not lapse or terminate by reason of consummation of the transactions contemplated hereby. All such material insurance policies are currently in full force and effect. The Acquired Companies are beneficiaries under those policies set forth on Schedule 3.1(q). (r) Environmental Matters. Except as set forth on Schedule --------------------- 3.1(r) or as would not have a Material Adverse Effect, to the knowledge of Seller, (i) the Acquired Companies are in compliance with all applicable federal, state and local laws governing pollution or the protection of human health or the environment ("Environmental Laws"), (ii) the Acquired Companies have not received any written notice or claim from any governmental authority or third party alleging that the Acquired Companies are not in compliance with any Environmental Law, and (iii) there has been no release of a Hazardous Substance, as that term is defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et seq., in excess of a reportable quantity on any of the real properties owned or leased by the Acquired Companies. (s) Government Regulations. The Acquired Companies are not ---------------------- subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act, the Commodity Exchange Act or any Federal or State statute or regulation limiting its ability to incur or assume indebtedness for borrowed money. (t) Brokers, Finders, etc. Except as set forth on Schedule --------------------- 3.1(t), Seller is not subject to any valid claim of any broker, investment banker, finder or other intermediary in connection with the transactions contemplated by this Agreement. Seller 16 is solely responsible for any payment, fee or commission that may be due to the parties referenced on Schedule 3.1(t) in connection with the transactions contemplated hereby. (u) Disclosure. No representation or warranty made by ---------- Seller or the Acquired Companies in this Agreement or any disclosure schedule or certificate delivered hereunder contains any untrue statement of a material fact or omits any material fact necessary to make the statements contained herein or therein not materially misleading. SECTION III.2 Representations and Warranties of Purchaser. ------------------------------------------- Purchaser hereby represents and warrants to Seller as follows: (a) Organization and Standing. Purchaser is a corporation ------------------------- duly organized, validly existing and in good standing under the laws of its state of incorporation. (b) Authority. The execution and delivery of this --------- Agreement, and the performance by Purchaser of its obligations hereunder, have been duly authorized by all necessary action on the part of Purchaser. This Agreement has been duly executed and delivered by Purchaser and assuming the due execution and delivery of this Agreement by Seller, this Agreement constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforcement may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). (c) No Conflict. Except for the consents, approvals, ----------- orders, authorizations, registrations, declarations and filings (i) set forth on Schedule 3.2(c)-1, or (ii) that become applicable solely as a result of the specific regulatory status of Seller and its affiliates, to the knowledge of Purchaser, the consummation of the transactions hereunder will not require the consent of any party to any material Contract to which Purchaser, or any of its affiliates, is a party or by which any of them is bound, or the consent, approval, order or authorization of, or the registration, declaration or filing with, any governmental authority. Except as set forth on Schedule 3.2(c)-2, assuming the consents, approvals, orders, authorizations, registrations, declarations and filings contemplated by the immediately preceding sentence are obtained or made, as applicable, the execution, delivery and performance by Purchaser of this Agreement will not (i) violate any material law applicable to Purchaser or any of its respective affiliates, (ii) result in a breach or violation of any material provision of, or constitute a material default 17 under, any such Contract, or (iii) conflict with any provision of the certificate of incorporation or by-laws of Purchaser. (d) Financing. Purchaser will have available as of the --------- Closing Date funds sufficient to pay the Purchase Price. (e) Purchase For Investment. Purchaser is acquiring the ----------------------- Stock being acquired by it hereunder for investment (for its own account or for accounts over which it exercises investment control), and not with a view to, or for offer or sale in connection with, any distribution thereof, which would be in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities law, without prejudice, however, to Purchaser's right at all times to sell or otherwise dispose of all or any part of said Stock pursuant to an effective registration statement under the Securities Act and applicable state securities laws, or under an exemption from such registration available under the Securities Act and other applicable state securities laws. (f) Brokers, Finders, etc. Except for Trenwith Securities, --------------------- LLC, Purchaser is not subject to any valid claim of any broker, investment banker, finder or other intermediary in connection with the transactions contemplated by this Agreement. Purchaser is solely responsible for any payment, fee or commission that may be due to Trenwith Securities, LLC in connection with the transactions contemplated hereby. ARTICLE IV COVENANTS SECTION IV.1 Conduct of Business. From the date of this Agreement ------------------- through the Closing, Seller agrees that, except (i) as disclosed in Schedule 4.1 of this Agreement or otherwise provided for in, or contemplated by, this Agreement or (ii) as approved by Purchaser: (a) The Acquired Companies shall carry on their business and operate in the ordinary course in substantially the same manner as currently conducted. (b) Except in the ordinary course of business or as required by law or by contractual obligations or other understandings or arrangements existing on the date of this Agreement, the Acquired Companies shall not knowingly perform any act, or omit to perform any act within their reasonable control, which will cause a breach of any representation, warranty or obligation contained in this Agreement, which breach will result in a Material Adverse Effect. 18 (c) Seller shall transfer ownership of any assets related to the operation of the Business but held by any entity other than the Acquired Companies to the appropriate Acquired Company (such assets limited to those set forth in the Financial Statements or located at the premises of the Business). (d) Notwithstanding the fact that Section 1.3(ii) and Section 1.3(vii) provide for Purchase Price Adjustments with respect to inventory and cash, Seller and the Acquired Companies shall maintain the inventory and cash of the Acquired Companies at levels sufficient to continue current levels of services and in any event, shall provide at Closing that the amount of cash shall be at least $20,000. (e) Seller and the Acquired Companies shall not, except in the normal course of business, (i) hire or employ any additional hourly employees of the Acquired Companies or (ii) increase the compensation of any hourly Employee. Notwithstanding the preceding sentence, under no circumstances shall the aggregate compensation as of the date of this Agreement of all hourly Employees be increased by more than 5% prior to the Closing Date. (f) Seller and the Acquired Companies shall not (i) hire or employ any additional salaried employees (including officers and directors) of the Acquired Companies, except to replace, at no greater level of compensation, current positions that become open, or (ii) increase the compensation of any salaried Employee. SECTION IV.2 Access to Information. --------------------- (a) Access. Seller shall afford to representatives of ------ Purchaser, including its counsel, accountants and lenders, reasonable access during normal business hours during the period prior to the Closing Date to inspect all assets, properties, books, Contracts and records of the Acquired Companies, and reasonable access to the employees and representatives of the Acquired Companies. Purchaser shall indemnify Seller and hold it harmless from all liabilities, and for all losses, arising out of such representatives' acts or omissions in connection with such access and, after making any investigation of such properties, books, Contracts or records, Purchaser shall promptly restore such properties, books, Contracts and records to their condition prior to such investigation. If, in the course of any investigation pursuant to this Section 4.2(a), Purchaser discovers any breach of any representation or warranty contained in this Agreement or any circumstance or condition that, upon Closing, would constitute such a breach, Purchaser shall promptly inform Seller in writing of any such breach. 19 (b) Confidentiality. Purchaser acknowledges that the --------------- information being provided to Purchaser and its representatives by Seller is subject to, and Purchaser agrees to be bound by, a confidentiality agreement between Roscoe's and Hamlet, dated June 6, 2001 (the "Confidentiality Agreement"), which terms are incorporated herein by reference. SECTION IV.3 Consents. -------- (a) Subject to the terms and conditions of this Agreement, Seller and Purchaser agree (without being obligated to make any payment to any third party) to use their best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement: (i) Seller shall obtain, and Purchaser shall cooperate in obtaining, all necessary waivers, consents and approvals from other parties to material Contracts. (ii) Purchaser shall obtain, and Seller shall cooperate in obtaining, any and all approvals required in connection with any and all liquor licenses held by the Acquired Companies in connection with the operation of the Business, and Purchaser shall be responsible for maintaining such liquor licenses after the Closing Date. (iii) Seller and Purchaser shall use their reasonable best efforts to obtain all consents, approvals and authorizations that are required to be obtained under any Federal, state, local or foreign law or regulations (other than as set forth in (ii) above. (iv) Seller and Purchaser shall use their reasonable best efforts to obtain all documents, certificates and consents requested by Purchaser's financing sources. (v) Seller and Purchaser shall use their reasonable best efforts to prevent the entry, enactment or promulgation of any threatened or pending injunction or order that would adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby. 20 (vi) Seller and Purchaser shall use their reasonable best efforts to lift or rescind any injunction or order adversely affecting the ability of the parties hereto to consummate the transactions contemplated hereby, and (vii) Seller and Purchaser shall use their reasonable best efforts to effect all necessary registrations and filings, and submissions of information requested by governmental authorities. (b) Purchaser recognizes that certain consents to the transactions contemplated by this Agreement may have been or may be required from third parties, including parties to Contracts and governmental authorities. Purchaser agrees that Seller shall not have any liability whatsoever arising out of or relating to the failure to obtain any such consent or because of the termination of any Contract or any permit, license or other governmental authorization as a result thereof. Purchaser further agrees that no representation, warranty or covenant of Seller contained herein shall be breached or deemed breached as a result of (i) the failure to obtain any such consent or any such termination or (ii) any lawsuit, action, claim, proceeding or investigation commenced or threatened by or on behalf of any person arising out of or relating to the failure to obtain any such consent or because of any such termination. SECTION IV.4 Further Assurances. From time to time, whether ------------------ before, at, or after the Closing, each party hereto, shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such other actions as may be reasonably necessary to consummate the transactions contemplated by this Agreement. SECTION IV.5 Employee Benefit Plans. ---------------------- (a) If the employment of an individual employed by the Acquired Companies immediately prior to the Closing Date (other than the officers and directors of the Acquired Companies set forth on Schedule 4.6 whose resignations are required to be tendered in connection with the Closing) (the "Current Employees") is terminated by Purchaser within the six month period following the Closing Date and such Current Employee would have otherwise been eligible to receive a severance benefit under the Prandium Severance Plan, Purchaser shall provide each such Current Employee with a severance benefit no less favorable (except with respect to any acceleration of vesting on options to purchase common stock of Prandium) to the severance benefit such Current Employee would have received under the Prandium Severance Plan as set forth on Schedule 4.5-1 had such Current Employee remained employed by the Acquired Companies at the time of such termination. As of the Closing, Seller shall cease to provide coverage or benefits that arise or accrue on or after the Closing Date for Current 21 Employees under any Employee Benefit Plan maintained by Seller, Prandium or any of their subsidiaries, except as required by applicable law or otherwise agreed to by the parties hereto. (b) For a period of six months following the Closing Date, Purchaser shall continue to provide, subject to earlier termination in accordance with Section 4.5(a), Current Employees with (i) salary and wages no less favorable to the salary and wages received by each such Current Employee as set forth in Schedule 3.1(o)-1 and (ii) subject to Seller's compliance with Sections 4.2(a) and 4.5(c) and provided the Closing Date is no earlier than November 15, 2001 (or if the Closing occurs prior to November 15, 2001, Purchaser's obligations to provide benefits under this subsection (ii) shall not commence until November 15, 2001) employee benefits that are no less favorable to those set forth in Schedule 4.5-2 (the "Post Closing Employee Benefits"). To the extent applicable and not otherwise prohibited by any applicable law, service by Current Employees with the Acquired Companies or Seller shall be recognized under each of the Post Closing Employee Benefits for purposes of (i) eligibility to participate and (ii) vesting, but in no event shall such service be taken into account in determining the accrual of benefits under any such benefit plan or arrangement, including, but not limited to, a defined benefit plan. To the extent applicable and not otherwise prohibited by any applicable law, Purchaser shall waive any pre-existing conditions, limitations or waiting periods under such employee benefit plans. Notwithstanding anything to the contrary, each Affected Person shall receive full credit under the time-off benefits listed on Schedule 4.5-2 applicable to such Affected Person, for all accrued and unused time-off benefits to which such Affected Person is entitled as of the Closing Date. (c) Seller and Purchaser agree to cooperate in carrying out the duties and responsibilities contained in this Section 4.5. In addition, Seller agrees to make available to Purchaser in a timely manner, such information as Purchaser may reasonably request to facilitate the determination of (i) the period of service of any Current Employees with the Acquired Companies or Seller prior to the Closing Date, (ii) individual service accruals and salary histories of Current Employees, and (iii) such other information as Purchaser may reasonably request to carry out the provisions of this Section 4.5. (d) Notwithstanding any other provision of this Agreement to the contrary, the provisions of this Section 4.5 shall not confer any rights or remedies upon any person other than the parties to this Agreement and their respective successors and assigns, and the Current Employees shall not be "third party beneficiaries" of this Agreement for purposes of this Section 4.5 and the enforcement thereof. 