-----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, B0TrjGeANJlAHDkBc+ydzWppLJvViYmjBsKVpB/YUXFgzu/uPfS9SOsHEEP6qJsp 1Z0Zlnsjq2o6MC8DiuxGBA== 0000950144-97-003939.txt : 19970410 0000950144-97-003939.hdr.sgml : 19970410 ACCESSION NUMBER: 0000950144-97-003939 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RARE HOSPITALITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000883976 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581498312 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19924 FILM NUMBER: 97577502 BUSINESS ADDRESS: STREET 1: 8215 ROSWELL RD STREET 2: BLDG 200 CITY: ATLANTA STATE: GA ZIP: 30350 BUSINESS PHONE: 7703999595 MAIL ADDRESS: STREET 1: 8215 ROSWELL ROAD STREET 2: BLDG 200 CITY: ATLANTA STATE: GA ZIP: 30350 FORMER COMPANY: FORMER CONFORMED NAME: LONGHORN STEAKS INC DATE OF NAME CHANGE: 19930328 10-K/A 1 RARE HOSPITALITY: 10-K/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------------- FORM 10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996). FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-19924 --------------------- RARE HOSPITALITY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-1498312 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8215 ROSWELL ROAD, BLDG 200; 30350 ATLANTA, GA 30350 (Zip Code) (Address of principal executive offices)
770-399-9595 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of Each Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to ITEM 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 9, 1997, the aggregate market value of the voting stock held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are "affiliates" of the Registrant) of the Registrant was $121,749,446 based upon the last reported sale price in the NASDAQ National Market System on March 7, 1997 of $14.00. As of March 7, 1997, the number of shares outstanding of the Registrant's Common Stock, no par value, was 11,660,425. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 20, 1997 are incorporated by reference in Part III, hereof. FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages, particularly regarding estimates of the number and locations of new restaurants that the Company intends to open during fiscal 1997, constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended and the Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed in this Form 10-K, among the other factors that could cause actual results to differ materially are the following: the Company's ability to identify and secure suitable locations on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's strict business discipline over a large restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions, such as inflation or a recession, and growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. ================================================================================ 2 RARE HOSPITALITY INTERNATIONAL, INC. INDEX
PAGE ---- Part I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 12 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 13 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 15 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 42 Part III Item 10. Directors and Executive Officers of the Registrant.......... 42 Item 11. Executive Compensation...................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 42 Item 13. Certain Relationships and Related Transactions.............. 42 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 42 Signatures............................................................. 44 Financial Statement Schedules Exhibits
3 PART I ITEM 1. BUSINESS GENERAL RARE Hospitality International, Inc. (the "Company"), formerly known as Longhorn Steaks, Inc., operates and franchises 108 restaurants as of March 9, 1997, including 82 Longhorn Steakhouse restaurants, 14 Bugaboo Creek Steak House restaurants, and six The Capital Grille restaurants, as well as six additional restaurants ("Specialty restaurants"), consisting of two Skeeter's Grilles and one Lone Star Steaks in Atlanta, Georgia and Hemenway's Seafood Grille & Oyster Bar ("Hemenway's"), The Old Grist Mill Tavern, and Monterey in the Providence, Rhode Island market. The Company was incorporated in Georgia in December 1982. On September 13, 1996, the Company completed the acquisition of Bugaboo Creek Steak House, Inc., along with certain related restaurant and real estate properties. Bugaboo Creek Steak House, Inc., now a wholly-owned subsidiary of the Company, owns and operates the 14 Bugaboo Creek Steak House restaurants and the six The Capital Grille restaurants. A separate subsidiary, Whip Pooling Corporation, owns and operates the Hemenway's, The Old Grist Mill Tavern, and Monterey restaurants, as well as the real estate associated with two of the Company's other restaurants. On January 13, 1997, the Company changed its name from Longhorn Steaks, Inc. to RARE Hospitality International, Inc., to reflect the organization of its operations into three distinct restaurant operating businesses. The Company believes that the new name and corporate structure more adequately reflect its position as a multi-concept operator. As a result of this change, the Company's common stock, which had traded on the Nasdaq National Market under the symbol "LOHO" began trading under its current symbol "RARE". CONCEPTS Longhorn Steakhouse restaurants, which are located primarily in the southeastern and midwestern United States, are casual dining, full-service restaurants that serve lunch and dinner, offer full liquor service and feature a menu consisting of fresh cut steaks, as well as salmon, shrimp, chicken, ribs, pork chops and prime rib. Longhorn Steakhouses emphasize high quality, moderately-priced food and attentive, friendly service, provided in a casual atmosphere resembling a Texas roadhouse. The 14 Bugaboo Creek Steak House restaurants are currently located in the northeastern and mid-Atlantic regions of the United States. The Bugaboo Creek Steak Houses are casual dining restaurants designed to resemble a Canadian Rocky Mountain lodge. Menu offerings include seasoned steaks, prime rib, spit-roasted half chickens, smoked baby back ribs, grilled salmon and a variety of freshwater fish. The six The Capital Grille restaurants are currently located in the northeastern region of the United States, Troy, Michigan and Miami, Florida. The Capital Grilles are fine-dining restaurants with menu offerings ranging from chilled baby lobster and beluga caviar appetizers to entrees of dry-aged steaks, lamb and veal steaks, lobster, grilled salmon and chicken to a wine list of over 300 selections. 1 4 RESTAURANT LOCATIONS The following tables set forth the location of each existing restaurant by concept at March 9, 1997 and the number of restaurants in each area. LONGHORN STEAKHOUSE RESTAURANTS EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS FLORIDA Miami/Ft. Lauderdale.................. 4 Jacksonville.......................... 4 Tallahassee........................... 1 Orlando............................... 7 Ocala................................. 1 West Palm............................. 2 Ft. Myers............................. 1 Tampa................................. 1 Destin................................ 1 GEORGIA Athens................................ 1 Atlanta............................... 19 Columbus.............................. 1 Macon................................. 1 Rome.................................. 1 Savannah.............................. 1 Augusta............................... 1 Valdosta.............................. 1 ALABAMA Dothan................................ 1 Montgomery............................ 1 Mobile................................ 1 TENNESSEE Chattanooga........................... 1 Knoxville............................. 1 Nashville............................. 5 OHIO Cincinnati............................ 4 Cleveland............................. 7 Columbus.............................. 2 NORTH CAROLINA Greensboro/High Point/Winston-Salem... 2 Charlotte............................. 2 SOUTH CAROLINA Greenville/Spartanburg................ 2 Hilton Head........................... 1 Columbia.............................. 1
Total Existing Company-Owned/Joint Venture Restaurants................79 EXISTING FRANCHISE-OWNED RESTAURANTS ALABAMA Birmingham............................ 1 FLORIDA Tampa................................. 1 NORTH CAROLINA Raleigh............................... 1
Total Existing Franchise-Owned Restaurants.............................3 Total Longhorn Steakhouse restaurants.................................82 2 5 BUGABOO CREEK STEAK HOUSE RESTAURANTS EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS MASSACHUSETTS Boston................................ 4 VIRGINIA Springfield........................... 1 NEW YORK Albany................................ 1 Rochester............................. 1 Poughkeepsie.......................... 1 PENNSYLVANIA Philadelphia.......................... 1 RHODE ISLAND Providence............................ 2 CONNECTICUT Manchester............................ 1 MAINE Portland.............................. 1 MARYLAND Gaithersburg.......................... 1
Total Bugaboo Creek Steak House restaurants...........................14 THE CAPITAL GRILLE RESTAURANTS EXISTING COMPANY-OWNED RESTAURANTS MASSACHUSETTS Boston................................ 2 DISTRICT OF COLUMBIA Washington............................ 1 FLORIDA Miami................................. 1 RHODE ISLAND Providence............................ 1 MICHIGAN Troy.................................. 1
Total The Capital Grille restaurants...................................6 SPECIALTY RESTAURANTS EXISTING COMPANY-OWNED RESTAURANTS GEORGIA Skeeter's Grille, Atlanta............. 2 Lone Star Steaks, Atlanta............. 1 RHODE ISLAND Hemenway's Seafood Grille & Oyster Bar, Providence.................... 1 Monterey, Providence.................. 1 The Old Grist Mill Tavern, Providence......................... 1
Total Specialty Restaurants............................................6 RESTAURANTS UNDER CONSTRUCTION GEORGIA Longhorn Steakhouse, Statesboro....... 1 FLORIDA Longhorn Steakhouse, St. Petersburg... 1 Longhorn Steakhouse, Sarasota......... 1 Longhorn Steakhouse, Ft. Lauderdale... 1 TEXAS The Capital Grille, Houston........... 1 ILLINOIS The Capital Grille, Chicago........... 1
Total Restaurants Under Construction...................................6 3 6 UNIT ECONOMICS Longhorn Steakhouse The Company's modified Longhorn Steakhouse restaurant design, developed and refined over the past three years, has increased capacity from an average of 150 seats for Longhorn Steakhouse restaurants open prior to 1994 to an average of 236 seats for Longhorn Steakhouse restaurants opened in 1996. The objective of this modification was to increase the revenues of the Company's new Longhorn Steakhouse restaurants while reducing capital expenditures as a percentage of revenues. On a weighted average basis, the 14 new Longhorn Steakhouse restaurants opened during 1996 generated annualized revenues of $2,907,000 per unit (40% above the 1996 average revenue by those Company-owned and joint venture restaurants open for the full year), restaurant average annualized operating cash flow of $606,000 per unit (or 20.9% of revenues), and restaurant average annualized operating profit after depreciation and amortization of $269,000 per unit (or 9.3% of revenues). The Company intends to continue to emphasize leasing as its preferred arrangement for Longhorn Steakhouse sites and currently leases all but 17 of its Longhorn Steakhouse sites. The Company purchases land only in those circumstances it believes are cost effective. Four of the 14 Longhorn Steakhouse restaurants opened in 1996 were located on property purchased at an average cost of $649,000 per location. Excluding real estate costs, the average cash investment to open a Longhorn Steakhouse restaurant in 1996 was $1,571,000 including pre-opening expenses of $218,000. The Company amortizes pre-opening expenses over the first 12 months of a restaurant's operation. Bugaboo Creek Steak House The Company has developed a modified Bugaboo Creek Steak House restaurant design which will serve as the new prototype for all future Bugaboo Creek Steak House restaurants constructed, beginning in 1997. The objective of this new design is to reduce the capital expenditure for new restaurant construction and reduce ongoing operating costs at these new restaurants due to lower square footage and a more efficient layout. None of the Bugaboo Creek Steak House restaurants constructed to date have utilized this design. The average revenues for Bugaboo Creek Steak House restaurants open for a full year were $3,116,000 per unit, with average operating cash flow per unit of $403,000 and restaurant average annualized operating profit after depreciation and amortization per unit of $173,000. The Company intends to continue to emphasize leasing as its preferred arrangement for Bugaboo Creek Steak House sites and currently leases all but two of its Bugaboo Creek Steak House sites. The Company purchases land only in those circumstances it believes are cost effective. None of the three Bugaboo Creek Steak House restaurants opened in 1996 were located on purchased property. Excluding real estate costs, the average cash investment to open a Bugaboo Creek Steak House restaurant in 1996 was $2,664,000, including pre-opening expenses of $197,000. The Company amortizes pre-opening expenses over the first 12 months of a restaurant's operation. The Capital Grille Due to the historic nature of many of the sites selected for The Capital Grille restaurants (which is incorporated into the design of the facility), the development of a prototype is not feasible. Instead, the Company is evaluating methods in which to lower construction costs while retaining the unique ambiance of each location. For 1996, the weighted average revenues for The Capital Grille restaurants open for a full year were $5,191,000 per unit, with average operating cash flow per unit of $1,313,000 and restaurant average annualized operating profit after depreciation and amortization per unit of $1,179,000. The Company intends to continue to emphasize leasing as its preferred arrangement for The Capital Grille sites and currently leases all of its The Capital Grille sites. The Company intends to purchase land only in those circumstances it believes are cost effective. The average cash investment to open a The Capital Grille restaurant in 1996 was $3,030,000, including pre-opening expenses of $294,000. The Company amortizes pre-opening expenses over the first 12 months of a restaurant's operation. 