22 SECTION IV.6 Employees. Purchaser acknowledges and agrees that --------- any employment loss within the meaning of the Worker Adjustment and Retraining Notification Act (the "WARN Act"), 29 U.S.C. 2101 et seq., suffered by any ------ Employee immediately upon or within 90 days following the Closing (other than those Affected Persons set forth on Schedule 4.6 whose resignations are required to be tendered in connection with the Closing), shall have been caused by Purchaser's decision not to continue the employment of such Employee, and not by the sale of the Acquired Companies. Purchaser further acknowledges and agrees that it shall be responsible for giving any notices required by the WARN Act, that it is liable to any Employee who does not receive notice under, and who suffers an employment loss, as defined in, the WARN Act and that it is responsible to and shall indemnify and hold harmless Seller and its affiliates for any and all claims asserted under the WARN Act because of a "plant closing" or "mass layoff," as defined therein, occurring on or after the Closing Date. For purposes of this Agreement, the Closing Date is and shall be the same as the "effective date" of the sale within the meaning of the WARN Act. SECTION IV.7 Cooperation With Respect to Tax Matters. --------------------------------------- (a) Seller and Purchaser recognize that the Acquired Companies have joined with Seller in filing unitary, consolidated, or combined Tax Returns. After the Closing Date (i) Seller shall include (to the extent required by law) the taxable income or loss, and all other items, of the Acquired Companies for periods ending before or on the Closing Date, in their unitary, consolidated or combined Tax Returns, and (ii) with respect to any other Tax Returns for any taxable period that includes but does not end on the Closing Date (the "Straddle Tax Returns"), Seller shall prepare a schedule allocating, on a basis consistent with the preparation of Seller's consolidated Federal income tax return for the taxable period ending on the Closing Date, the taxable income or loss, and all other items, of the Acquired Companies to the period commencing with the first day of the taxable period covered by such Straddle Tax Return up to and including the Closing Date (the "Pre-Closing Period") and the period commencing with the first day after the Closing Date and ending with the last day of the taxable period covered by such Straddle Tax Return (the "Post-Closing Period"). (b) Seller shall be responsible for, and shall have ultimate discretion with respect to, (i) all Tax Returns required or permitted by applicable law to be filed by the Acquired Companies (or by Seller on its behalf) with respect to periods that end on or before the Closing Date, (ii) any elections and/or payments related to such Tax Returns, and (iii) any Audit (including the execution of any waiver of limitation with respect to any Audit) relating to any such Tax Returns. The foregoing Tax Returns shall be prepared and filed consistently with Seller's past practices. Seller shall consult in good 23 faith with Purchaser in any audit with respect to specific issues that may reasonably be expected to materially affect Purchaser's future Tax liability ("Going Forward Tax Issues") and Seller shall consult with Purchaser and shall not settle any Going Forward Tax Issues without the consent of Purchaser, which consent shall not be unreasonably withheld. Purchaser and the Acquired Companies shall cooperate with Seller for the purpose of making any reasonable election under applicable law. (c) Purchaser and the Acquired Companies shall be responsible for, and shall have ultimate discretion with respect to, (i) all Tax Returns required to be filed by the Acquired Companies with respect to periods that begin after the Closing Date and (ii) the Straddle Tax Returns, if any, and (iii) any Audit (including the execution of any waiver of limitation with respect to any Audit) relating to any such Tax Returns; provided, however, that -------- ------- (x) in the case of any Straddle Tax Return, the preparation and filing of such Tax Return shall be subject to review and approval of Seller which consents shall not be unreasonably withheld, and (y) in the event that any Audit for which Purchaser is responsible pursuant to this Section 4.7(c) could reasonably be expected to result in a material increase in Tax liability for which Seller would be responsible, Purchaser shall consult in good faith with Seller in respect of the specific issues that could give rise to such increased Tax liability. (d) After the Closing Date, each of Purchaser and the Acquired Companies, on the one hand, and Seller, on the other, shall (i) provide, or cause to be provided, to each other's respective subsidiaries, officers, employees, representatives and affiliates, such assistance as may reasonably be requested, including making available employees and the books and records of the Acquired Companies, by any of them in connection with the preparation of any Tax Return or any Audit of the Acquired Companies in respect of which Purchaser, the Acquired Companies or Seller, as the case may be, is responsible pursuant to Sections 4.7(b) or (c) of this Agreement and (ii) retain, or cause to be retained, for so long as any such taxable years or Audits shall remain open for adjustments, any records or information which may be relevant to any such Tax Returns or Audits. (e) Each of Purchaser and the Acquired Companies, on the one hand, and Seller, on the other, shall promptly inform, keep regularly apprised of the progress with respect to, and notify the other party in writing not later than (i) ten business days after the receipt of any notice of any Audit or (ii) fifteen business days prior to the settlement or final determination of any Audit for which it was responsible pursuant to Section 4.7(b) or (c) of this Agreement which could affect the Tax liability of such other party for any taxable year. 24 (f) Seller hereby agrees that it will not file an election pursuant to Treasury Regulation section 1.1502-20(g)(4) to reattribute any of the net operating losses or capital loss carry forwards of the Acquired Companies to itself. (g) As used in this Agreement: (i) "Social Security Taxes" shall include any Taxes imposed pursuant to the Federal Insurance Contributions Act under section 3101 et seq. of the Code; (ii) "Tax" or "Taxes" shall include all Federal, state, local and foreign taxes, assessments, and governmental charges (whether imposed directly or through withholdings), including any interest, penalties and additions to Tax applicable thereto including without limitation, liability imposed pursuant to Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law) which may be imposed upon on entity as a transferee or successor and any Taxes payable by the Acquired Companies under contract or otherwise; (iii) "Tax Returns" shall include any Federal, state, local and foreign tax returns, declarations, elections, statements, reports, schedules and information returns or the refiling of any such Tax Returns previously filed; and (iv) "Audit" shall include any audit, assessment of Taxes, reassessment of Taxes, or other examination by any taxing authority or any judicial or administrative proceedings or appeal of such proceedings. SECTION IV.8 Tax Indemnity. ------------- (a) Seller shall be liable for, shall pay to the appropriate Tax authorities, and shall hold Purchaser and the Acquired Companies harmless against, all Taxes of the Acquired Companies in excess of any liability for Taxes (whether or not shown due on any Tax Return) which has been accrued for or reserved on the respective balance sheets of the Acquired Companies as of the Closing Date taking into account all adjustments made pursuant to Section 1.3 that relate to (i) the taxable periods ending before or on the Closing Date and (ii) the Pre-Closing Period. Seller shall be entitled to all Tax refunds (including interest) attributable to the taxable periods in respect of which Seller is so obligated to indemnify Purchaser and the Acquired Companies. (b) Purchaser and the Acquired Companies shall be liable for, shall pay to the appropriate Tax authorities, and shall hold Seller harmless against all 25 Taxes of the Acquired Companies that relate to (i) the taxable periods that begin after the Closing Date and (ii) the Post-Closing Period. Purchaser and the Acquired Companies shall be entitled to any Tax refund (including interest) attributable to the taxable periods in respect of which Purchaser and the Acquired Companies are so obligated to indemnify Seller. (c) Upon receipt of notice from any taxing authority of any tax liability that would be subject to indemnity pursuant to this Section 4.8, Seller or Purchaser shall in writing notify the other party to this Agreement within 20 days of receiving such notice; provided, however, that the failure to give such notice shall not reduce the indemnification obligations of the indemnifying party unless and only to the extent that such failure materially prejudices the rights of the indemnifying party. SECTION IV.9 Financial Information. --------------------- (a) After the Closing, upon reasonable written notice, Purchaser and Seller shall furnish or cause to be furnished to each other and their respective accountants, counsel and other representatives access, during normal business hours, such information (including records pertinent to the Acquired Companies) as is reasonably necessary for financial reporting and accounting matters. (b) Purchaser shall retain all of the books and records of the Acquired Companies for a period of ten years after the Closing Date or such longer time as may be required by law. After the end of such period, before disposing of such books or records, Purchaser shall give notice to such effect to Seller and give Seller an opportunity to remove and retain all or any part of such books or records as Seller may select. (c) After the Closing, and for so long as Seller has any material contingent or other obligation under any of the Applicable Contracts to any party other than Purchaser or the Acquired Companies, Purchaser shall provide to Seller (i) within 90 days after the end of each fiscal year of Purchaser, any financial statements of Purchaser prepared for such fiscal year and (ii) within 45 days after the end of each fiscal quarter (other than the last fiscal quarter of any fiscal year) of Purchaser, any financial statements of Purchaser prepared for such fiscal quarter. Seller shall not disclose such information to any person other than its affiliates, accountants, counsel or representatives or any lessor, mortgagee or prospective purchaser who agrees to keep such information confidential. The confidentiality restrictions of this Section 4.9(c) shall not apply to information which (x) was or becomes generally available to the public other than as a result of a disclosure by Seller or (y) was or becomes available to Seller on a 26 nonconfidential basis from a source other than Purchaser or its affiliates, accountants, counsel or representatives or any person known by Seller to be bound by a confidentiality agreement with Purchaser. SECTION IV.10 Expenses. Whether or not the Closing takes place, -------- except as otherwise provided herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses. SECTION IV.11 Insurance. Purchaser shall secure insurance with --------- respect to the Acquired Companies' business from the Closing Date covering general liability (including premises liability), products liability and workers compensation in amounts customary for the industries in which the Acquired Companies operate. SECTION IV.12 Publicity. Seller and Purchaser agree that, prior --------- to the Closing, no public release or announcement concerning the transactions contemplated hereby shall be issued by any party without the prior written consent (which consent shall not be unreasonably withheld) of the other party, except as such release or announcement may be required by law. Seller and Purchaser agree that, prior to the Closing, no disclosure of the terms or provisions of this Agreement shall be made except to representatives, advisors, counsel, and lenders to the parties hereto who acknowledge the confidentiality of this Agreement, and except as required by law. SECTION IV.13 Certain Understandings. ---------------------- (a) Purchaser has received from Seller certain projected financial information ("Projections") relating to the Acquired Companies. Purchaser acknowledges that (i) there are uncertainties inherent in such Projections, (ii) Purchaser is familiar with such uncertainties and is taking full responsibility for making its own evaluation of the adequacy and accuracy of all Projections so furnished to it and (iii) Purchaser shall not have any claim against Seller or its agents with respect thereto. Accordingly, Seller makes no representation or warranty with respect to such Projections. (b) Purchaser acknowledges that, except as expressly set forth herein, neither Seller, nor any other person, has made any representation or warranty, express or implied, as to the accuracy or completeness of any Projections regarding the Acquired Companies, and other than as expressly set forth herein, neither Seller nor any other person will be subject to any liability to Purchaser or any other person resulting from the distribution to Purchaser, or the use of, any such Projections. Purchaser acknowledges that, should the Closing occur, Purchaser will acquire the Acquired Companies' business in an "as is" condition and on a "where is" basis, without any 27 representation or warranty of any kind, express or implied, except such representations and warranties of Seller expressly set forth in this Agreement, in the Escrow Agreement and in the certificate referenced in Section 6.1(c). (c) Purchaser acknowledges that, except as expressly set forth herein, neither Seller, nor any other person, has made any representation or warranty, express or implied, as to (i) the physical condition or state of repair of the Acquired Companies' real property, the improvements constituting a part thereof or the equipment and fixtures appurtenant thereto, (ii) the gross or net income derived therefrom, (iii) the cost, book value or market value thereof, (iv) the use or potential use thereof, or (v) any other matter affecting, or relating to, such property or the operation or management thereof. SECTION IV.14 Cooperation with Respect to Insurance Matters. --------------------------------------------- (a) Seller shall be responsible for any claim (including, without limitation, claims related to worker's compensation and general liability), loss, liability, damage or expense relating to any of the Acquired Companies solely relating to or arising out of events (known or unknown) prior to the Closing Date that are covered by any Seller's Insurance Policies (the "Seller's Pre-Closing Liabilities"). Purchaser and the Acquired Companies shall cooperate and cause their subsidiaries to cooperate with Prandium and Seller in submitting claims with respect to Seller's Pre-Closing Liabilities ("Seller's Pre-Closing Claims") (or pursuing Seller's Pre-Closing Claims previously made). It is further understood and agreed that any deductibles and/or self-insured retentions applicable to Seller's Pre-Closing Liabilities under Seller's Insurance Policies will be the sole responsibility of Seller and Prandium. Purchaser shall be responsible for any loss, liability, claim, damage or expense relating to any of the Acquired Companies relating to or arising out of (i) events (known or unknown) occurring on or after the Closing Date and (ii) events (known or unknown) occurring prior to the Closing Date that are not Seller's Pre-Closing Liabilities. (b) To the extent that, after the Closing Date, Purchaser or Seller reasonably require any information regarding claim data, payroll or other similar information in order to make filings with insurance carriers, Seller or Purchaser, as the case may be, shall promptly supply such information to the other. (c) Seller shall provide Purchaser with such information in its possession that Purchaser reasonably requires to obtain insurance for the Acquired Companies. 28 SECTION IV.15 Closing Deliveries. ------------------ (a) At the Closing, in addition to the documents required to be delivered pursuant to Section 2.2(a) above, Seller shall (i) deliver to Purchaser short-form certificates of good standing for each of the Acquired Companies, dated as of a date within 20 days of the Closing Date, issued by the Secretary of State of the state of incorporation of such Acquired Company; (ii) deliver to Purchaser true, complete and correct copies of resolutions duly adopted by the Board of Directors of Seller, relating to the approval of the transactions contemplated by this Agreement; (iii) deliver or make available to Purchaser at the locations at which the business of the Acquired Companies is being conducted all of the Acquired Companies' books and records, including all Intellectual Property; (iv) deliver a statement (in form and substance reasonably satisfactory to Purchaser) that satisfies Purchaser's obligations under Treasury Regulation section 1.1445-2(b)(2); and (v) deliver fully-executed resignations from the then current officers and directors of the Acquired Companies set forth on Schedule 4.6. (b) At the Closing, in addition to the documents required to be delivered pursuant to Section 2.2(b) above, Purchaser shall (i) deliver to Seller a short-form certificate of good standing for Purchaser, dated as of a date within 20 days of the Closing Date, issued by the Secretary of State of the state of incorporation of Purchaser; and (ii) deliver to Seller true, complete and correct copies of resolutions duly adopted by the Board of Directors of Purchaser, relating to the approval of the transactions contemplated by this Agreement. SECTION IV.16 Notice and Cure. Seller will notify Purchaser prior --------------- to the Closing in writing of, and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to, and will use all commercially reasonable efforts to cure before the Closing any event, transaction or circumstance, as soon as practicable after Seller has knowledge thereof, that causes or will cause any covenant or agreement of Seller or the Acquired Companies under this Agreement to be breached in any material respect or that renders or will render untrue in any material respect any representation or warranty of Seller or the Acquired Companies contained in this Agreement as if the same were made on or as of the date of such notice. 29 SECTION IV.17 Exclusivity. From the date hereof until the Closing ----------- Date or the termination of this Agreement pursuant to Section 7.1, Seller shall not solicit any offers for purchase of the Stock from any parties other than Purchaser, nor shall Seller provide material due diligence documents or information to third parties; provided, however, that upon commencement of the -------- ------- Reorganization Case, Seller may advise third parties of the terms and conditions of this Agreement and respond to requests for due diligence material. Seller will advise Purchaser of any third party due diligence requests for material not previously provided to Purchaser and will, at Purchaser's request, provide the same material to Purchaser. SECTION IV.18 Financing. On or prior to November 15, 2001, --------- Purchaser shall deliver to Seller an executed commitment letter or letters from responsible financial institution(s) in form and substance satisfactory to Seller for the provision of funds sufficient to consummate the transactions contemplated by this Agreement. Purchaser shall use its best efforts to prevent such letters from being withdrawn. ARTICLE V SALE ORDER; TERMINATION FEE SECTION V.1 Approval of this Agreement -------------------------- (a) Seller shall, as quickly as reasonably practicable under the circumstances, but in any event no later than (I) two court days after the commencement of the Reorganization Case, or (II) if the execution date of this Agreement is less than six days before the date on which the Reorganization Case commences, the tenth calendar day after the execution date of this Agreement (or the next court day, if the tenth calendar day is not a court day), file a motion (the "Sale Motion") requesting that the Bankruptcy Court enter an order approving this Agreement (the "Sale Order"). The Sale Order shall be in a form and substance reasonably acceptable to Purchaser and, among other things, shall: (i) approve the sale of the Stock to Purchaser on the terms and conditions set forth in this Agreement and authorize Seller to proceed with the Acquisition; (ii) state that the sale of the Stock to Purchaser shall be free and clear of all liens, claims, interests, and encumbrances whatsoever; 30 (iii) state that the Sale Order shall be immediately effective upon entry, notwithstanding the provisions of Rule 6004(g) of the Federal Rules of Bankruptcy Procedure and Rule 62(g) of the Federal Rules of Civil Procedure; (iv) find and direct that the Escrowed Amount shall be disbursed to Purchaser or Seller, as the case may be, only in accordance with the express terms of the Escrow Agreement; (v) order that the automatic stay under Bankruptcy Code (S) 362(a) is modified to the extent required to permit, and no injunction shall be issued by the Bankruptcy Court that would stay, impede, or otherwise interfere with, the disbursement of the Escrowed Amount in whole or in part, to Purchaser or Seller, as the case may be, pursuant to the terms of the Escrow Agreement; (vi) provide that Purchaser and Seller may cause the Closing to occur as soon as practicable after the Sale Order's entry; and (vii) contain at least the following findings of fact and conclusions of law, in form and substance satisfactory to Purchaser, in its reasonable discretion: (1) the Notice of Sale, Assignment, and Transfer of the Stock free and clear of liens, and the parties who were served with copies of such Notice, were in compliance with Sections 102 and 363 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004, and 9014 and any other applicable provision of the Bankruptcy Code, the Bankruptcy Rules, or any local bankruptcy rule governing the sale of assets free and clear of liens, or as directed by the Bankruptcy Court as long as the Bankruptcy Court finds that such notice is sufficient under the circumstances; (2) all requirements imposed by Section 363(f) of the Bankruptcy Code for the sale of the Stock free and clear of Liens have been satisfied; (3) Purchaser is a purchaser of the Stock in "good faith" pursuant to Section 363(m) of the Bankruptcy Code, and the Acquisition is entitled to the protections of 363(m); 31 (4) Purchaser and Seller did not engage in any conduct which would allow this Agreement or the Acquisition to be set aside pursuant to Section 363(n) of the Bankruptcy Code; (5) pursuant to Section 105 of the Bankruptcy Code, any creditors of Seller are prohibited from taking any actions against Purchaser or the Stock except in connection with liabilities expressly assumed by Purchaser, if any; and (6) the terms and provisions of this Agreement are fair and reasonable. (7) The Bankruptcy Court shall not confirm any reorganization plan that modifies in any material respect Seller's obligations under Section 4.14 of this Agreement. All of Seller's obligations under this Agreement, including without limitation its obligations under Sections 4.14 and Article VIII, constitute administrative expenses of the Reorganization Case entitled to priority under Bankruptcy Code (S) 507(a)(1) until such time as Seller's reorganization plan is confirmed. Upon confirmation, Seller's obligations under Section 4.l4 and Article VIII shall become direct obligations of the reorganized debtor. (b) Simultaneously with filing the Sale Motion, Seller shall file a motion in the Bankruptcy Court for an order (the "Procedures Order") approving, on an expedited basis and, in any event, before the hearing on the Sale Motion (the "Sale Hearing"), the payment of the Termination Fee in accordance with Section 7.3 below and the Sales Procedures. The Procedures Order shall be in form and substance acceptable to Purchaser in its reasonable discretion. As used herein, "Sales Procedures" means all of the following procedures for the submission of competing offers for the Stock at the hearing on the Sale Motion: (i) Any entity other than Purchaser (an "Overbidder") that is interested in purchasing the Stock must file with the Bankruptcy Court and serve on Seller and Purchaser an "Initial Overbid" in conformance with this paragraph, so that it is actually received by Purchaser and Seller no later than five court days before the Sale Hearing (the "Bid Deadline"). Any Initial Overbid must: (1) include a proposed Stock Purchase Agreement (the "Competing Agreement"), executed by the Overbidder, that is on 32 substantially the same terms and conditions as those in this Agreement, along with a redlined, marked copy showing all changes between the Competing Agreement and this Agreement; (2) remain open until the conclusion of the Sale Hearing; (3) contain terms and conditions no less favorable to Seller than the terms and conditions of this Agreement; (4) provide for an all-cash purchase price to be paid to Seller that exceeds the Purchase Price herein by at least the sum of (i) the Termination Fee and (ii) $100,000; (5) be accompanied by admissible evidence in the form of affidavits or declarations establishing the Overbidder's good faith, within the meaning of Section 363(m) of the Bankruptcy Code; (6) be accompanied by admissible evidence in the form of affidavits or declarations establishing that the Overbidder is capable and qualified, financially, legally, and otherwise, of unconditionally performing all obligations under the Competing Agreement; (7) be accompanied by a cashier's check made payable to the order of Seller in the amount of the Termination Fee, as set forth in Section 7.3 (the "Overbidder's Deposit"), and further provide that (A) if the Bankruptcy Court approves a sale of the Stock to Overbidder, Seller may retain the Overbidder's Deposit for application as a non-refundable deposit for application against the purchase price at the closing of the transaction, and (B) if the Bankruptcy Court does not approve a sale of the Stock to Overbidder, Seller will promptly return the Overbidder's Deposit to Overbidder; (8) disclaim any right of Overbidder to receive a fee analogous to the Termination Fee or to compensation under Bankruptcy Code Section 503(b) for making a substantial contribution; and (9) contain a proposed closing date that is not later than the Closing Date hereunder. 