4 7 EXPANSION STRATEGY Longhorn Steakhouse and Bugaboo Creek Steak House: The Company plans to expand through the development of joint ventures and additional Company-owned Longhorn Steakhouse restaurants and Bugaboo Creek Steak House restaurants in existing markets and in other selected metropolitan markets in the southeastern, midwestern, northeastern and mid-Atlantic regions of the United States. Under its joint venture arrangements, the Company intends to expand into those markets where the Company has identified joint venture partners who are experienced restaurant operators with knowledge of the market in which the joint venture will operate. Currently, the Company has joint venture arrangements covering territories in southern Alabama, various areas of Florida, Georgia, North Carolina, South Carolina and Ohio and in the Philadelphia/Baltimore/Harrisburg and St. Louis areas. The Company plans to continue to expand its Company-owned restaurant base by clustering its restaurants in existing and new markets, with Longhorn Steakhouse restaurants primarily in the southeastern and midwestern regions of the United States and Bugaboo Creek Steak House restaurants primarily in the northeastern and mid-Atlantic regions of the United States. The Company believes this clustering enhances its ability to supervise operations, market the Company's concept and distribute supplies. The Company also intends to open single restaurants in smaller markets in sufficiently close proximity to the Company's other markets to enable the Company to efficiently supervise operations and distribute supplies. The Company currently does not plan to develop Longhorn Steakhouse restaurants and Bugaboo Creek Steak House restaurants in the same markets. The Capital Grille: The Company plans to expand through the development of additional Company-owned The Capital Grille restaurants in selected metropolitan markets nationwide. Overall: The Company's objective is to increase earnings by expanding market share in existing markets and by developing restaurants in new markets. The Company intends to open approximately 24 Company-owned and joint venture restaurants in 1997: 17 Longhorn Steakhouse restaurants; three Bugaboo Creek Steak House restaurants and four The Capital Grille restaurants. Of the restaurants proposed for 1997, the Company has opened one restaurant in Ohio, has six restaurants under construction in Florida, Georgia, Texas and Illinois and has signed letters of intent or leases on sites for 17 additional restaurants as of March 9, 1997. The Company expects that 18 of the 20 Longhorn Steakhouse restaurants and Bugaboo Creek Steak House restaurants to be opened in 1997 will be developed under joint ventures, and that all of The Capital Grille restaurants will be Company-owned. In January, 1997, the Company acquired two previously franchised Longhorn Steakhouse restaurants in Greenville and Spartanburg, South Carolina and the attendant territory franchise development rights for the Greenville-Spartanburg DMA and the Raleigh, NC DMA. The Company may transfer other Company-owned restaurants to joint ventures in connection with the future development of existing territories. The Company is not currently a party to any agreement, arrangement or understanding in connection with any other potential acquisition of existing restaurants other than in the ordinary course of business, but the Company will continue to evaluate suitable acquisitions in the restaurant industry as they are identified. The Company will consider on a selective basis qualified applicants with substantial restaurant experience and financial resources for franchises of either Longhorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants. The Company does not currently anticipate offering franchises for The Capital Grille restaurants. The Company expects that it will grant franchises to operators who are not joint venture partners with the Company primarily in markets in which the Company would not otherwise expand itself. The Company does not expect franchisees to open any restaurants in 1997. The preceding discussion of expansion strategy contains certain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed in this Form 10-K, among the other factors that could cause actual results to differ materially are the following: the 5 8 Company's ability to identify and secure suitable locations on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's strict business discipline over a large restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions and growth in the restaurant industry and the general economy; and other risks identified from time to time in the Company's SEC reports and public announcements. See the discussion of forward-looking statements found in "Documents Incorporated by Reference." SITE SELECTION AND RESTAURANT LAYOUT The Company considers the location of a restaurant to be a critical factor to the unit's long-term success and devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on trade area demographics, target population density and household income level as well as specific site characteristics, such as visibility, accessibility and traffic volumes. The Company also reviews potential competition and the profitability of national chain restaurants operating in the area. Senior management inspects and approves each restaurant site. It typically takes 100 to 120 days to construct and open a new Longhorn Steakhouse restaurant, 130 to 140 days to construct and open a new Bugaboo Creek Steak House restaurant and 170 to 185 days to construct and open a new The Capital Grille restaurant. While the Company will consider the option of purchasing sites for its new restaurants where it is cost effective to do so, currently all but 20 of the Company's restaurant sites are leased. Over the past three years, the Company has modified its prototype Longhorn Steakhouse restaurant, increasing its average seating capacity from approximately 150 seats for Longhorn Steakhouse restaurants open prior to 1994 to 236 seats in approximately 6,000 square feet of space for Longhorn Steakhouse restaurants opened in 1996. An expanded kitchen design incorporating equipment needed for a broader menu is also part of the prototype. The Company believes the kitchen design simplifies training, lowers costs and improves the consistency and quality of the food. The prototype restaurant design also includes cosmetic changes that provide a total restaurant concept that is inviting and comfortable while maintaining the ambiance of a Texas roadhouse. The Company is in the process of modifying its prototype Bugaboo Creek Steak House restaurant to incorporate a smaller seating capacity than its average restaurant. This new prototype incorporates a target of 270 seats in approximately 7,500 square feet of space. The Company expects the new prototype will reduce labor, utilities and other operating costs as well as capital required for expansion. Over the past three years, the Company renovated and remodeled those Longhorn Steakhouse restaurants that had been opened prior to the development of its new prototype in late 1994. The remodeling involved the installation of kitchen equipment needed for new menu items, as well as the installation of kitchen printers in conjunction with the new point-of-sale ("POS") system. The remodeling also included cosmetic improvements such as repainting and refinishing, new lighting and various decor adjustments. Exterior improvements encompassed repainting and additional lighting designed to convey a more inviting image, as well as new signage to reflect the change in the name of the restaurant to Longhorn Steakhouse from Longhorn Steaks. In 1996, those Longhorn Steakhouse restaurants that were remodeled were closed an average of 2.2 days to complete the construction and train the restaurant staff on the new menu items and the new POS system. In 1996, closing these restaurants for remodeling resulted in reduced sales of approximately $10,000 per restaurant during the period of remodeling and additional reductions in restaurant operating profit of approximately $15,000 per restaurant for one to two months following the remodeling as a result of training costs associated with new systems. The average capitalized cost per restaurant remodeled in 1996 was approximately $140,000. The Company remodeled two restaurants in 1994, 25 in 1995 (which included one restaurant that had been acquired in 1995) and 20 restaurants in 1996 (which included five restaurants that had been acquired in 1995 and 1996). 6 9 RESTAURANT OPERATIONS Management and Employees. The management staff of a typical restaurant consists of one general manager or managing partner, two or three assistant managers and one kitchen manager. In addition, a typical Longhorn Steakhouse restaurant employs approximately 30 to 50 staff members, a typical Bugaboo Creek Steak House restaurant employs approximately 85 staff members, and a typical The Capital Grille restaurant employees approximately 60 staff members. The general manager or managing partner of each restaurant has primary responsibility for the day-to-day operation of the restaurant and is responsible for maintaining Company-established operating standards. The Company employs seven Longhorn Steakhouse regional managers, who each have responsibility for the operating performance of three to eight Company-owned Longhorn Steakhouse restaurants and report directly to the Director of Operations for the Longhorn Steakhouse concept. The Company employs two Bugaboo Creek Steak House regional managers, who each have responsibility for the operating performance of seven Bugaboo Creek Steakhouse restaurants and report directly to the Executive Vice President for the Bugaboo Creek Steak House concept. The Company also employs one regional manager responsible for four The Capital Grille restaurants plus the three specialty restaurants in the Providence, Rhode Island market, reporting directly to the Vice President of Operations for The Capital Grille. The Vice President of Operations for The Capital Grille also has direct responsibility for the operating performance of the remaining The Capital Grille restaurants, which have been opened within the last seven months. The Company seeks to recruit managers with substantial restaurant experience. The Company selects its restaurant personnel utilizing a selection process which includes psychological and analytical testing which is designed to identify individuals with those traits the Company believes are important to success in the restaurant industry. The Company requires new managers to complete an intensive training program focused on both on-the-job training as well as a rigorous in-house classroom-based educational course. The program is designed to encompass all phases of restaurant operations, including the Company's philosophy, management strategy, policies, procedures and operating standards. Through its management information systems, senior management receives weekly reports on daily sales, customer counts, payroll and cost of sales. Based upon these various reports, management believes that it is able to closely monitor the Company's operations. The Company maintains a performance measurement and an incentive compensation program for its management level employees. The performance programs reward restaurant management teams with cash bonuses for meeting profitability targets and for improved profitability at the restaurant. In addition, if profitability targets are met, the management team is also awarded cash bonuses for improvements in restaurant sales. Incentive compensation is also sometimes provided to management in the form of stock options. During 1996, no stock options were awarded to Longhorn Steakhouse restaurant level managers. However, stock options were awarded to joint venture-owned Longhorn Steakhouse restaurant level managing partners upon execution of their employment agreement and to Bugaboo Creek Steak House general managers upon appointment as general managers. Management Information Systems. The Company utilizes a Windows-based accounting software package and a network that enables electronic communication throughout the entire Company. In addition, the Longhorn Steakhouse restaurants utilize a Windows-based POS system. The Company utilizes these management information systems to develop pricing strategies, monitor new product reception and evaluate restaurant-level productivity. The Company expects to continue to develop its management information systems in each concept to assist restaurant management in analyzing their business and to improve efficiency. Purchasing. The Company establishes product quality standards for beef, then negotiates directly with suppliers to obtain the lowest possible prices for the required quality. The Company also utilizes select long-term contracts on certain items to avoid short-term meat cost fluctuations. For the Bugaboo Creek Steak House restaurants, beef is received from suppliers at age specifications; all steaks, other than bone steaks, are then cut in each restaurant by restaurant-level management on a daily basis. For the Longhorn Steakhouse restaurants, beef is aged at the facility of the Company's largest distributor, who delivers the beef to the Longhorn Steakhouse restaurants when the age reaches specified guidelines; this arrangement is closely monitored by Company personnel and management believes it provides for efficient and cost-effective meat processing and distribution, while maintaining the Company's control and supervision of purchasing and aging. 7 10 Except for bone steaks, which are cut by a meat company in Atlanta under contract with the Company, the restaurant-level management at Longhorn Steakhouse restaurants cuts all steaks on a daily basis. For The Capital Grille restaurants, beef is aged in a controlled climate in each individual restaurant and all steaks, other than bone steaks, are cut in each restaurant by restaurant-level management on a daily basis. The Company's management negotiates directly with suppliers for most other food and beverage products to ensure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases its meat, food and other supplies from a sufficient number of suppliers such that the loss of any one supplier would not have a material effect on the Company. In mid-1996, the Company completed a transition from its current distribution system which utilized various regional distributors to a consolidated system under which a single distributor services all of the Longhorn Steakhouse restaurants. In early 1997, this system was also phased in for the Bugaboo Creek Steak House restaurants. There are no plans to expand this to The Capital Grille restaurants, which are more geographically diverse and require a wider selection of raw products than the Longhorn Steakhouse restaurants and Bugaboo Creek Steak House restaurants. Seasonality. Although individual restaurants have seasonal patterns of performance that depend on local factors, aggregate sales by the Company's restaurants have not displayed pronounced seasonality, other than lower sales during the "back-to-school" season, which falls in the Company's third fiscal quarter, and higher sales during the Christmas holiday season, which falls in the Company's fourth fiscal quarter. Extreme weather, especially during the winter months, may adversely affect sales. OWNERSHIP STRUCTURES The Company's interests in its restaurants are divided into three categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised restaurants. Company-owned restaurants. 43 Longhorn Steakhouse restaurants, all Bugaboo Creek Steak House restaurants, all The Capital Grille restaurants, the two Skeeter's Grille restaurants, and the Lone Star Steaks, Hemenway's, The Old Grist Mill Tavern and Monterey are owned and operated by the Company. The general manager of each of these restaurants is employed and compensated by the Company. See "Restaurant Operations -- Management and Employees" above. Joint Venture Restaurants. The Company is a partner in thirteen joint ventures for the operation of Longhorn Steakhouse restaurants that in the aggregate operate 36 restaurants as of March 9, 1997. In each case the Company's partner is an experienced restaurant operator who owns from 10% to 50% of the joint venture. While the scope and terms of these joint ventures vary, they are generally formed with the goal of developing multiple restaurants in a particular market under the supervision of the Company's joint venture partner. The joint ventures generally contemplate that the general manager of each restaurant developed or operated by the joint venture will purchase a 10% interest in the cash flow of the restaurant managed thereby ratably diluting the interest of the Company and its joint venture partner. The joint ventures generally pay fees to the managing partner at a rate of $1,000 to $2,500 per restaurant per month and pay fees to the Company at a rate of $1,500 to $4,000 per restaurant per month. Those joint ventures that operate under franchise agreements pay royalties at the rate of 1.5% of gross sales. In addition, under the terms of the Company's 50/50 joint ventures, the Company is paid a $15,000 opening supervision fee from the joint venture for services performed in connection with each restaurant opening. The joint ventures either operate their restaurants under the control of the Company or under franchise agreements with the Company. Franchise agreements for joint ventures are modified by an addendum that provides that no franchise fee is payable and reduces the royalty rate. In the event that the Company's partner in the joint venture or any other entity should acquire the joint venture's restaurants, this addendum to the franchise agreement would terminate and the operation of the restaurants would continue under the terms of the franchise agreement. Three of the joint ventures have area development agreements with the Company for the development of additional restaurants. Six other joint ventures do not have specific development rights although the Company has agreed, during a specified time, not to establish restaurants in their market areas except through the joint venture, so long as a specified development schedule is met. 8 11 The Joint ventures are terminable by either joint venture partner upon default by the other partner. Certain of the joint ventures give the Company the option under certain circumstances to acquire the interest of the 10% joint venture partner for cash or shares of the Company's common stock. Five of the joint ventures obligate the Company to purchase the interest of its 10% joint venture partner upon the death of the principal of the joint venture partner and three include a provision permitting either partner to set a price at which the other partner must either buy the interest of the terminating partner or sell its interest to the terminating partner. Franchised Restaurants. As of March 9, 1997, 27 of the 36 restaurants operated by the Company's joint ventures are operated under franchise agreements. In addition, the Company has three unaffiliated franchises that currently operate three Longhorn Steakhouse restaurants in Alabama, Florida and North Carolina. The Company has also entered into an area development agreement with an unaffiliated entity with the right to operate franchised Longhorn Steakhouse restaurants in Puerto Rico. In 1996, no unaffiliated franchise restaurants were opened and two were closed, one each in Roanoke, Virginia and in Birmingham, Alabama. Original Franchise Agreements. The Company entered into its first generation of franchise agreements during the years 1987 through 1993. Three