33 (ii) Any entity that submits a timely, conforming Initial Overbid, as set forth above, shall be deemed a "Qualified Overbidder" and may bid for the Stock at the Sale Hearing. (iii) Any entity that fails to submit a timely, conforming Initial Overbid, as set forth above, shall be disqualified from bidding for the Stock at the Sale Hearing. (iv) If no timely, conforming Initial Overbid is submitted, Seller shall request at the Sale Hearing that the Court approve the proposed sale of the Stock to Purchaser under the Agreement. (v) If Seller receives one or more timely, conforming Initial Overbids, Seller may nevertheless request either that the Court approve this Agreement and the proposed sale of the Stock to Purchaser, or that the Court conduct an auction of the Stock at the Sale Hearing (the "Auction") in which Purchaser and all Qualified Overbidders may participate. The Auction shall be governed by the following procedures: (1) all bidders shall be deemed to have consented to the core jurisdiction of the Bankruptcy Court and to have waived any right to jury trial in connection with any disputes relating to the Auction or the sale of the Stock; (2) bidding will commence at the amount of the highest bid submitted by a Qualified Overbidder, as determined by the Bankruptcy Court; (3) each subsequent bid shall be in increments of no less than $100,000; (4) Purchaser shall have the right, in its sole and absolute discretion, to match bids made by any Qualified Overbidder and, in such event, Purchaser's matching bid shall be deemed the highest and best bid for the Stock; (5) if, upon conclusion of the Auction, and consistent with the terms of these bidding procedures, Purchaser's final bid matches or is greater than the highest bid made by a Qualified Overbidder, Seller shall recommend that the Bankruptcy Court approve the Agreement and authorize Seller to sell the Stock to Purchaser, and 34 the amount of Purchaser's final bid (less the amount of the Termination Fee) shall constitute the Purchase Price under this Agreement; (6) Seller may, with Bankruptcy Court approval, elect to deem Purchaser's final bid to be the highest bid, notwithstanding the receipt of an apparently higher bid from another Overbidder, if Seller reasonably concludes that the Overbidder may not be able to close, or for any other reason. (c) Purchaser and Seller shall use their reasonable best efforts to cause the Bankruptcy Court to enter the Procedures Order and the Sale Order. Unless the Bankruptcy Court fails to approve the payment of the Termination Fee as provided herein, neither Purchaser nor any of its agents shall seek compensation from Seller under Bankruptcy Code (S) 503(b) or otherwise for making a substantial contribution in the Reorganization Case. ARTICLE VI CONDITIONS PRECEDENT SECTION VI.1 Conditions Precedent to Obligations of Purchaser. ------------------------------------------------ The obligation of Purchaser to purchase the Stock shall be subject to the satisfaction or waiver on the Closing Date of the following conditions precedent (which shall not be construed as covenants): (a) No Injunctions or Restraints. No temporary restraining ---------------------------- order or preliminary or permanent injunction of any court or administrative agency of competent jurisdiction prohibiting the purchase and sale of the Stock shall be in effect. (b) Consents. All consents, approvals and waivers from -------- third parties and governmental authorities and other parties set forth on Schedule 3.1(e)-1 or necessary to permit Seller to transfer the Stock to Purchaser shall have been obtained. The consent or approval of each third party whose consent or approval shall be required in connection with the transactions contemplated hereby under any Contract or permit set forth on Schedule 6.1(b) hereto shall have been obtained. (c) Representations and Warranties. The representations ------------------------------ and warranties of Seller set forth in this Agreement shall be true and correct in all material respects on and as of the Closing Date, as though made on and as of the Closing Date, 35 except as otherwise contemplated by this Agreement, and Purchaser shall have received a certificate signed by an authorized officer of Seller to such effect. (d) Performance of Obligations of Seller. Seller shall ------------------------------------ have performed all material obligations required to be performed by them under this Agreement on or prior to the Closing Date, and Purchaser shall have received a certificate signed by an authorized officer of Seller to such effect. (e) Financing. Purchaser shall have satisfied any and all --------- conditions required of it by a responsible financial institution(s), which institution(s) shall be reasonably acceptable to both Prandium and Seller, and such institution(s) shall have provided Purchaser with the cash funds necessary to consummate the Acquisition. (f) Estoppel Certificates. Seller shall have delivered to --------------------- Purchaser estoppel certificates, substantially in the form attached hereto as Exhibit B, from each real property lessor of each lease listed on Schedule 6.1(f). (g) Sale Order. The Bankruptcy Court shall have entered ---------- the Sale Order in a form acceptable to Purchaser in its reasonable discretion, which shall contain, among other things, the provisions required by Article V of this Agreement, and the Sale Order shall have become a Final Order. As used herein, "Final Order" means an order, entered by a court of competent jurisdiction, that has not been withdrawn, modified, or reversed, remains in full force and effect, and as to which (i) the time to seek rehearing or to appeal has expired, (ii) no request for rehearing or appeal is pending, and (iii) no stay is in effect. Notwithstanding the foregoing, Purchaser may waive the requirement that the Sale Order be a Final Order and may cause the Closing to occur at any time after the Sale Order's entry, so long as on the Closing Date (i) all other conditions to Closing are satisfied or waived, and (ii) the Sale Order is in full force and effect and is not the subject of a stay. SECTION VI.2 Conditions Precedent to Obligations of Seller. The --------------------------------------------- obligation of Seller to sell, assign, transfer, convey and deliver the Stock is subject to the satisfaction or waiver on the Closing Date of each of the following conditions precedent (which shall not be construed as covenants): (a) No Injunctions or Restraints. No temporary restraining ---------------------------- order or preliminary or permanent injunction of any court or administrative agency of competent jurisdiction prohibiting the purchase and sale of the Stock shall be in effect. 36 (b) Consents. All consents, approvals and waivers from -------- third parties and governmental authorities and other parties set forth on Schedule 3.1(e)-1 shall have been obtained. (c) Representations and Warranties. The representations ------------------------------ and warranties of Purchaser set forth in this Agreement shall be true and correct in all material respects on and as of the Closing Date, as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and Seller shall have received a certificate signed by an authorized officer of Purchaser to such effect. (d) Performance of Obligations of Purchaser. Purchaser --------------------------------------- shall have performed all material obligations required to be performed by it under this Agreement on or prior to the Closing Date, and Seller shall have received a certificate signed by an authorized officer of Purchaser to such effect. (e) Sale Order. The Bankruptcy Court shall have entered ---------- the Sale Order, and the Sale Order shall have become a Final Order, except that it shall not be a condition to Seller's obligations hereunder that the Sale Order become a Final Order if Purchaser has waived that condition, as provided in Section 6.1(g), and the Sale Order is not the subject of a stay. 37 ARTICLE VII TERMINATION AND AMENDMENT SECTION VII.1 Termination. This Agreement may be terminated and ----------- the Acquisition may be abandoned at any time prior to the Closing: (a) by mutual written consent of Seller and Purchaser; (b) by either Seller or Purchaser, by written notice to the other party, if there has been a violation or breach of any of the other party's material covenants, agreements, or representations or warranties or if there has been a failure on a scheduled Closing Date of satisfaction of any of the material conditions to the obligations of the terminating party which has not been cured within 10 business days after written notice thereof by the terminating party to the other party; (c) by either Seller or Purchaser, by written notice to the other party, if the Acquisition has not been consummated by ninety days from the date hereof (or such later date, as is agreed to in writing by Seller and Purchaser), and such failure to consummate is not caused by a breach of this Agreement (or any representation, warranty, covenant, or agreement included herein) by the party electing to terminate pursuant to this clause (c); (d) by either Seller or Purchaser, by written notice to the other party, if there shall be any law or regulation that makes consummation of the Acquisition illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Seller or Purchaser from consummating the Acquisition is entered and such judgment, injunction, order or decree shall become final and nonappealable; (e) by either Seller or Purchaser, if the Bankruptcy Court authorizes Seller to sell the Stock to an Overbidder; (f) by Seller, (i) on November 15 or November 16, 2001, if Purchaser has not delivered to Seller an executed commitment letter or letters from responsible financial institution(s) in form and substance satisfactory to Seller for the provision of funds sufficient to consummate the transactions contemplated by this Agreement, or (ii) if any of such commitment letters are withdrawn such that the remaining effective letters no longer provide funds sufficient to consummate the transactions contemplated by this Agreement and such withdrawn letters are not replaced with effective letters in form and substance satisfactory to Seller within ten business days 38 following such withdrawal (the "Replacement Period"), then at the expiration of the Replacement Period; (g) by Purchaser, if the Bankruptcy Court's Sale Order does not include provisions approving the Escrow Agreement in substantially the form attached hereto as Exhibit A and the findings and directions described in Sections 5.1(a)(iv) and (v); or (h) by Purchaser, if Seller does not commence the Reorganization Case within 45 days of the date hereof. SECTION VII.2 Effect of Termination. In the event of termination --------------------- of this Agreement in accordance with Section 7.1, this Agreement shall forthwith become void and have no effect, except (a) to the extent that such termination results from the breach by a party hereto of its obligations hereunder (in which case such breaching party shall be liable for all damages allowable at law and any relief available at equity), (b) as otherwise set forth in any written termination agreement and (c) that Sections 4.2(b), 4.10, 4.12 and 7.3 shall survive termination of this Agreement. SECTION VII.3 Termination Fee. Notwithstanding anything herein to --------------- the contrary, in the event that: (a) Purchaser or Seller terminates the Agreement under Section 7.1(e), Seller shall pay to Purchaser no later than two business days after the entry of the Bankruptcy Court's order approving the transaction with an Overbidder the sum of $700,000 (the "Termination Fee"), which amount shall be paid directly from the winning Overbidder's Overbidder's Deposit provided under Section 5.1(b)(i)(7); (b) a Sale Order has been entered approving the sale of the Stock to the Purchaser pursuant to this Agreement, Seller breaches its obligation to close the Acquisition and such breach is not remedied within five business days, and Purchaser is not in breach of its material representations, warranties, covenants or agreements herein, then, within ten days of Seller's termination of this Agreement, Seller shall pay to Purchaser the sum of $450,000 as liquidated damages (the "Liquidated Damages"); or (c) a Sale Order has been entered approving the sale of the Stock to the Purchaser pursuant to this Agreement, Purchaser breaches its obligation to close the Acquisition and such breach is not remedied within five business days, and Seller is not in breach of its material representations, warranties, covenants or agreements herein, then, 39 within ten days of Seller's termination of this Agreement, Purchaser shall pay to Seller the Liquidated Damages. The obligation of Seller to pay the Termination Fee or Liquidated Damages, as the case may be, shall constitute an administrative expense in the Reorganization Case having super-priority administrative status ahead of all other super-priority administrative claims allowed under Code Sections 503(b), 507(b) and 364(c)(1). SECTION VII.4 Amendment. This Agreement may not be amended except --------- by an instrument in writing signed by the party against whom enforcement of any such amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by the other party hereto with any term or provision of this Agreement. A party's waiver of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach. ARTICLE VIII INDEMNIFICATION SECTION VIII.1 Indemnification Generally. In addition to and not ------------------------- in limitation of the indemnities provided in Section 4.8, from and after the Closing, subject to the other provisions of this Article VIII, the parties shall be indemnified as provided in this Article VIII. All amounts payable pursuant to this Article VIII shall be treated as adjustments to the Purchase Price. SECTION VIII.2 Indemnification of Purchaser Indemnitees. Seller ---------------------------------------- and Prandium shall indemnify, save and keep Purchaser and its "Affiliates" (such term having the meaning set forth in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended), successors and permitted assigns, and their respective directors, officers, employees and agents, and the heirs, executors and personal representatives of each of the foregoing (each a "Purchaser Indemnitee" and collectively the "Purchaser Indemnitees"), harmless against and from all Damages sustained or incurred by any Purchaser Indemnitee on an after-Tax basis, as a result of or arising out of: (a) any inaccuracy in or breach of any representation and warranty made by Seller to Purchaser herein or in the Schedules or in any other document or certificate executed in connection with the Closing; or (b) any breach by Seller, or failure of Seller to comply with, any of the covenants or obligations under this Agreement to be performed by Seller (including, without limitation, the obligations of Seller under this Article VIII). 40 SECTION VIII.3 Indemnification of Seller Indemnitees. Purchaser ------------------------------------- shall indemnify, save and keep Seller and its Affiliates, successors and permitted assigns, and their directors, officers, employees and agents, and the heirs, executors and personal representatives of each of the foregoing (each a "Seller Indemnitee" and collectively the "Seller Indemnitees"), harmless against and from all Damages sustained or incurred by any Seller Indemnitee on an after-Tax basis, as a result of or arising out of: (a) any inaccuracy in or breach of any representation and warranty made by Purchaser to Seller herein or in the Schedules or in any other document or certificate executed in connection with the Closing; (b) any breach by Purchaser, or failure of Purchaser to comply with, any of the covenants or obligations under this Agreement to be performed by Purchaser (including, without limitation, the obligations of Purchaser under this Article VIII); or (c) the ownership or operation of the Business from and after the Closing. SECTION VIII.4 Limitation on Indemnification Obligations. ----------------------------------------- (a) All representations and warranties of Seller and Purchaser contained in this Agreement shall survive the Closing and continue in full force and effect for a period of twelve months thereafter. A claim by a Purchaser Indemnitee or a Seller Indemnitee for indemnification under Section 8.2 or 8.3(a), respectively, shall be ineffective unless such person delivers a written claim for indemnification within the survival period specified in this Section 8.4(a). (b) Purchaser Indemnitees shall only be entitled to indemnification pursuant to Section 8.2 once the aggregate amount otherwise payable to Purchaser Indemnitees pursuant to such Section exceeds an amount equal to $50,000 (the "Purchaser Threshold Amount"), and then to the full amount of such claims. The indemnification to which Purchaser Indemnitees are entitled pursuant to Section 8.2 and Section 4.8(a) shall be subject to an aggregate ceiling equal to $1,000,000. (c) Seller Indemnitees shall only be entitled to indemnification pursuant to Section 8.3 once the aggregate amount otherwise payable to Seller Indemnitees pursuant to such Section exceeds an amount equal to $50,000 (the "Seller Threshold Amount"), and then to the full amount of such claims. The indemnification to which Seller Indemnitees are entitled pursuant to Section 8.3 shall be subject to an aggregate ceiling equal 41 to $1,000,000. The limitations on Purchaser's indemnification set forth in this Section 8.4(c) shall not apply to claims made by Seller Indemnitees under Section 8.3(c). SECTION VIII.5 Cooperation. ----------- The party that is required to provide indemnification to another party pursuant to this Article VIII (and "Indemnifying Party") shall have the right, at the Indemnifying Party's own expense, to participate in the defense of any Third Party Claim, and if said right is exercised, the Indemnifying Party and any party that is entitled to indemnification from another party pursuant to this Article VIII (an "Indemnified Party") shall cooperate in the investigation and defense of said Third Party Claim. SECTION VIII.6 Third Party Claims Procedure. ---------------------------- (a) Promptly following the receipt of notice of a Third Party Claim for which it may seek indemnification hereunder, the party receiving the notice of the Third Party Claim shall notify the Indemnifying Party of such Third Party Claim explaining in reasonable detail the Third Party Claim. The failure to give such notice shall not relieve the Indemnifying Party of its obligations under this Agreement except to the extent that the Indemnifying Party is prejudiced as a result of the failure to give such notice. Within 15 business days after receipt of the notice by the Indemnifying Party pursuant to the preceding sentence, the Indemnifying Party shall notify the Indemnified Party whether it elects to undertake the defense of the Third Party Claim; provided that the Indemnifying Party may so elect to undertake the defense of - -------- ---- such claim without the consent of the Indemnified Party only if such claim involves money damages and if the adverse determination of such claim, singly or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the business of the Indemnified Party; provided, further, the -------- ------- Indemnifying Party must elect to undertake the defense of any Third Party Claims relating to Section 8.3(c). Each Indemnified Party shall make available to the Indemnifying Party all information reasonably available to it relating to such Third Party Claim. In addition, the parties hereunder shall render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any such action or claim. If the Indemnifying Party elects to undertake the defense of such Third Party Claim, it shall do so at its own expense with counsel of its own choosing and it shall acknowledge in writing its indemnification obligations as provided in this Agreement to the Indemnified Party as to such Third Party Claim. If the Indemnifying Party elects not to defend such Third 42 Party Claim or fails to pursue the defense of such Third Party Claim diligently, the Indemnified Party shall have the right to undertake the defense of such Third Party Claim through counsel of its own choosing. The party that defends the Third Party Claim shall keep the other party fully advised of the progress and disposition of such claim. (b) In the event the Indemnifying Party elects not to undertake the defense of a Third Party Claim or fails to pursue diligently the defense of such claim and the Indemnified Party litigates or otherwise contests or settles the Third Party Claim, then, the Indemnifying Party shall promptly reimburse the Indemnified Party for all Damages, including any amounts paid to litigate or otherwise contest or settle such claim and all amounts paid in satisfaction of a judgment against the Indemnified Party in contesting such claim and in providing its right to indemnification hereunder, all in accordance with the provisions of this Article VIII. (c) No Third Party Claim will be settled by the Indemnifying Party or the Indemnified Party without the consent of the other, which consent will not be unreasonably withheld or delayed; provided, however, -------- that if such claim asserts that the Indemnifying Party is jointly and severally liable and the Indemnified Party shall be fully released from all liability relating to such Third Party Claim in connection with such settlement, the Indemnifying Party shall not be required to obtain the consent of the Indemnified Party. The party in charge of the defense or any settlement negotiations shall keep the other party apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. (d) "Damages" shall mean all liabilities, assessments, levies, losses, fines, penalties, damages (including punitive damages), settlements, costs and expenses, including reasonable fees and expenses of attorneys, accountants, consultants and other professionals sustained or incurred by an Indemnified Party and resulting from, arising out of or incident to (a) any matter for which indemnification is provided under this Agreement, or (b) the enforcement by an Indemnified Party of its rights to indemnification under this Agreement; provided that Damages shall not include any amounts paid -------- in connection with Section 1.3 of this Agreement. (e) "Third Party Claim" shall mean any claims for Damages which are asserted or threatened by a person, other than a party to this Agreement or a successor or 43 assign of a party to this Agreement, against any Indemnified Party or to which an Indemnified Party is subject from such a person. SECTION VIII.7 General. ------- (a) Each Indemnified Party shall be obligated in connection with any claim for indemnification under this Article VIII to use all commercially reasonable efforts to obtain any insurance proceeds available to such Indemnified Party with regard to the applicable claims under the Indemnified Party's insurance policies. The amount that an Indemnifying Party is or may be required to pay to any Indemnified Party pursuant to this Article VIII shall be reduced (retroactively, if necessary) by the net insurance proceeds received under any such insurance policies. If an Indemnified Party shall have received the entire payment required by this Agreement in respect of Damages and shall subsequently receive insurance proceeds under any such insurance policies or other amounts in respect of such Damages, then such Indemnified Party shall promptly repay to the Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received (net of any direct collection costs). (b) In addition to the requirements of Section 8.7(a), each Indemnified Party shall be obligated in connection with any claim for indemnification under this Article VIII to use all commercially reasonable efforts to mitigate Damages upon and after becoming aware of any event which could reasonably be expected to give rise to such Damages. Notwithstanding the foregoing, (i) Damages incurred by any Indemnified Party in pursuit of such mitigation shall constitute indemnifiable Damages hereunder and (ii) no Indemnified Party shall be so obligated if such mitigation could adversely affect such Indemnified Party in a significant manner other than solely as a result of monetary damages for which such persons would be entitled to indemnification hereunder. (c) Subject to the rights of insurers of an Indemnified Party, an Indemnifying Party shall be subrogated to any right of action which the Indemnified Party may have against any other person, other than another Indemnified Party, with respect to any matter giving rise to a claim for indemnification hereunder. (d) The indemnification provided in Section 4.8 and in this Article VIII and the specific remedies provided for elsewhere in this Agreement shall be the exclusive 44 post-Closing remedy available to any party with respect to any breach of any representation or warranty made by the other party in Article III of this Agreement at law or in equity. ARTICLE IX MISCELLANEOUS SECTION IX.1 Notices. All notices and other communications ------- hereunder shall be in writing and shall be deemed given (i) when delivered personally or by documented overnight courier or (ii) upon return of the receipt after being mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Purchaser, to Othello Holding Corporation 9100 Wilshire Blvd. Suite 250W Beverly Hills, California 90212 Attn: Lanz Alexander, President with a copy to: Akin, Gump, Strauss, Hauer & Feld, LLP 2029 Century Park East, Suite 2400 Los Angeles, California 90067 Attn: Channing D. Johnson, Esq. (b) if to Seller, to Prandium, Inc. 2701 Alton Avenue Irvine, California 92614 Attention: Michael Rule, Esq. with a copy to: 45 Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Attention: Rod A. Guerra, Esq. SECTION IX.2 Interpretation. When a reference is made in this -------------- Agreement to a Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or Exhibit of this Agreement unless otherwise indicated. When a reference is made in this Agreement to a specific Schedule, such reference shall be deemed to include, to the extent applicable, all the other Schedules. All references to Schedules herein shall be deemed to be a reference to such Schedule as it may be amended on or prior to the twenty-first day after the execution of this Agreement. The table of contents, table of definitions and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When the words "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." When any representation or warranty in Section 3.1 is made to the knowledge of Seller, such term shall mean only the actual knowledge of Seller's executive officers and the knowledge of no other person shall be imputed to any such executive officer or to Seller. All accounting terms not defined in this Agreement shall have the meanings determined by generally accepted accounting principles as of the date of this Agreement. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms. SECTION IX.3 Severability. If any provision of this Agreement or ------------ the application of any such provision shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. In lieu of any such invalid, illegal or unenforceable provision, the parties hereto intend that there shall be added as part of this Agreement a provision as similar in terms to such invalid, illegal or unenforceable provision as may be possible and be valid, legal and enforceable. SECTION IX.4 Counterparts. This Agreement may be executed in one ------------ or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 46 SECTION IX.5 Entire Agreement. This Agreement (including ---------------- agreements incorporated herein) and the Schedules and Exhibits hereto constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. SECTION IX.6 Governing Law; Forum. This Agreement shall be -------------------- governed by and construed in accordance with the laws of the State of California without giving effect to the principles of conflicts of laws thereof. Seller and Purchaser agree that, so long as the Reorganization Case is pending, the Bankruptcy Court shall have exclusive jurisdiction to resolve any dispute related to the interpretation or performance of this Agreement. SECTION IX.7 Survival of Representations. Except as specifically --------------------------- set forth herein, the representations or warranties contained in this Agreement or in any other instrument delivered in connection herewith shall terminate at, and shall not survive or have any force or effect after the Closing. SECTION IX.8 Assignment. This Agreement shall be binding upon and ---------- inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated by any of the parties hereto without the prior written consent of the other parties. SECTION IX.9 No Third-Party Beneficiaries. Except as provided in ---------------------------- Section 4.5, nothing herein expressed or implied shall be construed to give any person other than the parties hereto (and their successors and assigns permitted by Section 9.8) any legal or equitable rights hereunder. 