Longhorn Steakhouse restaurants currently operate under the original franchise agreements. These franchise agreements were typically for a ten-year period and were usually renewable for two or three subsequent five year periods. The franchise agreements permitted the operation of multiple restaurants in a specified territory and typically provided for payment of a franchise fee in the aggregate amount of $50,000, generally payable in installments upon execution and the opening of the second and third units. The franchise fee could vary depending on the territorial size and location of the franchise area and the number of restaurants the Company estimates could be developed within the designated franchise area. The franchise agreements also provided for royalties with respect to each franchise unit of 4% of gross sales per unit on the first $1.0 million in annual gross sales and 3% of gross sales per unit on the second $1.0 million of annual gross sales, with a minimum payment of $2,800 per month per franchised unit. In addition to the royalties described above, the franchise is required to pay a 3% royalty with respect to each franchise unit on annual gross sales between $2.0 million and $2.5 million during the first five year renewal period, and on annual sales between $2.0 million and $3.0 million during the second five year renewal period. The franchisee has the right to terminate a franchise agreement at any time, upon 30 days written notice to the Company. The Company has the right to terminate a franchise agreement for a variety of reasons, including the franchisee's failure to pay all amounts due when required or the willful failure to adhere to the Company's methods and standards. New Franchise Agreements. In 1994, the Company revised its form of franchise agreement and all franchises granted since 1993 have been on this revised form. 27 Longhorn Steakhouse restaurants operate under the new franchise agreement, all of which are operated by joint ventures. The Company may grant additional franchises to operate Longhorn Steakhouse restaurants and Bugaboo Creek Steak House restaurants under the revised form. The franchise agreements are granted with respect to individual restaurants and are either for a term of ten years with a right of the franchisee to acquire a successor franchise for an additional ten-year period if specified conditions are met or for a period of twenty years. The franchise agreements provide for a franchise fee of $60,000, which amount is reduced for subsequent franchises acquired by the same franchisee. The franchise fee is payable in full upon execution. The franchise agreements provide for royalties with respect to each restaurant of 4% of gross sales and require the franchisee to expend on local advertising during each calendar month an amount equal to at least 1.5% of gross sales and, if the Company establishes an advertising fund, to contribute an additional amount of 0.5% of gross sales to such fund or up to 4.5% of the restaurant's gross sales during the conduct of a market, regional or national advertising campaign. The franchisee has the right to terminate the franchise agreement upon default by the Company. The Company also retains the right to terminate a franchise for a variety of reasons, including the franchisee's failure to pay amounts due under the agreement or to otherwise comply with the terms of the franchise agreement. 9 12 General. An important element of the Company's franchise program is the training the Company provides for each franchisee. With respect to each new franchisee, the Company provides the same training program provided to the Company's management and employees. In addition to this initial training, the Company provides supervision at the opening of the franchisee's first restaurant, beginning one week prior to opening, and routine supervision thereafter. In addition, the Company makes available, at no cost to franchisees, the advertising materials which it has developed for its own Longhorn Steakhouse restaurants, or Bugaboo Creek Steak House restaurants as appropriate. All franchisees are required to operate their restaurants in compliance with the Company's methods, standards and specifications regarding such matters as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs. The franchisee has full discretion to determine the prices to be charged to all customers. In addition, all franchisees are required to purchase food, ingredients, supplies and materials that meet standards established by the Company or which are provided by suppliers approved by the Company. Although not required to do so by the franchise agreements, all of the franchisees currently purchase beef from the Company's suppliers. The Company does not receive fees or profits on sales by third-party suppliers to franchisees. Many state franchise laws limit the ability of a franchisor to terminate or renew a franchise. Area Development Agreements. The Company has also entered into area development agreements with developers, including joint ventures in which the Company is a partner. Under these agreements, the developer has exclusive rights to establish and operate Longhorn Steakhouse restaurants in a defined territory generally for a period of five years, conditioned upon meeting a development schedule provided in the area development agreement. The Company may enter into similar agreements with respect to Bugaboo Creek Steak House restaurants. The area development agreements provide the developer with the option to renew the agreement, usually for an additional five-year period, predicated upon the establishment of new performance goals and the Company's determination that the developer has the capability to comply with the new performance goals. Development fees paid upon execution of area development agreements reflect the size of the territory involved and are non-refundable, but are applied to the payment of franchise fees for restaurants opened pursuant to franchises granted to the developer. TRADEMARKS The Company has registered LONGHORN STEAKS and BUGABOO CREEK STEAK HOUSE and design and THE CAPITAL GRILLE as service marks with the United States Patent and Trademark Office and has applied for registration of its LONGHORN STEAKHOUSE and design service mark. The Company regards its service marks as having significant value and as being important factors in the marketing of its restaurants. The Company is aware of names and marks similar to the service marks of the Company used by other persons in certain geographic areas; however, the Company believes such uses will not adversely affect the Company. It is the Company's policy to pursue registration of its mark whenever possible and to oppose vigorously any infringement of its marks. COMPETITION The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors with substantially greater financial and other resources than the Company. Such competitors include a large number of national and regional restaurant chains. Some of the Company's competitors have been in existence for a substantially longer period than the Company and may be better established in the markets where the Company's restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company's restaurants in particular. 10 13 GOVERNMENT REGULATION The Company is subject to various federal, state and local laws affecting its business. Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. In addition, most municipalities in which the Company's restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. The Company is also subject to federal and state environmental regulations, but they have not had a material effect on the Company's operations. Approximately 17% of the Company's restaurant sales are attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not experienced and does not presently anticipate experiencing any delays or other problems in obtaining or renewing licenses or permits to sell alcoholic beverages; however, the failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant's operations. The Company and its franchisees are subject in each state in which they operate restaurants to "dramshop" statutes or case law interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company is also subject to federal and state laws regulating the offer and sale of franchises administered by the Federal Trade Commission and various similar state agencies. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. These laws often apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company designs its restaurants to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled. The Company's restaurant operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, overtime and tip credits. Significant numbers of the Company's food service and preparation personnel are paid at rates related to the federal minimum wage and, accordingly, further increases in the minimum wage could increase the Company's labor costs. Various proposals for comprehensive health care reform have been or are expected to be submitted to Congress. To the extent that proposals are enacted which require employers to pay for employees' health insurance or other coverage, such legislation may have a significant effect on the Company. EMPLOYEES As of March 9, 1997, the Company employed approximately 6,321 persons, 117 of whom were corporate personnel, 466 of whom were restaurant management personnel and the remainder of whom were hourly personnel. Of the 117 corporate employees, 46 are in management positions and 71 are administrative or office employees. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its employee relations to be good. 11 14 ITEM 2. PROPERTIES As of March 9, 1997, all but 20 of the Company's restaurants were located in leased space. The Company's Tucker, Georgia restaurant is leased from a partnership that is 50% owned by the four original shareholders of the Company. Initial lease expirations typically range from five to ten years, with the majority of these leases providing for an option to renew for at least one additional term. All of the Company's leases provide for a minimum annual rent, and approximately half of the leases call for additional rent based on sales volume (generally 2.0% to 8.0%) at the particular location over specified minimum levels. Generally the leases are net leases which require the Company to pay the costs of insurance, taxes and a portion of lessors' operating costs. The leases on the operating Company-owned restaurants will expire (assuming exercise of all renewal options) on the following schedule: 1 in 1997; 2 in 1998; 2 in 1999 and the remainder over the period from 2000 through 2028. (A complete listing of each restaurant is set forth under "Restaurant Locations.") The Company's executive offices are located in 10,000 square feet of space in Atlanta, Georgia, in a building purchased by the Company in November 1992. In addition, the Company leases approximately 7,300 square feet of space in East Providence, Rhode Island to house primarily operations, marketing, training, purchasing, and administrative staff to support the operation of Bugaboo Creek Steak House restaurants and The Capital Grille restaurants. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these incidental actions will have a material adverse effect on the Company's financial position. On December 11, 1996 the Company announced it had reached an agreement in principle to settle for $1.4 million the putative class action filed on February 10, 1994 against the Company, several of its directors, and the two managing underwriters of its previous public offering of common stock, styled Linda Upton v. George W. McKerrow, Jr., Ronald P. Sheean, Ronald W. San Martin, J. William Norman, George W. McKerrow, Sr., J. C. Bradford & Co., The Robinson-Humphrey Company, Inc., and Longhorn Steaks, Inc., Civil Action No. 1:94-CV-0353-MHS, U.S. District Court for the Northern District of Georgia, Atlanta Division. The consummation of the settlement is subject to documentation, approval by the court, conditional certification of a class for settlement purposes, and approval by that class of the settlement. The Company believes that the settlement will be consummated. A total consideration of $1.4 million, the major portion of which was funded by an officers and directors liability insurance policy, has been placed in escrow to fund this settlement. The cost to the Company, including related attorneys' fees, was approximately $605,000. The Plaintiff purported to represent a class of all persons who purchased the Common Stock of the Company between July 27, 1992 and June 17, 1993. The complaint alleged that during this interval the defendants made material misrepresentations and omissions in connection with the financial condition of the Company which had the effect of artificially inflating the market price of the Company's Common Stock. The complaint alleged that by virtue of this conduct defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the 1934 "Act") and SEC Rule 10b-5 thereunder. The complaint sought compensatory damages along with pre- and post-judgment interest, reasonable attorney's fees, expert witness fees, costs and equitable relief. In the plaintiff's answers to mandatory interrogatories filed under the Court's rules, the plaintiff states that, although this is a matter for experts, at this point, it appears that "class-wide damages likely total in excess of $40 million." The defendants deny any wrongdoing and liability, and this settlement reflects the desire of the Company to limit further expenses, distraction and diversion of personnel, and to remove the cloud of protracted litigation. On March 25, 1997, Michael Blocker, a former employee of the Company filed a complaint, styled Michael Blocker v. RARE Hospitality International, Inc. d/b/a Longhorn Steaks, Inc., in the United States District Court, Northern District of Georgia, Atlanta Division. Civil Action File No. 1:97-CV-0794-JEC. The individual plaintiff, who purports to represent a class of all male applicants who have sought wait staff positions 12 15 with the Company, filed this putative class action alleging a pattern and practice of discrimination on the basis of race and gender in the hiring of wait staff employees. The complaint further alleges the individual plaintiff has been discriminated against on the basis of his race and gender, and has been retaliated against upon complaining of the discrimination. The complaint has only recently been filed, and an answer is not due for some time. Discovery has not commenced. The Company believes that the claims of the plaintiff in this lawsuit are unfounded and completely without merit. The Company denies any liability with respect to these claims and intends to vigorously defend the case, including contesting certification of the class action, and defending against the individual claims by the plaintiff. This action is at its earliest stages and it is not possible at this time to determine the outcome of the lawsuit or the effect of its resolution on the Company's Financial position or operating results. Management believes that the Company's defenses have merit and that the resolution of this matter will not have a material adverse effect on the Company's financial condition or results of operations. On September 13, 1996, Longhorn Steaks of Alabama, Inc. (the Company's franchisee in certain Alabama counties), William L. Kemp, and James E. Adams, each 50% stockholders of Longhorn Steaks of Alabama, Inc., filed suit in the Circuit Court of Jefferson County, Alabama, alleging that the Company had breached certain terms of the Franchise Agreement between Longhorn Steaks of Alabama, Inc. and the Company. The case is styled Longhorn Steaks of Alabama, Inc., William L. Kemp, and James E. Adams v. Longhorn Steaks, Inc. and Richard E. Rivera, in the Circuit Court of Jefferson County, Alabama, Civil Action No. CV9605485. Specifically, plaintiffs alleged that the Company violated a right of first refusal concerning future expansion by the Company into Alabama counties not specifically assigned to Longhorn Steaks of Alabama, Inc. The Company filed its responsive pleading on October 21, 1996. The Company has reached an agreement with the plaintiffs for the termination of the franchise agreement between the Company and Longhorn Steaks of Alabama, Inc. and the settlement of this litigation. The Company has paid Longhorn Steaks of Alabama, Inc. $1,200,000 for the termination of the franchise agreement as of April 5, 1997, the Longhorn Steaks restaurant operated by the franchisee has been closed, the parties have exchanged mutual releases and the plaintiffs have agreed to dismiss this action with prejudice. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted for a vote of security holders during the Fourth Quarter of 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock has been traded on Nasdaq National Market under the symbol "LOHO" since March 31, 1992 (the stock now trades under the symbol "RARE" to reflect the January name change). The table below sets forth the high and low sales prices of the Common Stock, as reported on the Nasdaq National Market, during the periods indicated.
FISCAL YEAR ENDED DECEMBER 31, 1995 HIGH LOW - ----------------------------------- ---- ---- First Quarter............................................. $11 $ 8 1/2 Second Quarter............................................ 14 1/2 10 1/2 Third Quarter............................................. 18 3/4 13 3/4 Fourth Quarter............................................ 18 1/4 14 1/2 FISCAL YEAR ENDED DECEMBER 29, 1996 - ------------------------------------------------------------ First Quarter............................................. $24 3/4 $15 1/2 Second Quarter............................................ 29 1/2 21 3/4 Third Quarter............................................. 25 1/2 14 1/2 Fourth Quarter............................................ 21 1/8 14 3/4
As of March 9, 1997, there were 425 holders of record of Common Stock. 13 16 Since the Company's public offering in 1992, the Company has not declared or paid any cash dividends or distributions on its capital stock. The Company does not intend to pay any cash dividends on its Common Stock in the foreseeable future, as the current policy of the Company's Board of Directors is to retain all earnings to support operations and finance expansion. The Company's existing revolving line of credit restricts the payment of cash dividends without prior lender approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company's earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA Following is selected consolidated financial data as of and for each of the years in the five years ended December 29, 1996. The Consolidated Financial Statements as of December 29, 1996 and December 31, 1995 and for each of the years in the three year period ended December 29, 1996 and the independent auditors' report thereon are included in this Form 10-K. The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations," also included in this Form 10-K.
FISCAL YEARS ENDED ------------------------------------------------------- DEC. 29, DEC. 31, DEC. 31, DEC. 31, DEC. 31 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF EARNINGS DATA: Revenues: Restaurant sales.................... $212,894 $149,279 $111,025 $85,710 $59,705 Wholesale meat sales................ 2,547 6,495 3,389 3,504 3,575 Franchise revenues.................. 308 606 615 478 667 Total revenues.............. 215,749 156,380 115,029 89,692 63,947 Costs and expenses: Cost of restaurant sales............ 78,637 54,074 39,956 30,143 19,764 Cost of wholesale meat sales........ 2,491 6,159 3,137 3,174 3,199 Operating expenses -- restaurants... 94,587 67,629 50,924 37,622 26,664 Operating expenses -- meat division......................... 234 766 702 734 610 Provision for restaurant closings... 1,436 155 1,120 -- -- Merger and conversion expenses...... 2,900 -- -- -- -- Depreciation and amortization -- restaurants...................... 12,191 7,171 5,025 3,946 2,877 General and administrative expenses......................... 13,732 11,082 10,131 6,896 5,661 -------- -------- -------- ------- ------- Total costs and expenses.... 206,208 147,036 110,995 82,515 58,775 Operating income............ 9,541 9,344 4,034 7,177 5,172 Interest income (expense), net........ 79 291 794 372 (8) Provision for litigation settlement... 605 -- -- -- -- Minority interest..................... 602 5 -- -- 71 Earnings before income taxes..................... 8,413 9,630 4,828 7,549 5,093 Income taxes.......................... 3,170 3,047 1,286 1,855 1,384 -------- -------- -------- ------- ------- Net earnings................ 5,243 6,583 3,542 5,694 3,709 Earnings per common and common equivalent share.................... $ 0.46 $ 0.66 $ 0.37 $ 0.69 $ 0.50 Weighted average common and common equivalent shares outstanding....... 11,302 9,955 9,517 8,227 7,480
14 17
FISCAL YEARS ENDED ------------------------------------------------------- DEC. 29, DEC. 31, DEC. 31, DEC. 31, DEC. 31 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital....................... $ 2,065 $ 561 $ 22,488 $19,076 $ 6,238 Total assets.......................... 151,594 107,735 81,951 62,319 33,727 Long-term debt........................ 7,100 13,858 1,808 5,108 3,807 Minority interest..................... 3,301 615 -- -- -- Total stockholders' equity............ 121,384 78,133 70,289 49,446 23,483
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On September 13, 1996, the Company completed the acquisition of Bugaboo Creek Steak House, Inc., along with related restaurant and real estate properties. The acquisition provided for the issuance of 2,939,062 shares of the Company's common stock to the stockholders of Bugaboo Creek Steak House, Inc. and 240,410 shares of the Company's common stock for the purchase of three other related restaurants and certain related real estate. The exchange of shares was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to include the accounts and operations of Bugaboo Creek Steak House, Inc. and the related restaurant and real estate properties that were acquired for all periods presented. Effective July 1, 1996, the Company changed its fiscal year-end from December 31 to a 52- or 53-week year ending on the last Sunday in December. Interim reporting periods within 1996 contained three months for the first two quarters. The third and fourth quarters each contained 13 weeks. Fiscal 1996, which ended on December 29, 1996, contains 52 weeks. All general references to years relate to fiscal years, unless otherwise noted. The Company's revenues are derived primarily from restaurant sales from Company-owned and joint venture restaurants. The Company also derives a small percentage of its total revenue from franchise revenues from unaffiliated franchised restaurants. Cost of restaurant sales consists of food and beverage costs for Company-owned and joint venture restaurants. Restaurant operating expenses consist of all other restaurant-level costs. These expenses include the cost of labor, advertising, operating supplies, rent, and utilities. Depreciation and amortization includes only the depreciation attributable to restaurant level capital expenditures and amortization primarily associated with pre-opening expenditures. General and administrative expenses include finance, accounting, management information systems, and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Minority interest consists of partners' share of earnings in joint venture restaurants. In April, 1996, the Company discontinued the meat cutting and distribution operations at the Company's meat division, but retained the purchasing and quality control functions. As a result, the Company no longer generates wholesale meat sales to franchises or unaffiliated businesses. Prior to April 1996, the Longhorn Steakhouse restaurants were not charged distribution costs, which were absorbed by the Company's meat division. Subsequent to April 1996 the Longhorn Steakhouse restaurants absorb the full cost of purchased beef. The Company defines the comparable restaurant base for 1996 to include those restaurants open prior to October 1, 1994. The Company defines the comparable restaurant base for 1995 to include those restaurants open prior to October 1, 1993. Average weekly sales are defined as total restaurant sales divided by restaurant weeks. A "restaurant week" is one week during which a single restaurant is open, so that two restaurants open during the same week constitutes two restaurant weeks. 15 18 The Company's revenues and expenses can be significantly affected by the number and timing of the opening of additional restaurants. The timing of restaurant openings also can affect the average sales and other period-to-period comparisons. The following table sets forth the percentage relationship to total revenues of the listed items included in the Company's statement of earnings, except as indicated:
FISCAL YEARS ENDED -------------------------------------------- DECEMBER 29, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Revenues: Restaurant Sales: Longhorn Steakhouse...................... 63.3% 62.7% 68.5% Bugaboo Creek Steak House................ 20.4 16.6 11.4 The Capital Grille....................... 9.4 9.1 7.3 Other restaurants........................ 5.6 7.1 9.3 ----- ----- ----- Total restaurant sales.............. 98.7 95.5 96.5 Wholesale meat sales........................ 1.2 4.1 3.0 Franchise revenues.......................... 0.1 0.4 0.5 ----- ----- ----- Total revenues...................... 100.0 100.0 100.0 Costs and expenses: Cost of restaurant sales(1)................. 36.0 36.2 36.0 Cost of wholesale meat sales(1)............. 97.8 94.8 92.6 Operating expenses -- restaurants(1)........ 44.4 45.3 45.9 Operating expenses -- meat division......... 0.1 0.5 0.6 Provision for restaurant closings........... 0.7 0.1 1.0 Merger and conversion expenses.............. 1.3 -- -- Depreciation and amortization -- restaurants(1)........... 5.7 4.6 4.4 General and administrative expenses......... 6.4 7.1 8.8 ----- ----- ----- Total costs and expenses............ 95.6 94.0 96.5 Operating income.................... 4.4 6.0 3.5 Interest income, net.......................... 0.1 0.2 0.7 Provision for litigation settlement........... 0.3 -- -- Minority interest............................. 0.3 -- -- Earnings before income taxes........ 4.2 6.2 3.9 Income taxes.................................. 1.1 2.0 1.5 Net earnings........................ 3.1 4.2 2.4
- --------------- (1) Cost of restaurant sales, restaurant operating expenses, and depreciation and amortization are expressed as a percentage of restaurant sales, and cost of wholesale meat sales is expressed as a percentage of wholesale meat sales. RESULTS OF OPERATIONS Year Ended December 29, 1996 Compared to Year Ended December 31, 1995 REVENUES Total revenues increased 37.9% to $215.7 million for 1996 compared to $156.4 million for 1995. Restaurant sales increased 42.5% to $212.8 million in 1996 compared to $149.3 million in 1995. Longhorn Steakhouse: Sales in the Longhorn Steakhouse restaurants increased 39.3% to $136.5 million for 1996 compared to $98.0 million for 1995. The increase reflects a 28.8% increase in restaurant weeks in 1996 as compared to 1995, resulting primarily from the opening of 14 new Longhorn Steakhouse restaurants and the acquisition of 16 19 3 additional Longhorn Steakhouse restaurants. Average weekly sales for all Longhorn Steakhouse restaurants in 1996 were $38,858, a 8.1% increase over 1995. Sales for the 45 comparable Longhorn Steakhouse restaurants increased 3.0% in fiscal 1996 as compared to fiscal 1995. The increase in comparable restaurant sales at the Longhorn Steakhouse restaurants is primarily attributable to an increase in customer counts. Bugaboo Creek Steak House: Sales in the Bugaboo Creek Steak House restaurants increased 70.0% to $44.1 million for 1996 compared to $25.9 million for 1995. The increase reflects a 77.6% increase in restaurant weeks in 1996 as compared to 1995, resulting primarily from the opening of 3 new Bugaboo Creek Steak House restaurants. Average weekly sales for all Bugaboo Creek Steak House restaurants in 1996 were $62,370, a 4.3% decrease from 1995. Sales for the 5 comparable Bugaboo Creek Steak House restaurants decreased 9.4% in fiscal 1996 as compared to fiscal 1995. The decrease in comparable restaurants sales at the Bugaboo Creek Steak House restaurants is primarily attributable to a decrease in customer counts. Bugaboo Creek Steak House restaurant customer counts and sales in 1996 were severely impacted by record setting winter storms in the northeastern and mid- Atlantic regions of the United States. The Capital Grille: Sales in The Capital Grille restaurants increased 43.0% to $20.3 million for 1996 compared to $14.2 million for 1995. The increase reflects a 32.1% increase in restaurant weeks in 1996 as compared to 1995, resulting primarily from the opening of 3 new The Capital Grille restaurants. Average weekly sales for all The Capital Grille restaurants in 1996 were $99,166, a 8.3% increase over 1995. Sales for the 2 comparable The Capital Grille restaurants increased 15.2% in fiscal 1996 as compared to fiscal 1995. The increase in comparable restaurants sales at The Capital Grille restaurants is primarily attributable to an increase in customer counts. Company-wide: Wholesale meat sales decreased $4.0 million to $2.5 million in 1996 from $6.5 million in 1995. This decrease resulted from the cessation of meat cutting and distribution at the Company's meat division, Superior Meats, Ltd. As a result, the Company discontinued selling meat to its Longhorn Steakhouse franchisees and other unaffiliated parties. Franchise revenues decreased $298,000 to $308,000 in 1996 from $606,000 in 1995. This decrease resulted primarily from the closure of a franchised Longhorn Steakhouse restaurant in Roanoke, Virginia in the first quarter of 1996, the Company's purchase of the two franchised Longhorn Steakhouse restaurants in Greensboro and High Point, North Carolina in the third quarter of 1995, the formation of a joint venture to own and operate these two restaurants along with the three franchised Longhorn Steakhouse restaurants in Charlotte, North Carolina and Columbia, South Carolina in the second quarter of 1996 and the closure of a franchised Longhorn Steakhouse restaurant in Birmingham, Alabama in the third quarter of 1996. COSTS AND EXPENSES Cost of restaurant sales in 1996 as a percentage of restaurant sales increased to 36.9% from 36.2% in 1995. During 1995 and early 1996, the cost of restaurant sales in the Longhorn Steakhouse restaurants was reduced by the distribution costs absorbed by the Company's meat division. If these distribution costs absorbed by the meat division in 1995 and 1996 had been charged directly to the Longhorn Steakhouse restaurants, cost of restaurant sales would have been 37.1% in 1996 compared to 36.9% in 1995. The increase was primarily due to higher contracted beef prices and late year increases in dairy and baked good costs during 1996. The cost of wholesale meat sales increased to 97.8% of wholesale meat sales in 1996 as compared to 94.8% in 1995, primarily as the result of the resale of certain overstocks of beef at lower than normal margins. 