47 IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of Seller and Purchaser, all as of the date first written above. FRI-MRD CORPORATION By: /s/ R. T. Trebing, Jr. ----------------------------- Name: Robert T. Trebing, Jr. Title: President OTHELLO HOLDING CORPORATION By: /s/ Lanz Alexander. ----------------------------- Name: Lanz Alexander Title: Chief Executive Officer BY SIGNING BELOW, PRANDIUM, INC. INDICATES ITS ACKNOWLEDGMENT AND ACCEPTANCE OF THE PROVISIONS OF ARTICLE VIII HEREOF, AND AGREES TO BE BOUND BY THE TERMS OF ARTICLE VIII. PRANDIUM, INC. By: /s/ Michael Malanga ----------------------------- Name: Michael Malanga Title: Executive Vice President EX-10.(D) 4 dex10d.txt LETTER AGREEMENT FOOTHILL CAPITAL CORPORATION EXHIBIT 10(d) Foothill Capital Corporation 2450 Colorado Avenue, Suite 3000 West Santa Monica, California 90404 As of October 18, 2001 FRI-MRD CORPORATION Attn: Mr. Robert D. Gonda 18831 Von Karman Avenue Irvine, California 92612 Re: Foothill Capital Corporation; Chi-Chi's, Inc., as Borrower, FRI-MRD Corporation, as a Guarantor, Prandium, Inc., as a Guarantor, and each of their Subsidiaries, as Guarantors -------------------------------------------------------- Ladies and Gentlemen: Reference hereby is made to that certain Amended and Restated Loan and Security Agreement, dated as of July 19, 2000 (as amended, restated, supplemented, or otherwise modified from time to time, the "Loan Agreement"), by -------------- and among, on the one hand, FRI-MRD CORPORATION, a Delaware corporation ("FRI- --- MRD"), CHI-CHI'S, INC., a Delaware corporation ("Borrower"), and for purposes of - --- -------- acknowledging and agreeing to Section 15.11 of the Loan Agreement, by PRANDIUM, ------------- INC., a Delaware corporation, formerly known as Family Restaurants, Inc. ("Prandium"), and each of its Affiliates that are signatories thereto, and, on --------- the other hand, FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"). Capitalized terms used but not otherwise defined herein shall --------- have the meanings ascribed to them in the Loan Agreement. Borrower, Prandium, FRI-MRD, and each of their undersigned Affiliates each acknowledge and agree that unwaived Events of Default have occurred. The Events of Default currently known by Foothill include the following Events of Default (the "Present Events of Default"): ------------------------- A. In violation of the financial covenant contained in Section ------- 7.20(a) of the Loan Agreement, the actual EBITDA of the Borrower for the period - ------- of four consecutive fiscal quarters ending December 31, 2000 was $557,000, which fails to satisfy the required minimum EBITDA for the Borrower of $4,500,000 for such period; B. In violation of the financial covenant contained in Section ------- 7.20(a) of the Loan Agreement, the actual EBITDA of the Borrower for the period - ------- of four consecutive fiscal quarters ending April 1, 2001 was ($1,500,000), which fails to satisfy the required minimum EBITDA for the Borrower of $4,500,000 for such period; C. In violation of the financial covenant contained in Section ------- 7.20(a) of the Loan Agreement, the actual EBITDA of the Borrower for the period - ------- of four consecutive fiscal quarters ending July 1, 2001 was ($1,551,000), which fails to satisfy the required minimum EBITDA for the Borrower of $4,500,000 for such period; D. In violation of the financial covenant contained in Section ------- 7.20(b) of the Loan Agreement, the actual EBITDA of the Borrower, HGI, KKR and - ------- FRI-Admin, on a combined basis for the period of four consecutive fiscal quarters ending December 31, 2000 was $1,970,000, which fails to satisfy the required minimum EBITDA for the Borrower, HGI, KKR and FRI-Admin, on a combined basis, of $6,000,000 for such period; E. In violation of the financial covenant contained in Section ------- 7.20(b) of the Loan Agreement, the actual EBITDA of the Borrower, HGI, KKR and - ------- FRI-Admin, on a combined basis for the period of four consecutive fiscal quarters ending April 1, 2001 was ($1,825,000), which fails to satisfy the required minimum EBITDA for the Borrower, HGI, KKR and FRI-Admin, on a combined basis, of $6,000,000 for such period; F. In violation of the financial covenant contained in Section ------- 7.20(b) of the Loan Agreement, the actual EBITDA of the Borrower, HGI, KKR and - ------- FRI-Admin, on a combined basis for the period of four consecutive fiscal quarters ending July 1, 2001 was ($3,665,000), which fails to satisfy the required minimum EBITDA for the Borrower, HGI, KKR and FRI-Admin, on a combined basis, of $6,000,000 for such period; G. In violation of the financial covenant contained in Section ------- 7.20(c) of the Loan Agreement, the actual EBITDA of KKR for the period of four - ------- consecutive fiscal quarters ending December 31, 2000 was ($675,000), which fails to satisfy the required minimum EBITDA for KKR of $0 for such period; H. In violation of the financial covenant contained in Section ------- 7.20(c) of the Loan Agreement, the actual EBITDA of KKR for the period of four - ------- consecutive fiscal quarters ending April 1, 2001 was ($1,162,000), which fails to satisfy the required minimum EBITDA for KKR of $500,000 for such period; I. In violation of the financial covenant contained in Section ------- 7.20(c) of the Loan Agreement, the actual EBITDA of KKR for the period of four - ------- consecutive fiscal quarters ending July 1, 2001 was ($1,818,000), which fails to satisfy the required minimum EBITDA for KKR of $500,000 for such period; J. In violation of the financial covenant contained in Section ------- 7.20(d) of the Loan Agreement, the actual EBITDA of KKR and HGI on a combined - ------- basis for the period of four consecutive fiscal quarters ending April 1, 2001 was $2,559,000, which fails to satisfy the required minimum EBITDA for KKR and HGI on a combined basis of $3,000,000 for such period; K. In violation of the financial covenant contained in Section ------- 7.20(d) of the Loan Agreement, the actual EBITDA of KKR and HGI on a combined - ------- basis for the period of four consecutive fiscal quarters ending July 1, 2001 was $1,824,000, which fails to satisfy the required minimum EBITDA for KKR and HGI on a combined basis of $3,000,000 for such period; L. FRI-MRD is in default with respect to its payment obligations under the Senior Discount Notes and the Senior Secured Discount Notes, which constitutes an Event of Default pursuant to Section 8.10 of the Loan Agreement. ------------ 2 Borrower, Prandium, FRI-MRD, and each of their undersigned Affiliates each acknowledge and agree that, as a result of the Present Events of Default, among other things, Foothill's obligation to make Advances, issue Letters of Credit or otherwise extend credit to Borrower under the Loan Agreement has been terminated. To provide FRI-MRD with additional time to negotiate a restructuring of its Indebtedness under the Senior Secured Discount Notes and the Senior Discount Notes, among other Indebtedness, Foothill agrees to forbear from exercising its remedies relative to the Present Events of Default during the Forbearance Period (as hereinafter defined), subject to satisfaction of the following conditions precedent: (a) Foothill shall have received a fully executed counterpart of this agreement, (b) Foothill shall have received a reaffirmation and consent, in the form of Exhibit A hereto, which shall be duly executed by each Guarantor, dated as of the date hereof, and in full force and effect, and (c) Foothill shall have received a forbearance fee, in full in cash, in the amount of $50,000, which forbearance fee shall be fully earned and non- refundable as of the date hereof. The foregoing to the contrary notwithstanding, Foothill shall have no obligation to forbear from satisfying any Obligations which may be outstanding as of any date of determination from any cash or Cash Equivalents held by or on behalf of Foothill or its Affiliates to secure the Obligations. FRI-MRD, Prandium, Borrower and each of their undersigned Affiliates each covenants and agrees as follows: 1. FRI-MRD, Prandium, Borrower and each such undersigned Affiliate (collectively, the "Releasing Parties") each hereby releases and discharges ----------------- absolutely and forever, Foothill, Foothill's predecessors, assigns and their respective officers, directors, shareholders, partners, agents, employees, servants, related corporations, subsidiaries, affiliates, partnerships, or other entities related thereto, whether controlled by or related to Foothill and their attorneys (collectively, the "Released Parties") of and from any and all claims, ---------------- rights, demands, injuries, debts, damages, liabilities, omissions, accounts, contracts, agreements, promissory notes, obligations, causes of action, costs, expenses, liens, things, matters, and defenses, whether known or unknown, suspected or unsuspected, of every kind and nature which now exist, and/or heretofore have existed in the favor of the Releasing Parties against the Released Parties arising or in any way connected with the financial relationship between the parties arising from the underlying Loan Documents and documents related thereto. Each of the Releasing Parties acknowledges that Section 1542 of the Civil Code of California provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in his-favor at the time of executing a release, which "if known by him must have materially affected his settlement with the debtor." Each of the Releasing Parties have been advised by counsel with respect to the release contained herein. Each such Releasing Party also acknowledges that it may hereafter discover facts in addition to or different from those which each such party know or believe to be true with respect to the subject matter of the release given hereby, but that it is the intention of each such Releasing Party to, and each such Releasing Party does hereby, fully, finally and 3 forever waive any and all rights and defenses as set forth hereinabove. Upon advice of such counsel, and in furtherance of such intention, each Releasing Party waives all rights granted to each such Releasing Party by Section 1542 of the Civil Code of California and acknowledges that the release herein given shall be and remain in effect as a full and complete general release as to the matters released herein, notwithstanding the subsequent discovery or existence of any such additional or different facts. 2. FRI-MRD, Prandium, Borrower, and each such undersigned Affiliate each agrees that Foothill and its Affiliates may continue to hold any cash or Cash Equivalents which were previously provided to Foothill as additional security for the Obligations until such time as (a) all Obligations have been satisfied in full in cash, and (b) (i) Foothill has received an irrevocable letter of credit from a financial institution acceptable to Foothill in its discretion, in form and substance acceptable to Foothill in its discretion, in favor of Foothill in an amount equal to 105% of the maximum amount of Foothill's obligations under all outstanding Letters of Credit, or (ii) all Letters of Credit have expired or have been released. 3. FRI-MRD, Prandium, Borrower, and each such undersigned Affiliate each waives any right to seek authority from the bankruptcy court in which an Insolvency Proceeding is pending to obtain the use of any cash or Cash Equivalents held by or on behalf of Foothill or its Affiliates to secure the Obligations. In addition, FRI-MRD, Prandium, Borrower and each of their undersigned Affiliates each covenants and agrees that such Person shall not seek authority of such bankruptcy court to use such cash or Cash Equivalents. Such cash collateral will bear interest at the per annum rate applicable from time to time with respect to ninety (90) day certificates of deposit offered by Wells Fargo Bank, National Association, a national banking association. If at any time the aggregate amount of such collateral exceeds 105% of the maximum amount of Foothill's obligations under outstanding Letters of Credit by more than $50,000, Foothill shall promptly (and in any event within five (5) Business Days of Foothill's receipt of a written notice from Borrower of the existence of such excess) pay such excess to Borrower, to the extent that such excess is greater than $50,000; provided, however, that if at any time the maximum amount of -------- ------- Foothill's obligations under outstanding Letters of Credit does not exceed $6,000,000, Foothill shall only be required to return a portion of such collateral to Borrower to the extent that the aggregate amount of such collateral exceeds 105% of the maximum amount of Foothill's obligations under outstanding Letters of Credit by more than $250,000. Foothill also agrees to pay to Borrower, on the last Business Day of each month, all accrued and unpaid interest on such collateral during such month pursuant to the first sentence of this paragraph. 4. On or before the earlier to occur of (a) October 18, 2001, and (b) the date when an Insolvency Proceeding is commenced with respect to FRI-MRD, Prandium, Borrower or any of their Affiliates, FRI-MRD, Prandium, Borrower and such Affiliates shall cause the releases of the mortgages and deeds of trust previously executed and delivered in favor of Foothill with respect to the Real Property Collateral, which releases were executed by Foothill prior to the date hereof, to be recorded in each jurisdiction where the Real Property Collateral is located. 