17 20 Restaurant operating expenses decreased as a percentage of restaurant sales in 1996 to 44.4% from 45.3% in 1995. This decrease was primarily attributable to higher sales levels and relatively stable fixed costs in the Longhorn Steakhouse restaurants and The Capital Grille restaurants. Meat division operating costs decreased to 0.1% of revenues in 1996 as compared to 0.5% in 1995 as the meat cutting and distribution operations were discontinued. In 1996, the Company recorded a $1.4 million provision before tax benefits related to the closure of two Longhorn Steakhouse restaurants in Cincinnati, Ohio and Knoxville, Tennessee. The Ohio restaurant was closed in the fourth quarter of 1996. In 1995, the Company recorded a $155,000 provision before tax benefits related to the closure of one Longhorn Steakhouse restaurant in Jacksonville, Florida, which was closed in the first quarter of 1996. The provisions included estimated future net lease obligations and other costs of closing the facilities and the writedown of restaurant assets to estimated net realizable value. In 1996, the Company expensed transaction costs of $2.9 million associated with the acquisition of Bugaboo Creek Steak House, Inc. and related restaurant and real estate properties. These transaction costs consisted of investment banking, accounting, legal and regulatory agency fees and other expenses related to completing the acquisition and integrating the management information systems. General and administrative expenses increased to $13.7 million in 1996, or 6.4% of total revenues, from $11.1 million in 1995, or 7.1% of total revenues. The dollar amount increase was primarily due to increased labor and support expenses related to managing a larger number of restaurants; further, in the restated 1995 and 1996 periods, two full support offices were maintained, one of which (Providence, Rhode Island) was reduced to an operations support office during the last quarter of 1996. The decreased percentage is due to restaurant revenues increasing at a faster rate than general and administrative expenses, which have a large fixed component. Operating income increased to $9.5 million for 1996 from $9.3 million for 1995. After adjusting for one-time merger and conversion expenses, operating income increased a total of $3.1 million, or 33.3%. This increase is primarily attributable to higher sales levels resulting from an increase in the Company's restaurant base, relatively stable fixed costs and decrease in general and administrative costs as a percentage of revenues, but is partially offset by the provision for restaurant closings discussed above. Interest income, net decreased to $79,000 for 1996 from $291,000 for 1995. The reduction was due to lower average levels of cash and cash equivalents and higher average levels of long-term debt in 1996 as compared to 1995. In 1996, the Company recorded a $605,000 provision associated with the defense and settlement of a shareholder litigation matter. (See "Item 3 -- Legal Proceedings"). Minority interest increased to $602,000 in 1996 from $5,000 in 1995. This reflects the increase in the number of joint venture restaurants to 35 restaurants at fiscal year end 1996 from 16 at fiscal year end 1995. Income tax expense for 1996 was 37.7% of earnings before income taxes reflecting $2.5 million of non-deductible merger and conversion expenses, offset primarily by the benefits of FICA tip credits. Net earnings decreased 21.2% to $5.2 million for 1996 from net earnings of $6.6 million for 1995, reflecting the net effect of the items discussed above. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 REVENUES Total revenues increased 35.9% to $156.4 million for 1995 compared to $115.0 million for 1994. Restaurant sales increased 34.5% to $149.3 million in 1995 compared to $111.0 million in 1994. Longhorn Steakhouse: Sales in the Longhorn Steakhouse restaurants increased 24.4% to $98.0 million for 1995 compared to $78.8 million for 1994. The increase reflects a 15.2% increase in restaurant weeks in 1995 as compared to 18 21 1994, resulting primarily from the opening of 10 new Longhorn Steakhouse restaurants, the acquisition of 2 additional Longhorn Steakhouse restaurants, and the conversion of one restaurant acquired in 1995 to a Longhorn Steakhouse. Average weekly sales for all Longhorn Steakhouse restaurants in 1995 were $35,932, a 8.1% increase over 1994. Sales for the 40 comparable restaurants increased 5.1% in fiscal 1995 as compared to fiscal 1994. The increase in comparable restaurant sales at the Longhorn Steakhouse restaurants is primarily attributable to an increase in customer counts. Bugaboo Creek Steak House: Sales in the Bugaboo Creek Steak House restaurants increased 97.7% to $25.9 million for 1995 compared to $13.1 million for 1994. The increase reflects a 109.3% increase in restaurant weeks in 1995, resulting primarily from the opening of 6 new Bugaboo Creek Steak House restaurants. Average weekly sales for all Bugaboo Creek Steak House restaurants in 1995 were $65,195, a 5.6% decrease from 1994. Sales for the 2 comparable restaurants decreased 3.7% in fiscal 1995 as compared to fiscal 1994. The decrease in comparable restaurant sales at the Bugaboo Creek Steak House restaurants is primarily attributable to a decrease in customer counts. The Capital Grille: Sales in The Capital Grille restaurants increased 69.0% to $14.2 million for 1995 compared to $8.4 million for 1994. The increase reflects a 43.3% increase in restaurant weeks in 1995 as compared to 1994. Average weekly sales for all The Capital Grille restaurants in 1995 were $91,535, an 18.4% increase over 1994. Sales for the 2 comparable restaurants increased 15.7% in fiscal 1995 as compared to fiscal 1994. The increase in comparable restaurant sales at The Capital Grille restaurants is primarily attributable to an increase in customer counts. Company-wide: Wholesale meat sales increased $3.1 million to $6.5 million in 1995 from $3.4 million in 1994. This increase resulted from increased meat sales to unrelated parties, partially offset by a decrease in sales to franchisees. Franchise revenues decreased to $606,000 in 1995 from $615,000 in 1994. This decrease resulted primarily from closure of one franchised Longhorn Steakhouse restaurant in Charlotte, North Carolina in the first quarter of 1995 and the Company's purchase of the two franchised Longhorn Steakhouse restaurants Greensboro and High Point, North Carolina in the third quarter of 1995. This was partially offset by the opening of another franchised Longhorn Steakhouse restaurant in Raleigh, North Carolina in the third quarter of 1995. COSTS AND EXPENSES Cost of restaurant sales in 1995 as a percentage of restaurant sales increased to 36.2% from 36.0% in 1994. In both 1995 and 1994, the cost of restaurant sales in the Longhorn Steakhouse restaurants was reduced by the distribution costs absorbed by the Company's meat division. If these distribution costs absorbed by the meat division in 1995 and 1994 had been charged directly to the Longhorn Steakhouse restaurants, cost of restaurant sales would have been 36.9% in 1995 compared to 37.0% in 1994. The decrease was primarily due to lower beef costs and an increase in sales of non-beef items in Longhorn Steakhouse restaurants, partially offset by higher beef costs in Bugaboo Creek Steak House restaurants and The Capital Grille restaurants. The cost of wholesale meat sales increased to 94.8% of wholesale meat sales in 1995 as compared to 92.6% in 1994, primarily as the result of the resale of certain overstocks of beef at lower than normal margins. Restaurant operating expenses decreased as a percentage of restaurant sales in 1995 to 45.3% from 45.9% in 1994. This decrease was primarily attributable to higher sales levels and relatively stable fixed costs in the Longhorn Steakhouse restaurants and The Capital Grille restaurants. Meat division operating costs decreased 19 22 to 0.5% of revenues in 1995 as compared to 0.6% in 1994. The decrease was primarily attributable to higher sales levels and relatively stable fixed costs. In 1995, the Company recorded a $155,000 provision before tax benefits related to the closure of one Longhorn Steakhouse restaurant in Jacksonville, Florida, which was closed in the first quarter of 1996. In 1994, the Company recorded a $1,120,000 provision before tax benefits related to the closure of one Longhorn Steakhouse restaurant in Orlando, Florida and the planned relocation of one Longhorn Steakhouse restaurant in Jacksonville, Florida. The Orlando restaurant was closed in the third quarter of 1994 and the Jacksonville restaurant was relocated in the second quarter of 1995. The provisions included estimated future net lease obligations and other costs of closing the facilities and the writedown of restaurant assets to estimated net realizable value. General and administrative expenses increased to $11.1 million in 1995, or 7.1% of total revenues, from $10.1 million in 1994, or 8.8% of total revenues. The dollar increase was primarily due to increased labor and support expenses related to managing a larger number of restaurants; further, in the restated 1995 and 1996 periods, two full support offices were maintained, one of which (Providence, Rhode Island) was reduced to an operations support office during the last quarter of 1996. The decreased percentage is due to restaurant revenues increasing at a faster rate than general and administrative expenses, which have a fixed component. Operating income increased to $9.3 million for 1995 from $4.0 million for 1994. The increase is primarily attributable to higher sales levels resulting from an increase in the Company's restaurant base, relatively stable fixed costs and decrease in general and administrative costs as a percentage of revenues. Interest income for 1995 was $291,000 compared to $794,000 for 1994. The reduction was due to lower average levels of cash and cash equivalents and higher average levels of long-term debt in 1995 as compared to 1994. Income tax expense for 1995 was 31.6% of earnings before income taxes reflecting the benefits of FICA tip credits. Net earnings increased 85.9% to $6.6 million for 1995 from net earnings of $3.5 million for 1994, reflecting the net effect of the items discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. Capital expenditures totaled $45.5 million in 1996, $41.1 million in 1995, and $18.1 million in 1994. The Company's primary sources of working capital have been the proceeds of its previous public offerings of Common Stock in 1992, 1993 and 1996, the public offering of Bugaboo Creek Steak House, Inc. in 1994, cash flow from operations and borrowings under its line of credit. The Company had working capital of $2.1 million, $0.6 million and $3.6 million at the end of 1996, 1995 and 1994, respectively. As of March 9, 1997, the Company had borrowings of $13.1 million under a $60.0 million line of credit, which bears interest at the rate of either (i) 75 basis points over the LIBOR rate with a term that the Company selects, ranging from 30 days to 6 months or (ii) prime. As of March 9, 1997, the weighted average rate on all outstanding borrowings was 6.26%. Borrowings under the line of credit are unsecured. The line of credit contains certain financial covenants including a debt to capitalization ratio, a leverage ratio, an interest coverage ratio, a minimum net worth and a limit on capital expenditures and payment of dividends. The Company intends to open approximately 24 Company-owned and joint venture restaurants in 1997 and approximately 30 in 1998. The Company estimates that its capital expenditures (without consideration of contributions from joint venture partners) will be approximately $50-55 million in fiscal 1997 and $60-70 million in fiscal 1998. The capital expenditure estimate for 1997 includes the estimated cost of developing 24 new restaurants, continuing to refurbish Longhorn Steakhouse restaurants, and continuing to invest in improved management information systems. The Company expects that available borrowing under the 20 23 Company's line of credit, together with cash on hand and cash provided by operating activities will provide sufficient funds to finance its expansion plans through 1998. The preceding discussion of liquidity and capital resources contains certain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed in this Form 10-K, among the other factors that could cause actual results to differ materially are the following: the Company's ability to identify and secure suitable locations on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's strict business discipline over a large restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions and growth in the restaurant industry and the general economy; and other risks identified from time to time in the Company's SEC reports and public announcements. See the description of forward-looking statements found in "Documents Incorporated by Reference." 21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 29, 1996 AND DECEMBER 31, 1995 WITH INDEPENDENT AUDITORS' REPORT THEREON 22 25 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ Consolidated Balance Sheets as of December 29, 1996 and December 31, 1995......................................... Consolidated Statements of Earnings for Each of the Years in the Three-Year Period ended December 29, 1996............. Consolidated Statements of Stockholders' Equity for Each of the Years in the Three-Year Period ended December 29, 1996...................................................... Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period ended December 29, 1996.......... Notes to Consolidated Financial Statements..................
23 26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders RARE Hospitality International, Inc.: We have audited the accompanying consolidated balance sheets of RARE Hospitality International, Inc. and subsidiaries (the "Company") -- (formerly Longhorn Steaks, Inc.) as of December 29, 1996 and December 31, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 29, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RARE Hospitality International, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 31, 1997 24 27 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) CONSOLIDATED BALANCE SHEETS DECEMBER 29, 1996 AND DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 6,478 $ 2,427 Marketable debt securities................................ 861 817 Accounts receivable....................................... 2,522 2,292 Inventories............................................... 7,883 6,137 Prepaid expenses.......................................... 1,465 1,467 Preopening costs, net of accumulated amortization......... 2,665 2,271 -------- -------- Total current assets.............................. 21,874 15,411 Property and equipment, less accumulated depreciation and amortization (note 4)..................................... 120,431 84,913 Goodwill, less accumulated amortization..................... 6,139 5,691 Property acquired, held for sale............................ -- 680 Deferred income taxes (note 7).............................. 816 -- Other....................................................... 2,334 1,040 -------- -------- Total assets...................................... $151,594 $107,735 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current debt (note 6)..................................... $ -- $ 1,025 Accounts payable.......................................... 11,385 6,492 Accrued expenses (note 5)................................. 8,152 7,267 Deferred income taxes (note 7)............................ 272 66 -------- -------- Total current liabilities......................... 19,809 14,850 Debt, net of current installments (note 6).................. 7,100 13,858 Deferred income taxes (note 7).............................. -- 146 Other....................................................... -- 133 -------- -------- Total liabilities................................. 26,909 28,987 -------- -------- Minority interest........................................... 3,301 615 Stockholders' equity (notes 2, 11, and 12): Preferred stock, no par value. Authorized 10,000 shares, none issued............................................ -- -- Common stock, no par value. Authorized 25,000 shares; issued and outstanding 11,653 shares and 9,805 shares at December 29, 1996 and December 31, 1995, respectively........................................... 100,180 61,861 Additional paid-in capital................................ 919 919 Retained earnings......................................... 20,231 15,349 Unrealized gain on marketable debt securities............. 54 4 -------- -------- Total stockholders' equity........................ 121,384 78,133 Commitments and contingencies (notes 8, 9, and 13) -------- -------- Total liabilities and stockholders' equity........ $151,594 $107,735 ======== ========
See accompanying notes to consolidated financial statements. 25 28 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 29, 1996 AND DECEMBER 31, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- -------- -------- Revenues: Restaurant sales: Longhorn Steakhouse................................... $136,547 $ 98,034 $ 78,780 Bugaboo Creek Steak House............................. 44,060 25,929 13,121 The Capital Grille.................................... 20,329 14,201 8,372 Other restaurants..................................... 11,958 11,115 10,752 -------- -------- -------- Total restaurant sales........................... 212,894 149,279 111,025 Wholesale meat sales.................................. 2,547 6,495 3,389 Franchise revenues.................................... 308 606 615 -------- -------- -------- Total revenues................................... 215,749 156,380 115,029 -------- -------- -------- Costs and expenses: Cost of restaurant sales................................. 78,637 54,074 39,956 Cost of wholesale meat sales............................. 2,491 6,159 3,137 Operating expenses -- restaurants........................ 94,587 67,629 50,924 Operating expenses -- meat division...................... 234 766 702 Provision for restaurant closings........................ 1,436 155 1,120 Merger and conversion expenses (note 3).................. 2,900 -- -- Depreciation and amortization -- restaurants............. 12,191 7,171 5,025 General and administrative expenses...................... 13,732 11,082 10,131 -------- -------- -------- Total costs and expenses......................... 206,208 147,036 110,995 -------- -------- -------- Operating income................................. 9,541 9,344 4,034 Interest income, net....................................... 79 291 794 Provision for litigation settlement (note 13).............. 605 -- -- Minority interest (note 2)................................. 602 5 -- -------- -------- -------- Earnings before income taxes..................... 8,413 9,630 4,828 Income taxes (note 7)...................................... 3,170 3,047 1,286 -------- -------- -------- Net earnings..................................... $ 5,243 $ 6,583 $ 3,542 ======== ======== ======== Earnings per common and common equivalent share............ $ .46 $ .66 $ .37 ======== ======== ======== Weighted average common and common equivalent shares outstanding.............................................. 11,302 9,955 9,517 ======== ======== ========
See accompanying notes to consolidated financial statements. 26 29 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 29, 1996 AND DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
UNREALIZED GAIN/LOSS ON COMMON STOCK ADDITIONAL MARKETABLE TOTAL ----------------- PAID-IN RETAINED DEBT STOCKHOLDERS' SHARES DOLLARS CAPITAL EARNINGS SECURITIES EQUITY ------ -------- ---------- -------- ------------ ------------- BALANCE, DECEMBER 31, 1993.......... 8,730 $ 42,622 919 5,236 -- 48,777 Net earnings........................ -- -- -- 3,542 -- 3,542 Issuance of shares pursuant to public offering................... 970 18,995 -- -- -- 18,995 Distributions made by acquired companies......................... -- (1,110) -- (12) -- (1,122) Exercise of stock options........... 1 11 -- -- -- 11 Unrealized loss on marketable debt securities........................ -- -- -- -- (246) (246) ------ -------- --- ------ ---- ------- BALANCE, DECEMBER 31, 1994.......... 9,701 60,518 919 8,766 (246) 69,957 Net earnings........................ -- -- -- 6,583 -- 6,583 Exercise of stock options........... 8 93 -- -- -- 93 Issuance of shares in connection with acquisition.................. 96 1,250 -- -- -- 1,250 Unrealized gain on marketable debt securities........................ -- -- -- -- 250 250 ------ -------- --- ------ ---- ------- BALANCE, DECEMBER 31, 1995.......... 9,805 61,861 919 15,349 4 78,133 Net earnings........................ -- -- -- 5,243 -- 5,243 Issuance of shares pursuant to public offering................... 1,781 37,638 -- -- -- 37,638 Exercise of stock options........... 67 681 -- -- -- 681 Distributions made by acquired companies......................... -- -- -- (361) -- (361) Unrealized gain on marketable debt securities........................ -- -- -- -- 50 50 ------ -------- --- ------ ---- ------- BALANCE, DECEMBER 29, 1996.......... 11,653 $100,180 919 20,231 54 121,384 ====== ======== === ====== ==== =======
See accompanying notes to consolidated financial statements. 27 30 RARE HOSPITALITY INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 29, 1996 AND DECEMBER 31, 1995 AND 1994 (IN THOUSANDS OF DOLLARS)
DECEMBER 29, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Operating activities: Net earnings.......................................... $ 5,243 $ 6,583 $ 3,542 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization...................... 12,856 7,475 5,242 Provision for restaurant closings.................. 1,436 155 1,120 Provision for litigation settlement................ 605 -- -- Minority interest.................................. 602 5 -- Preopening costs................................... (4,341) (4,293) (1,766) Deferred tax (benefit) expense..................... (743) 15 (353) Loss on sale of property and equipment............. -- 68 -- Changes in: Accounts receivable................................ (230) (263) (1,229) Inventories........................................ (1,746) (2,961) (601) Prepaid expenses................................... 2 (572) (389) Other assets....................................... (97) -- (745) Income taxes refundable............................ -- 507 (507) Accounts payable................................... 1,020 1,628 1,719 Accrued expenses................................... 885 2,396 656 Other liabilities.................................. (133) (347) 92 -------- -------- -------- Net cash provided by operating activities..... $ 15,359 $ 10,396 $ 6,781 -------- -------- -------- Investing activities Purchase of marketable debt securities.................. -- (2,288) (12,207) Proceeds from sale of marketable debt securities........ 6 6,728 5,754 Proceeds from maturity of marketable debt securities.... -- 1,200 -- Purchase of property and equipment...................... (45,524) (41,115) (18,058) Proceeds from sale of property and equipment............ -- 16 -- Asset acquisitions...................................... -- (4,716) -- -------- -------- -------- Net cash used in investing activities......... $(45,518) $(40,175) $(24,511) -------- -------- -------- Financing activities (Repayments of) proceeds from borrowings on lines of credit................................................ (5,950) 13,050 800 Principal payments on long-term debt.................... (1,833) (13) (4,189) Proceeds from issuance of shares pursuant to public offering.............................................. 37,638 -- 18,995 Proceeds from minority partner contributions............ 1,796 833 -- Distributions to minority partners...................... (1,634) (223) -- Increase in bank overdraft included in accounts payable............................................... 3,873 647 -- Distributions made by acquired companies................ (361) -- (1,122) Proceeds from exercise of stock options................. 681 93 11 -------- -------- -------- Net cash provided by financing activities..... $ 34,210 $ 14,387 $ 14,495 -------- -------- -------- Net increase (decrease) in cash and cash equivalents................................. 4,051 (15,392) (3,235) Cash and cash equivalents at beginning of year.......... 2,427 17,819 21,054 -------- -------- -------- Cash and cash equivalents at end of year................ $ 6,478 $ 2,427 $ 17,819 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for income taxes............................ 2,807 983 1,742 -------- -------- -------- Cash paid for interest................................ $ 109 $ 147 $ 257 ======== ======== ========
See accompanying notes to consolidated financial statements 28 31 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 29, 1996 AND DECEMBER 31, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS RARE Hospitality International, Inc. (formerly Longhorn Steaks, Inc.), including its wholly owned subsidiaries (the "Company"), is a multi-concept restaurant company operating throughout the Eastern United States. At December 29, 1996, the Company operated the following restaurants:
CONCEPT NUMBER IN OPERATION - ------- ------------------- Longhorn Steakhouse......................................... 76 Bugaboo Creek Steak House................................... 14 The Capital Grille.......................................... 6 Other specialty concepts.................................... 6
The Company has also franchised certain Longhorn Steakhouse restaurants throughout the southeastern region of the United States. The Company operated a wholesale meat division through April 1996. Operations of this division consisted of the purchasing, cutting, aging and distribution of meat, primarily to the Company's Longhorn Steakhouse restaurants, including franchisees. The Company is a partner in several joint ventures organized for the purpose of operating Longhorn Steakhouse restaurants. As of December 29, 1996, 35 of the Company's restaurants operate in joint ventures. FISCAL YEAR Effective July 1, 1996, the Company changed its fiscal year-end from December 31 to a 52- or 53-week year ending on the last Sunday in December. Interim reporting periods within 1996 contained three months for the first two quarters. The third and fourth quarters each contained 13 weeks. Fiscal 1996, which ended on December 29, 1996, contains 52 weeks. All general references to years relate to fiscal years, unless otherwise noted. REVENUE RECOGNITION The Company recognizes initial franchise fees as income when substantially all of its obligations are satisfied, which generally coincides with the opening of the franchised restaurants. The Company also receives continuing royalty fees based upon a percentage of each franchised restaurant's gross revenues. Royalty fees are recognized when earned. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The carrying amount of these instruments approximates their fair values. All bank overdraft balances have been reclassified to accounts payable. MARKETABLE DEBT SECURITIES Marketable debt securities are classified as available-for-sale and are reported at fair value, with any unrealized gains or losses, net of deferred taxes, reflected as a separate component of stockholders' equity. 29 32 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INVENTORIES Inventories, consisting principally of food and beverages, are stated at the lower of cost or market, using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful life of the assets. Depreciation expense is computed using principally the straight-line method over the estimated useful lives of the respective assets. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of RARE Hospitality International, Inc., its wholly owned subsidiaries, and joint ventures over which the Company exercises control. All material balances and transactions between the consolidated entities have been eliminated. PRE-OPENING COSTS Costs related to hiring and training and other direct costs associated with opening new restaurants are capitalized and amortized over the first 12 months of a new restaurant's operations. UNREDEEMED GIFT CERTIFICATES The Company records a liability for outstanding gift certificates at the time they are issued. Upon redemption, sales are recorded and the liability is reduced by the amount of certificates redeemed. GOODWILL Goodwill, net of accumulated amortization of $499,219 and $234,450 at December 29, 1996 and December 31, 1995, respectively, represents the excess of purchase price over fair value of net assets acquired. Goodwill is amortized using the straight-line method over the expected period to be benefited, 25 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. OTHER ASSETS Other assets consist of organization costs, debt issuance costs, trademarks, and liquor licenses. Organization costs, trademarks, and liquor licenses are amortized on a straight-line basis over five years. Debt issuance costs are amortized on a straight-line basis over the term of the debt. RESTAURANT CLOSING COSTS Upon the decision to close or relocate a restaurant, estimated unrecoverable costs are charged to expenses. Such costs include leasehold improvements, equipment, and furniture and fixtures, net of salvage value, and a provision for the present value of future lease obligations, less estimated subrental income. The Company provided for the closure of two restaurants in 1996, one restaurant in 1995, and two restaurants in 1994. 