5. Before the date when an Insolvency Proceeding is commenced with respect to FRI-MRD, Prandium, Borrower or any of their Affiliates, Foothill shall have received 4 a copy of a commitment letter, which shall provide for, among other things, (a) the delivery to Foothill of an irrevocable letter of credit from a financial institution acceptable to Foothill in its discretion, in form and substance acceptable to Foothill in its discretion, in favor of Foothill in an amount equal to 105% of the maximum amount of Foothill's obligations under all outstanding Letters of Credit, or (b) the issuance of replacement letters of credit in connection with the release of all existing Letters of Credit. FRI-MRD, Prandium, Borrower, each of their undersigned Affiliates and Foothill each agree that Section 2.6(c) of the Loan Agreement is hereby amended -------------- and restated in its entirety as follows: "(c) Letter of Credit Fees. On the first day of each month, Borrower --------------------- will pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.2(d)) equal to 5.0% per annum times the actual -------------- Daily Balance of the undrawn Letters of Credit that were outstanding during the immediately preceding month (it being understood that Borrower will not be charged default interest based on the Present Events of Default or an Event of Default which occurs as a result of any failure by Borrower, any Guarantor or any of their Affiliates to comply with the requirements set forth in Sections -------- 7.20 or 7.21 of the Loan Agreement)." - ---- ---- As used herein, Forbearance Period shall mean the period commencing on the date when the above referenced conditions precedent have been satisfied and continuing through the earliest to occur of: (i) January 10, 2002 (or such later date as Foothill may designate in writing in its sole discretion); (ii) the occurrence of any Event of Default other than a Present Event of Default or an Event of Default which occurs as a result of any failure by Borrower, any Guarantor or any of their Affiliates to comply with the requirements set forth in Sections 7.20 or 7.21 of the Loan Agreement; or (iii) the first date when -------- ---- ---- FRI-MRD, Prandium, Borrower, or any of their undersigned Affiliates have failed to comply with any of the covenants set forth above in paragraphs 3, 4, 5 and 6. The forbearance referenced herein is limited to the specifics hereof, shall not apply with respect to any facts or occurrences other than those on which the same are based, shall not excuse future non-compliance with the Loan Agreement (as it may from time to time be amended), and, except as expressly set forth herein, shall not operate as a waiver or an amendment of any right, power or remedy of Foothill, nor as a consent to any further or other matter, under the Loan Documents. This letter agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this letter agreement by signing any such counterpart. Delivery of an executed counterpart of this letter agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this letter agreement. Any party delivering an executed counterpart of this letter agreement by telefacsimile also shall deliver an original executed counterpart of this letter agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this letter agreement. This letter agreement is a Loan Document. 5 Please indicate your agreement with the foregoing by signing this letter agreement in the space provided for your signature below and returning it to the undersigned. FOOTHILL CAPITAL CORPORATION By /s/ Teresa M. Bolick -------------------- Title Vice President Acknowledged and Agreed: FRI-MRD CORPORATION, a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title President CHI-CHI'S, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President PRANDIUM, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title EVP/CFO FRI-ADMIN CORPORATION, a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title President CCMR OF TIMONIUM, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF MARYLAND, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF CATONSVILLE, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF GREENBELT, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF RITCHIE HIGHWAY, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF CUMBERLAND, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF HARFORD COUNTY, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President MAINTENANCE SUPPORT GROUP, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF FREDERICK, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF INNER HARBOR, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CHI-CHI'S OF WEST VIRGINIA, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President KOO KOO ROO, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President THE HAMLET GROUP, INC., a California corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President cc: David Reamer, Esq. John Francis Hilson, Esq. EXHIBIT A --------- Reaffirmation and Consent Reference hereby is made to (a) that certain Amended and Restated Loan and Security Agreement, dated as of July 19, 2000 (as amended, restated, supplemented, or otherwise modified from time to time, the "Loan Agreement"), by -------------- and among, on the one hand, FRI-MRD CORPORATION, a Delaware corporation ("FRI- --- MRD"), CHI-CHI'S, INC., a Delaware corporation ("Borrower"), and for purposes of - --- -------- acknowledging and agreeing to Section 15.11 of the Loan Agreement, by PRANDIUM, ------------- INC., a Delaware corporation, formerly known as Family Restaurants, Inc. ("Prandium"), and each of its Affiliates that are signatories thereto, and, on --------- the other hand, FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"); and (b) that certain letter agreement dated as of October __, 2001 --------- (the "Letter Agreement"), by and among, on the one hand, FRI-MRD, Borrower, Prandium and each of its Affiliates that are signatories thereto, and on the other hand, Foothill. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. Each of the undersigned hereby (a) represents and warrants to Foothill that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the amendment of the Loan Agreement by the Letter Agreement; (c) acknowledges and reaffirms its obligations owing to Foothill under the Guaranty and any other Loan Documents to which it is party; and (d) agrees that each of the Guaranty and any other Loan Documents to which it is a party is and shall remain in full force and effect. Although each of the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that Foothill has no obligation to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. This Reaffirmation and Consent may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Reaffirmation and Consent. Delivery of an executed counterpart of this Reaffirmation and Consent by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Reaffirmation and Consent. Any party delivering an executed counterpart of this Reaffirmation and Consent by telefacsimile also shall deliver an original executed counterpart of this Reaffirmation and Consent but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Reaffirmation and Consent. This Reaffirmation and Consent shall be governed by internal laws of the State of California as more fully set forth in Section 13 of the Loan Agreement. FRI-MRD CORPORATION, a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title President PRANDIUM, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title EVP/CFO FRI-ADMIN CORPORATION, a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title President CCMR OF TIMONIUM, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF MARYLAND, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF CATONSVILLE, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF GREENBELT, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF RITCHIE HIGHWAY, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF CUMBERLAND, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF HARFORD COUNTY, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President MAINTENANCE SUPPORT GROUP, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF FREDERICK, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CCMR OF INNER HARBOR, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President CHI-CHI'S OF WEST VIRGINIA, INC., a Kentucky corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President KOO KOO ROO, INC., a Delaware corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President THE HAMLET GROUP, INC., a California corporation By /s/ R. T. Trebing, Jr. ----------------------- Title Vice President EX-10.(E) 5 dex10e.txt LETTER AGREEMENT - FRI-MRD [PRANDIUM LETTERHEAD] November 7, 2001 MacKay Shields Financial Corporation 9 West 57th Street New York, New York 10019 Attention: Don E. Morgan, CFA Re: Prandium Restructuring ---------------------- Gentlemen: Reference is made (i) to that certain Note Agreement, dated as of August 12, 1997, by and between FRI-MRD Corporation (the "Company") and each ------- Purchaser of the 15% Senior Discount Notes (the "Senior Discount Notes") of the --------------------- Company due January 24, 2002, as amended, and (ii) to that certain Note Agreement, dated as of June 9, 1998, between the Company and each Purchaser of the 14% Senior Secured Discount Notes (the "Senior Secured Discount Notes," ----------------------------- together with the Senior Discount Notes, the "Notes") of the Company due January ----- 24, 2002, as amended (together, the "Note Agreements"). Capitalized terms used --------------- herein and not otherwise defined have the meanings ascribed to them in the Note Agreements. This letter agreement (this "Letter of Intent") confirms our mutual ---------------- intentions regarding restructuring (the "Restructuring") the capital structure ------------- of the Company and Prandium, Inc. ("Prandium") for the purpose of restructuring -------- the indebtedness of the Company to the Majority Holders under the Notes on the terms set forth on the term sheet attached hereto as Exhibit A (the "Term ---- Sheet"). This Letter of Intent and the Term Sheet set forth the terms of our - ----- mutual understanding and will serve as the basis for definitive agreements related to the Restructuring (collectively, the "Definitive Agreements") to be --------------------- negotiated in good faith by the parties. 1. Definitive Agreements. The parties will in good faith use their best --------------------- efforts to implement the Restructuring contemplated by the Term Sheet. However, each party acknowledges that the terms described on the Term Sheet only constitute a statement of our mutual intentions with respect to the terms of the Restructuring and acknowledge that the Term Sheet does not contain all matters upon which agreement must be reached in order to consummate a Restructuring and, therefore, this Letter of Intent and the Term Sheet do not constitute a binding commitment with respect to the Restructuring itself. 2. Representations and Warranties. ------------------------------ (a) MacKay Shields Financial Corporation ("MacKay") represents and warrants ------ that it is the representative of a majority of the Purchasers (the "Majority Holders") of each of (i) the issued and outstanding Senior ---------------- Discount Notes and (ii) the issued and outstanding Senior Secured Discount Notes and that it is agreeing to the matters set forth herein on their behalf. Further, MacKay represents and warrants that it (i) has the requisite authority to execute and deliver this Letter of Intent and to perform its obligations hereunder; (ii) the execution and delivery of this Letter of Intent and the performance by it of its obligations hereunder have been duly authorized by its governing body, and no other proceedings on its part are necessary for the execution and delivery of this Letter of Intent and the performance of its obligations provided for herein; and (iii) this Letter of Intent has been duly executed and delivered by it, and assuming this Letter of Intent is a binding obligation of the other parties, this Letter of Intent constitutes a valid and binding obligation of it enforceable against it in accordance with its terms. (b) Each of Prandium and the Company represents and warrants, jointly and severally, that (i) it has the requisite authority to execute and deliver this Letter of Intent and to perform its obligations hereunder; (ii) the execution and delivery of this Letter of Intent and the performance by it of its obligations hereunder have been duly authorized by its governing body, and no other proceedings on its part are necessary for the execution and delivery of this Letter of Intent and the performance of its obligations provided for herein; and (iii) this Letter of Intent has been duly executed and delivered by it, and assuming this Letter of Intent is a binding obligation of the other parties, this Letter of Intent constitutes a valid and binding obligation of it enforceable against it in accordance with its terms. 3. Standstill Agreement. MacKay hereby agrees to refrain from taking any -------------------- enforcement action under the Notes or the Note Agreements as long as (i) Prandium and the Company are in compliance with the terms of the Letter of Intent and Term Sheet, (ii) since the date of this Letter of Intent, neither Prandium nor the Company has suffered a material adverse change and (iii) other than as specifically contemplated by this Letter of Intent and Term Sheet, each of Prandium and the Company are being operated in the ordinary course consistent with prior practice. 4. Confidentiality. The letter agreement, dated as of February 15, 2001, by --------------- and among the parties hereto shall remain in full force and effect notwithstanding the execution and delivery of this Letter of Intent. 5. Effect of Agreement. Each of the parties hereto acknowledges that this ------------------- Letter of Intent specifies our agreement regarding the material terms and conditions to our respective obligations to proceed in good faith to consummate a restructuring. However, the parties further acknowledge that the Term Sheet is an expression of intent only and is not legally binding upon any of the parties hereto. Furthermore, the parties agree that the implementation of the Hamlet Sale Procedure (as defined in the Term Sheet) shall begin immediately upon execution of this Letter of Intent. 6. Governing Law. The Note Agreements and the notes are governed by, and ------------- construed in accordance with, the laws of the State of New York. Accordingly, the parties to this Letter of Intent hereby acknowledge and agree that this Letter of Intent is also governed by New York law. Furthermore, in order to avoid any confusion or misunderstanding, each of us also agrees that this Letter of Intent may only be amended in writing. 