30 33 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Settlement did not have a material impact on the Company's financial position, results of operations, or liquidity. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In connection with the merger of the Company with Bugaboo Creek Steak House, Inc. ("Bugaboo Creek") (note 2), the Company acquired certain enterprises affiliated with Bugaboo Creek in a transaction accounted for as a pooling of interests. Prior to the merger, these affiliated entities were either S Corporations or partnerships, and as such, their stockholders or partners, and not the enterprises, were responsible for Federal and state income taxes. DEVELOPMENT COSTS Certain direct and indirect costs are capitalized in conjunction with acquiring and developing new restaurant sites. These costs are amortized over the life of the related building. Development costs were capitalized as follows: $389,000 in 1996, $411,000 in 1995, and $156,000 in 1994. STOCK-BASED COMPENSATION Stock-based compensation is determined using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock (note 12). ADVERTISING AND PROMOTION EXPENSES Advertising and promotion costs are expensed over the period covered by the related promotion. Advertising expense was $4,929,000, $3,438,000, and $2,959,000 for 1996, 1995, and 1994, respectively. EARNINGS PER SHARE Earnings per common and common equivalent share are computed by dividing net earnings by the weighted average common and common equivalent shares outstanding during the year. Outstanding stock 31 34 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) options, which are common stock equivalents, were not included in the computation of 1995 and 1994 earnings per share, as their effect would have been antidilutive. The difference between primary and fully diluted earnings per share was not significant in 1996. ACCOUNTS RECEIVABLE Accounts receivable represent amounts due from restaurant customers and suppliers and interest receivable relating to marketable debt securities. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statements to conform with the current year's presentation. (2) BUSINESS COMBINATIONS AND JOINT VENTURES LONE STAR-GEORGIA During 1995, the Company purchased certain assets and trademark rights of Lone Star Steaks, Inc. for a purchase price, including acquisition expenses, of $3,402,000. The purchase price included cash consideration of $2,152,000 and 96,153 newly issued shares of the Company's common stock. These shares had a market value at the time of the transaction of $1,250,000. Goodwill on this acquisition of $3,002,000 is being amortized over 25 years. BULLHEAD In 1995, the Company also purchased the assets of two previously franchised locations in Greensboro and High Point, North Carolina for $2,564,000. Goodwill on this acquisition of $1,358,000 is being amortized over 25 years. BUGABOO CREEK On September 13, 1996, the Company exchanged approximately 3,179,000 newly issued shares of its common stock for all of the outstanding shares of Bugaboo Creek Steak House, Inc. and certain affiliated entities (2,939,000 shares for Bugaboo Creek Steak House, Inc. and 240,000 shares for other nonpublic affiliated enterprises). Bugaboo Creek Steak House, Inc. operated 14 Bugaboo Creek Steak Houses and five The Capital Grille restaurants, and managed three specialty concept restaurants at the time of the merger. The exchange of shares was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to include the accounts and operations of Bugaboo Creek for all periods presented. Separate results for the combining entities for the years ended December 31, 1995 32 35 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and 1994, and for the most recent interim period prior to acquisition (the six-month period ended June 30, 1996) are as follows (amounts are in thousands of dollars):
JUNE 30, DECEMBER 31, DECEMBER 31, 1996 1995 1994 -------- ------------ ------------ Revenues: Previously reported........................... $ 69,139 $102,188 $ 82,510 Bugaboo Creek and affiliated enterprises...... 34,720 54,192 32,519 -------- -------- -------- $103,859 $156,380 $115,029 ======== ======== ======== Net earnings: Previously reported........................... $ 3,204 $ 4,137 $ 1,514 Bugaboo Creek and affiliated enterprises...... 1,221 2,446 2,028 -------- -------- -------- $ 4,425 $ 6,583 $ 3,542 ======== ======== ========
There were no adjustments required to conform Bugaboo Creek's accounting policies to those of the Company. The following summary, prepared on an unaudited pro forma basis, presents the results of operations of the Company and Bugaboo Creek on a pooled basis, combined with the acquired assets of the Lone Star-Georgia and Bullhead acquisitions for the years ended December 31, 1995 and 1994 as if the purchase business combinations had been completed as of the beginning of the periods presented, after the impact of certain adjustments, such as amortization of intangibles, elimination of franchise revenues, and increased interest expense (or reduced interest income).
1995 1994 ---------- ---------- Net earnings................................................ $6,382,000 $3,476,000 Earnings per common and common equivalent share outstanding............................................... $ .64 $ .37
DUKES-JOINT VENTURE During 1996, the Company entered into a joint venture arrangement whereby the Company contributed two Longhorn Steakhouse restaurants and agreed to contribute funds to construct a third Longhorn Steakhouse restaurant to a joint venture. The other partners in the joint venture contributed three restaurants with a fair market value of approximately $780,000 for a 49% minority interest. The Company has recorded goodwill of $1,050,000 on this joint venture, based on the fair value of assets the Company contributed for its 51% interest versus joint venture partner contributions. (3) MERGER AND CONVERSION EXPENSES Merger and conversion expenses are nonrecurring costs related to the merger with Bugaboo Creek, consisting primarily of investment banking fees, accounting and legal fees, printing costs, costs to integrate point-of-sale systems, and other costs related to the merger. 33 36 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) PROPERTY AND EQUIPMENT Major classes of property and equipment at December 29, 1996 and December 31, 1995 are summarized as follows (in thousands of dollars):
1996 1995 -------- -------- Land and improvements....................................... $ 13,294 $ 12,868 Buildings................................................... 15,032 9,167 Leasehold improvements...................................... 68,039 43,569 Restaurant equipment........................................ 28,220 18,542 Furniture and fixtures...................................... 16,300 10,219 Construction in progress.................................... 4,131 5,858 -------- -------- 145,016 100,223 Less accumulated depreciation and amortization.............. 24,585 15,310 -------- -------- $120,431 $ 84,913 ======== ========
During 1996 and 1995, the Company capitalized interest during construction of approximately $135,000 and $183,000, respectively, as a component of property and equipment. The Company has, in the normal course of business, entered into agreements with vendors for the purchase of restaurant equipment, furniture, fixtures, buildings, and improvements for restaurants that have not yet opened. At December 29, 1996, such commitments totaled approximately $6,000,000. (5) ACCRUED EXPENSES Accrued expenses consist of the following at December 29, 1996 and December 31, 1995 (in thousands of dollars):
1996 1995 ------ ------ Payroll and related......................................... $1,456 $1,548 Income taxes................................................ 500 428 Other taxes accrued and withheld............................ 1,096 1,490 Gift certificates........................................... 3,689 1,494 Construction costs.......................................... 442 478 Other....................................................... 969 1,829 ------ ------ $8,152 $7,267 ====== ======
34 37 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) DEBT At December 29, 1996 and December 31, 1995, debt outstanding was as follows (in thousands of Dollars):
1996 1995 ------ ------- Variable interest rate revolving credit and term loan agreement, with conversion of amounts outstanding at May 1, 1998 into a term note repayable over the forthcoming five years at a fixed or variable rate, at the option of the Company; bearing interest at 7.39% at December 31, 1995..... -- $ 5,000 Variable interest rate revolving credit and term loan agreement, with conversion of amounts outstanding at May 31, 1996 into a term note repayable over five years; bearing interest at 9% at December 31, 1995......................... -- 8,050 Variable interest rate revolving credit and term agreement (the "1996 Facility")....................................... $7,100 -- Other notes payable, secured by real estate................. -- 1,833 ------ ------- Total debt.................................................. 7,100 14,883 Less current portion........................................ -- 1,025 ------ ------- Debt, net of current portion................................ $7,100 $13,858 ====== =======
The 1996 Facility permits the Company to borrow up to $60,000,000 through December 1999. At that date, all amounts outstanding will convert to a two-year term loan, payable in eight equal quarterly installments of principal, plus interest. The 1996 Facility bears interest at the Company's option of LIBOR plus a margin of .75% to 1.25% (depending on the Company's leverage ratio) or the administrative agent's prime rate of interest. At December 29, 1996, the interest rate on outstanding obligations under the 1996 Facility was 6.375%, based on LIBOR plus .75%. Amounts available under the credit facility totaled $52,900,000 at December 29, 1996. The 1996 Facility restricts payment of dividends, without prior approval of the lender, and contains certain financial covenants, including debt to capitalization, leverage and interest coverage ratios, as well as minimum net worth and maximum capital expenditure covenants. The agreement is unsecured. At December 29, 1996, the Company was in compliance with the provisions of the 1996 Facility. 35 38 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) INCOME TAXES Income tax (benefit) expense consists of (in thousands of dollars):
CURRENT DEFERRED TOTAL ------- -------- ------ Year ended December 29, 1996: U.S. Federal........................................... $2,884 $(534) $2,350 State and local........................................ 1,029 (209) 820 ------ ----- ------ $3,913 $(743) $3,170 ====== ===== ====== Year ended December 31, 1995: U.S. Federal........................................... $2,403 $ 12 $2,415 State and local........................................ 629 3 632 ------ ----- ------ $3,032 $ 15 $3,047 ====== ===== ====== Year ended December 31, 1994: U.S. Federal........................................... $1,366 $(327) $1,039 State and local........................................ 273 (26) 247 ------ ----- ------ $1,639 $(353) $1,286 ====== ===== ======
The differences between income taxes at the statutory Federal income tax rate of 34% and income tax expense reported in the consolidated statements of earnings are as follows:
1996 1995 1994 ----- ---- ---- Federal statutory income tax rate........................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit.................. 5.0 4.2 4.1 Nondeductible merger and conversion expenses................ 11.1 -- -- Meals and entertainment..................................... .6 .3 .1 FICA tip credit............................................. (11.2) (5.2) (8.2) Other....................................................... (1.8) (1.7) (3.4) ----- ---- ---- Effective tax rates............................... 37.7% 31.6% 26.6% ===== ==== ====
36 39 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 29, 1996 and December 31, 1995 are presented below:
1996 1995 ------- ------- Deferred tax assets: Provisions for restaurant closings........................ $ 599 $ 367 Deferred rent............................................. 490 299 Alternative minimum taxes and general business credit carryforwards.......................................... 785 413 Conversion costs not currently deductible................. 129 -- Accrued health insurance not currently deductible......... 122 111 Accrued workers' compensation not currently deductible.... 36 86 Other..................................................... 47 51 ------- ------- Total gross deferred tax assets................... 2,208 1,327 Less valuation allowance.................................. -- 45 ------- ------- Net deferred tax assets........................... 2,208 1,282 ------- ------- Deferred tax liabilities: Property and equipment due to differences in depreciation and amortization....................................... (1,187) (1,211) Preopening costs expensed for tax purposes when incurred............................................... (430) (263) Other..................................................... (47) (20) ------- ------- Total gross deferred liabilities.................. (1,664) (1,494) ------- ------- Net deferred tax assets (liabilities)............. $ 544 $ (212) ======= =======
(8) EMPLOYEE BENEFIT PLANS The Company provides employees, not covered by the Bugaboo Creek plan discussed in the following paragraph and who meet minimum service requirements, with retirement benefits under a 401(k) salary reduction and profit sharing plan. Under the plan, employees may make contributions of between 1% and 20% of their annual compensation. The Company is required to make an annual matching contribution up to a maximum of 2 1/2% of employee compensation. Additional contributions are made at the discretion of the Board of Directors. The Company's expense under the plan was $220,000 for 1996 and $200,000 for 1995 and 1994. Additionally, commencing April 1, 1996, the Company provides a 401(k) salary reduction plan to Bugaboo Creek employees at the date of the merger. Under the plan, employees make contributions of between 1% and 15% of their annual compensation. The Company is required to make a matching contribution of 10% of the first 6% contributed by each employee. All employees of Bugaboo Creek prior to the merger with one year and 1,000 hours of service are eligible for the plan. The Company's expense under the plan was $20,000 for 1996. (9) LEASES AND RELATED COMMITMENTS The Company leases certain restaurant facilities under various noncancelable leases. The leases include minimum lease payments, plus additional amounts based on sales at the individual stores (contingent rentals). Many of the leases provide for the payment of taxes, insurance, and maintenance by the lessee. Under the terms of the leases, there are certain rent holidays and escalations in payments over the lease term. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the life of the anticipated lease terms. The Company also leases vehicles and equipment under operating leases. Future 37 40 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) minimum lease payments under these operating leases with initial or remaining terms of one year or more are summarized as follows (in thousands of dollars):
YEARS ENDING AT OR ABOUT DECEMBER 31: ------------------ 1997................................................. $ 8,128 1998................................................. 8,322 1999................................................. 8,130 2000................................................. 7,916 2001................................................. 7,918 Thereafter........................................... 42,980 ------- $83,394 =======
Rental expense consisted of the following (in thousands of dollars):