7. Assignment and Transfer of Notes. This Agreement shall be binding upon and -------------------------------- inure to the benefit of the parties hereto and their respective successors and assigns. Except as provided herein, this Letter of Intent shall not be assignable by any party hereto without the prior written consent of the other party hereto. On behalf of the Majority Purchasers, MacKay agrees that prior to any sale of the Notes to any party other than a Majority Purchaser and as a condition thereto, each Majority Purchaser shall cause any such 2 transferee to agree in writing to be bound by the terms and conditions of this Letter of Intent. 8. Third Party Beneficiaries. This Letter of Intent is solely for the benefit ------------------------- of the parties hereto and is not intended to create any rights in any third parties other than permitted assignees. 9. Counterparts. This Letter of Intent may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. If this Letter of Intent accurately reflects our understanding, please so indicate by signing and returning the enclosed copy. 3 Very truly yours, PRANDIUM, INC. By: /s/ R.T. Trebing, Jr. ---------------------------------- Name: R.T. Trebing, Jr. Title: EVP/CFO FRI-MRD CORPORATION By: /s/ R.T. Trebing, Jr. --------------------------------- Name: R.T. Trebing, Jr. Title: President ACCEPTED AND AGREED TO AS OF THE DATE FIRST WRITTEN ABOVE MACKAY SHIELDS FINANCIAL CORPORATION By: /s/ Donald E. Morgan III ---------------------------------- Name: Donald E. Morgan III Title: Managing Director 4 Exhibit A Confidential Proposed Terms and Conditions for Restructuring of FRI-MRD Corporation's $75MM ------------------------------------------------------------------------------ 15% Senior Discount Notes dated 8/12/97 (the "15% Notes") and $24MM 14% Senior - ------------------------------------------------------------------------------- Secured Discount Notes dated 6/9/98 (the "14% Secured Notes") in Connection with - -------------------------------------------------------------------------------- Prandium Restructuring ---------------------- Borrower: FRI-MRD Corporation. Facilities: The 15% Notes and the 14% Secured Notes (collectively, the "Facilities") will be amended and restated to include the terms and changes outlined herein. Except as contemplated herein, the Facilities will remain unchanged. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Note Agreements. Final Maturity: January 31, 2005. Interest Rate: Interest rate is 12%; no cash interest payments required. Collateral: The 14% Secured Notes will continue to be secured by the existing collateral (or by any segregated proceeds received by Borrower in accordance with this term sheet) until the Hamlet Prepayment, after which time any 14% Secured Notes remaining outstanding will be unsecured. The 15% Notes will continue to be unsecured. Scheduled Amortization: None. Call Premium: None. Prepayments: Prepayments of the Facilities will be allowed at any time under terms outlined under Prepayment Discount section below. Prepayment Discount: All prepayments will reduce the remaining principal balance, and interest accrued thereon, of the Facilities as follows: From the Closing Date up to and including December 31, 2002, by 133.33% of the actual prepayment amount; From January 1, 2003 up to and including December 31, 2003, by 117.65% of the actual prepayment amount; From January 1, 2004 up to and including September 30, 2004, by 111.11% of the actual prepayment amount; and From October 1, 2004 up to and including January 31, 2005, by 100.00% of the actual prepayment amount.
Page 1 of 6 Exhibit A Confidential Application of Payments Principal payments and prepayments will be applied pro-rata between Among Facilities: the Facilities, except for prepayments from net proceeds from the sale of the stock or substantially all of the assets of The Hamlet Group, Inc. ("Hamlet"). See the section entitled "Hamlet Prepayment" below. Hamlet Prepayment Net proceeds from the sale of Hamlet will be applied as a prepayment (the "Hamlet Prepayment"), upon the Closing Date, first to reduce principal under the 14% Secured Notes until paid in full; any excess will be applied to the 15% Notes. The holders of the Facilities shall consent to a sale of Hamlet prior to the confirmation of the Plan of Reorganization (as defined) provided such sale is consummated in accordance with the terms set forth in this term sheet and on terms otherwise reasonably acceptable to the holders of the Facilities and further provided that any proceeds therefrom received prior to the Closing are segregated by Borrower in accordance with the first paragraph of the section entitled "Segregation of Cash" below. Sale of Hamlet: Borrower will market and sell the stock and/or assets of Hamlet in an orderly fashion (the "Hamlet Sale Procedure"). The following performance milestones will be put in place: 1. Execute an agreement for sale of stock and/or assets of Hamlet no later than October 31, 2001(or within such longer time period as MacKay Shields Financial Corporation ("MacKay Shields") may agree); 2. Consummate the sale no later than 90 days after the execution of such agreement (or within such longer time period as MacKay Shields may agree). Sale of Hamlet may only be for all cash. Failure to meet any milestone will result in a covenant breach. The milestones may be waived in the sole discretion of the holders of a majority of the outstanding indebtedness under each of the Facilities. Proceeds from the sale of Hamlet will be applied as described in the Section entitled "Applications of Payments Among Facilities". Sale of Anaheim Property: Borrower will be allowed to sell the contiguous sites at 1751 S. State College Blvd. and 1801 E. Katella Avenue in Anaheim, CA (the "Anaheim Property") and retain 100% of the net proceeds up to $4.3 million and 25% of the net proceeds in excess of $4.3 million, subject to the Section entitled "Segregation of Cash". As soon as possible following any such sale, Borrower will use 75% of any net proceeds in excess of $4.3 million to prepay the Facilities in accordance with this term sheet (the "Anaheim Excess Proceeds").
Page 2 of 6 Exhibit A Confidential Accrued Interest: At the Closing Date, upon compliance with all the terms and conditions set forth in this Term Sheet (including the payment of the Cash Prepayment (as defined below) and the interest accrued thereon), interest calculated with respect to the Facilities prior to the Closing Date will be waived. Cash Prepayment: In addition to the Hamlet Prepayment and the payment of any Anaheim Excess Proceeds, at the Closing Date, Borrower will pay to holders of the Facilities $30 million in cash to be applied as a prepayment (the "Cash Prepayment") to principal outstanding under the Facilities in accordance with this term sheet. Segregation of Cash: Upon receipt of any net proceeds from the sale of Hamlet, Borrower shall segregate such proceeds received in connection with such sale for the purpose of making the Hamlet Prepayment at the Closing and the 14% Secured Notes shall be collateralized by such segregated proceeds until the Hamlet Prepayment is made. Within three business days of the mutual execution of the letter of intent, Borrower shall segregate $14 million in cash or cash equivalents (the "Initial Segregated Amount") for the purpose of making the Cash Prepayment at the Closing. As of the date of this term sheet, Borrower has provided approximately $12 million in cash or cash equivalents to Foothill in order to cash collateralize letters of credit outstanding under the Foothill facility. Borrower agrees to segregate any cash or cash equivalents returned to Borrower by Foothill prior to the Closing (the "Foothill Segregated Amount") for the purpose of making the Cash Prepayment at the Closing. In addition, Borrower agrees to segregate up to $4 million of the net proceeds (the "Anaheim Segregated Amount," together with the Initial Segregated Amount and the Foothill Segregated Amounted, the "Segregated Amount"), received from the sale of the Anaheim Property no later than three business days after the closing of such transaction for the purpose of making the Cash Prepayment at the Closing. Borrower agrees that it shall not use such Segregated Amount for any purpose other than making the Cash Prepayment. Borrower agrees to pay to the holders of the Facilities at the Closing Date an aggregate amount of interest in cash calculated at an annual rate of 4.5% on the $30 million Cash Prepayment accruing from the date of filing the Chapter 11 case to the Closing Date. Borrower shall not allow any person or persons, including the holders of the Facilities, other than Foothill but only to the extent provided under the current Foothill facility) to hold a security interest in the segregated Cash Prepayment. Financial Covenants: No change. Additional Covenants: The amended and restated Facilities dated as of the Closing Date will contain the following additional covenants:
Page 3 of 6 Exhibit A Confidential From and after the Closing, Borrower and its subsidiaries will not incur Indebtedness other than Maximum Permitted Indebtedness. For the purposes of this term sheet, "Maximum Permitted Indebtedness" means, subject to the Capital Expenditures Limitations set forth below and to any other limitations agreed upon by MacKay Shields and Borrower: (i) Indebtedness evidenced by the Facilities; (ii) Indebtedness under the senior secured credit facility to be entered into with Hilco Capital LP (as it may be amended, restated or replaced, the "Hilco Credit Facility") not to exceed $14 million at any one time; (iii) Indebtedness of Borrower and its subsidiaries outstanding as of April 1, 2001; (iv) Indebtedness relating to insurance premium financing or in respect of workers' compensation claims, in each case as incurred in the ordinary course of business; (v) Indebtedness relating to Borrower's and its subsidiaries' controlled disbursement accounts or in respect of overdrafts of zero balance bank accounts, in each case as incurred in the ordinary course of business; (vi) Indebtedness in respect of Capitalized Lease Obligations or purchase money financings (including the purchase price of inventory) if such Indebtedness is secured only by the applicable asset; (vii) Indebtedness between Borrower and a subsidiary or between Borrower's subsidiaries; (viii) Indebtedness represented by surety and performance bonds and similar obligations, in each case as incurred in the ordinary course of business; (ix) Hedging Obligations of Borrower or its subsidiaries incurred in the ordinary course of business; and (x) Indebtedness issued or incurred in connection with the renewal, expansion, refinancing or refunding of Indebtedness permitted by the preceding clauses (i) through (ix); provided that any expansion of such Indebtedness would otherwise satisfy the conditions of one of the other clauses (i) through (ix). From and after the Closing, to the extent permitted by the Hilco Credit Facility, Borrower will agree to prepay the Facilities on a pro rata basis with the net cash proceeds of any disposition of assets (subject to de minimis carve outs and other than proceeds received from the sale of Hamlet or the Anaheim Property) as follows: (1) 50% of the first $3 million of proceeds; and (ii) 100% of the proceeds thereafter. From and after the Closing, Borrower will not, and will not permit its subsidiaries to, make capital expenditures in excess of (each instance, a "Capital Expenditures Limitation"): (i) $11 million for the period from January 1, 2002 up to and including December 31, 2002; (ii) $11 million for the period from January 1, 2003 up to and including December 31, 2003; and (iii) $15 million for the period from January 1, 2004 through the maturity date. A carry forward allowance will be included to adjust for spending patterns of capital expenditures. From and after the Closing, Borrower will not, and will not permit its subsidiaries to, make any Restricted Payments
Page 4 of 6 Exhibit A Confidential except that Borrower and its subsidiaries may make Restricted Payments equal to the sum of (i) an amount not in excess of the Federal, state, local and foreign taxes and assessments payable by Prandium and its subsidiaries (determined on a consolidated basis) for such year, plus (ii) the aggregate amount of all general corporate, operating and administrative expenses incurred by Prandium (including, without limitation, any such expenses incurred on behalf of its subsidiaries) in the ordinary course of business consistent with past practice. Waiver of Defaults: All existing and prior defaults under the Facilities to be waived. Legal Fees: On or before the date of this term sheet, borrower will reimburse MacKay Shields for reasonable legal costs incurred up to and including July 31, 2001. At the Closing Date borrower to reimburse MacKay-Shields for reasonable legal costs incurred after July 31, 2001 through the Closing Date. Conditions to Closing: 1) The Hilco Credit Facility must be entered into under terms substantially the same as described in the term sheet dated as of August 10, 2001, but including: . Minimum facility availability of up to $14 million; . No requirement to cash collateralize L/Cs in excess of $1 million; . Maturity date no earlier than 1 year from Closing Date; . No minimum cash balance required as a condition to partial or full repayment of the Facilities; . Other financial covenants and terms reasonably acceptable to Borrower. 2) Restructuring of the debt and equity of Prandium, Inc. on terms reasonably satisfactory to Prandium, Inc. and MacKay Shields. 3) Confirmation of a plan of reorganization (the "Plan of Reorganization") under the Bankruptcy Code as a pre-negotiated or pre-packaged Chapter 11 that incorporates the terms outlined in this Term Sheet, including entering into the Hilco Credit Facility with terms described above and restructuring of the existing debt and equity of Prandium, Inc., on terms reasonably satisfactory to Prandium, Inc. and MacKay-Shields. 4) MacKay-Shields must consent to the terms of the Hilco Credit Facility and the sale of Hamlet. Closing Date: The effective date of the Chapter 11 bankruptcy plan described in Conditions to Closing.
Page 5 of 6 Exhibit A Confidential Governing Law New York Projected Dates: Borrower will use its commercially reasonable efforts to file the Plan of Reorganization under the Bankruptcy Code as a pre-negotiated or pre-packaged Chapter 11 on or before 60 days from the date of the Letter of Intent and will use its commercially reasonable efforts to have such Plan of Reorganization confirmed under the Bankruptcy Code on or before February 28, 2002.
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