1996 1995 1994 ------ ------ ------ Minimum lease payments...................................... $6,218 $5,207 $3,321 Contingent rentals.......................................... 640 536 374 ------ ------ ------ Total rental expense.............................. $6,858 $5,743 $3,695 ====== ====== ======
Future minimum lease payments to related parties aggregated $253,800 at December 29, 1996. Rental expense includes approximately $120,000, $163,000, and $114,000 for 1996, 1995, and 1994, respectively, for rents paid to entities in which certain of the Company's principal stockholders have a financial interest. The Company has guaranteed a restaurant lease of a franchisee that expires in 1999. Future minimum lease payments under this lease aggregated approximately $400,000 at December 29, 1996. The lease guarantee is collateralized by an agreement by the stockholders of the franchisee to indemnify the Company for any loss thereunder. In addition, the Company has guaranteed lease payments of a lease assignee in a former Company-leased location. Future minimum lease payments under this lease aggregate approximately $350,000 at December 29, 1996. The Company does not believe that these guarantees subject it to a material risk of loss. A standby letter of credit in the amount of $750,000 has been issued to secure the Company's obligations under a lease of real estate. Drafts may be presented against this letter of credit in the event that the Company is in default of the terms of the lease, all applicable grace periods have expired and the Company has failed to cure all such defaults. The amount of such drafts may be for the amount presently due and owing by the Company to the landlord or the full amount of the letter of credit if the landlord has notified tenant that it has terminated the lease or has exercised its right to repossess the leased premises. (10) RELATED PARTY TRANSACTIONS In February 1994, pursuant to an employment agreement, the Company purchased the Dallas, Texas home of the Company's new president for $740,000, the home's appraised value at that point in time. The property was sold in 1996 for approximately $650,000 in net proceeds to the Company. During 1996, 1995, and 1994, RDM Design, a company owned by a relative of two Company directors, provided architectural design services to the Company. Fees paid for these services (including payments for subcontracted engineering services) amounted to $114,000, $961,000, and $319,000 for the years 1996, 1995, and 1994, respectively. 38 41 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) STOCKHOLDERS' EQUITY On April 13, 1994, Bugaboo Creek sold 1,500,000 shares of common stock to the public as part of an initial public stock offering. On May 10, 1994, an additional 225,000 shares were sold upon exercise by the underwriters of their over allotment provision. Net proceeds from this offering were approximately $19,000,000. On April 1, 1996, the Company closed a secondary public offering for 1,875,000 shares of common stock. Net proceeds to the Company from this offering were approximately $38,000,000, including the underwriters' overallotment. (12) STOCK OPTIONS In February 1992, the Company's Board of Directors adopted and the stockholders approved a stock option plan ("1992 Stock Option Plan"). The 1992 Stock Option Plan provides for the granting of incentive stock options, nonqualified stock options, and stock appreciation rights to key employees and directors, based upon selection by the Stock Option Committee. All stock options issued under the 1992 Stock Option Plan were granted at prices which equate to fair market value on the date of the grant and must be exercised within ten years from the date of grant. The 1994 Bugaboo Creek Stock Option Plan (the "1994 Stock Option Plan") provides for the granting of approximately 306,550 shares of the Company's common stock to directors, officers, and key employees. Through December 29, 1996, approximately 214,050 options have been awarded, pursuant to the terms of the 1994 Stock Option Plan. Options awarded under the 1994 Stock Option Plan prior to the merger were adjusted based on the exchange ratio of 1.78 shares of common stock of Bugaboo Creek for each share of the Company's common stock. Options awarded under the 1994 Stock Option Plan are generally granted at prices which equate to fair market value on the date of the grant, are generally exercisable after two to three years, and expire ten years subsequent to award. On January 6, 1994, the Board of Directors adopted a resolution granting nonqualifying options for the purchase of 485,417 shares to the Company's new President and Chief Executive Officer. Of these options granted, 300,000 are exercisable at the closing price of $8.75 on that date, 91,667 at $12.00 per share, and 93,750 at $16.00 per share. The options become exercisable in installments on the first five anniversaries of the date of grant and expire in 2004. During 1995, the Company granted 2,500 nonqualifying options to a director of the Company at the closing price of $9.50 on the date of grant. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value methodology prescribed under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for Stock-Based Compensation, the Company's 1996 net earnings and net earnings per share would have been reduced by approximately $705,000, or approximately $.06 per share. The effects of disclosing compensation cost under SFAS No. 123 may not be representative of the effects on reported earnings for future years. The fair value of the options granted during 1996 is estimated at $1,593,000 on the date of grant, using the Black-Scholes option-pricing model with the following assumptions: dividend yield of zero, volatility of 20%, risk-free interest rate of 6%, and an average expected life of eight years. 39 42 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 29, 1996, options to purchase 436,898 shares were exercisable at a weighted-average exercise price of $14.10. Option activity under the Company's option plans is as follows:
AVERAGE SHARES PRICE --------- ------- Outstanding at December 31, 1993............................ 125,983 21.48 Granted in 1994............................................. 1,036,970 13.45 Exercised in 1994........................................... (1,000) 11.00 Canceled in 1994............................................ (35,135) 21.48 --------- Outstanding at December 31, 1994............................ 1,126,818 14.10 Granted in 1995............................................. 512,586 18.68 Exercised in 1995........................................... (8,300) 11.20 Canceled in 1995............................................ (61,127) 19.45 --------- Outstanding at December 31, 1995............................ 1,569,977 15.40 Granted in 1996............................................. 162,115 21.56 Exercised in 1996........................................... (67,367) 10.10 Canceled in 1996............................................ (253,959) 21.39 --------- Outstanding at December 29, 1996............................ 1,410,766 15.28 =========
The following table summarizes information concerning currently outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES (IN DOLLARS) OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------------------------------- ----------- --------- --------- ----------- --------- 8.75 to 10........................... 393,900 8.0 8.86 203,580 8.82 10.01 to 15.......................... 230,833 8.2 12.38 45,500 11.85 15.01 to 20.......................... 431,581 8.5 17.25 62,012 17.55 20.01 to 25.......................... 344,452 5.1 21.78 125,806 21.76 25.01 to 27.25....................... 10,000 10.0 26.50 -- --
(13) COMMITMENTS AND CONTINGENCIES JOINT VENTURES Several of the Company's joint venture agreements and employment agreements with joint venture partners and restaurant managers require or provide the Company with the option, to purchase the managers' interest upon termination of the joint venture. The purchase prices are based upon certain multiples of the relevant restaurant's cash flow. SHAREHOLDER SUIT In February 1994, the Company, several directors, and the two managing underwriters of its previous public offering were named as defendants in a lawsuit filed as a class action in the United States District Court in Atlanta, Georgia. The suit was filed by a shareholder of the Company who claims to represent a class of all persons who purchased the Company's common stock between July 27, 1992 and June 17, 1993. The Plaintiff alleged that the defendants made material misrepresentations and omissions in connection with the financial condition of the Company and sought compensatory damages and other relief. A total consideration of $1.4 million, the major portion of which was funded by an officers and directors liability 40 43 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY LONGHORN STEAKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) insurance policy, has been placed in escrow to fund this settlement. The cost to the Company, including related attorneys' fees, was approximately $605,000. PURCHASE COMMITMENTS The Company has entered into certain purchasing agreements with a meat supplier which required the Company to purchase contracted quantities of meat at established prices through their expiration on varying dates in 1997. The quantities contracted for are based on quantities management believes to be conservative estimates of actual requirements during the contract terms. The Company does not anticipate any material adverse effect on its results of operations or financial position from these contracts. OTHER Under the Company's insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Company's preference to retain a significant portion of certain expected losses related primarily to workers' compensation and employee medical costs. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred. Letters of credit for approximately $510,000 at December 29, 1996 are being maintained as security under the Company's workers' compensation policies. The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these incidental actions will have a material adverse effect on the Company's financial position. (14) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 29, 1996 and December 31, 1995 (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL YEAR ------- ------- ------- ------- ---------- 1996: Revenues.............................. $53,330 $51,672 $54,635 $56,112 $215,749 Operating income (loss)............... 3,382 3,440 (1,285) 4,004 9,541 Earnings (loss) before income taxes... 3,013 3,406 (1,188) 3,182 8,413 Net earnings (loss)................... 2,008 2,381 (1,659) 2,513 5,243 Net earnings (loss) per share......... .20 .20 (.15) .21 .46 1995: Revenues.............................. $35,541 35,602 39,886 45,351 156,380 Operating income...................... 2,002 2,081 2,409 2,852 9,344 Earnings before income taxes.......... 2,164 2,165 2,430 2,871 9,630 Net earnings.......................... 1,409 1,438 1,585 2,151 6,583 Net earnings per share................ .15 .14 .16 .21 .66
41 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None required to be reported in this report. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors and nominees for director of the Registrant and Executive Officers is incorporated herein by reference from the section of the Registrant's definitive Proxy Statement to be delivered to shareholders of the Registrant in connection with the annual meeting of shareholders to be held May 20, 1997 (the "Proxy Statement"), entitled "Election of Directors -- Certain Information Concerning Nominees and Directors," and "-- Meetings of the Board of Directors and Committees" and "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Information regarding Executive Compensation is incorporated herein by reference from the section of the Proxy Statement entitled "Executive Compensation". In no event shall the information contained in the Proxy Statement under the sections entitled "Shareholder Return Analysis," and "Compensation and Stock Option Committee's Report on Executive Compensation" be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated herein by reference from the section of the Proxy Statement entitled "Beneficial Owners of More Than Five Percent of the Company's Common Stock; Shares Held by Directors and Executive Officers". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions is incorporated herein by reference from the section of the Proxy Statement entitled "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) LISTING OF FINANCIAL STATEMENTS The following financial statements of the Registrant, included in the Registrant's Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference in Part II, Item 8: Consolidated Balance Sheets as of December 29, 1996 and 1995 Consolidated Statements of Earnings -- For Each of the Years in the Three-Year Period Ended December 29, 1996 Consolidated Statements of Stockholders' Equity -- For Each of the Years in the Three-Year Period Ended December 29, 1996 Consolidated Statements of Cash Flows -- For Each of the Years in the Three-Year Period Ended December 29, 1996 Notes to Consolidated Financial Statements Independent Auditors' Report Selected Financial Data 42 45 (A)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES No schedules are required to be filed herewith pursuant to Article 5 of Regulation S-X. (A)(3) LISTING OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 3(a) -- Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference from the Registrant's Current Report on Form 8-K filed January 17, 1997). 3(b) -- Amended and Restated Bylaws of the Registrant (incorporated by reference from Exhibit 3(b) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 4(a) -- See Exhibits 3(a) and 3(b) for provisions of the Amended and Restated Articles of Incorporation and Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant. 4(b) -- Specimen Stock Certificate for the Common Stock of the Registrant (incorporated by reference from exhibit 4(b) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(a) -- Line of Credit Agreement dated as of December 18, 1996 by and among Longhorn Steaks, Inc. and First Union National Bank of Georgia. 10(b) -- Credit Agreement dated as of December 18, 1996 by and among Longhorn Steaks, Inc. and several lenders with First Union National Bank of Georgia as Agent and Fleet National Bank as Co-Agent. Executive Compensation Plans and Arrangements 10(c) -- Longhorn Steaks, Inc. Amended and Restated 1992 Incentive Plan (incorporated by reference from Exhibit 10(n) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(d) -- Longhorn Steaks, Inc. 1996 Stock Plan for Outside Directors (incorporated be reference from Exhibit 4(c) to Registration Statement on Form S-8, Registration No. 333-11963). 10(e) -- Employment Agreement dated February 13, 1992 between the Registrant and George W. McKerrow, Sr. (incorporated by reference from Exhibit 10(o) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(f) -- Employment Agreement dated February 13, 1992 between the Registrant and George W. McKerrow, Jr. (incorporated by reference from Exhibit 10(p) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(g) -- Employment Agreement dated as of February 1, 1994 between the Registrant and Richard E. Rivera (incorporated by reference from Exhibit 10(x) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 10(h) -- Employment Agreement dated as of January 6, 1994 between the Registrant and Richard E. Rivera (incorporated by reference from Exhibit 10(x) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 21 -- Subsidiaries of the Company. 23(a) -- Consent of KPMG Peat Marwick. 27 -- Financial Data Schedule (for SEC use only).
(B) REPORTS ON FORM 8-K None. (C) EXHIBITS The exhibits in response to this Report are listed under Item 14(a)(3) above. (D) FINANCIAL STATEMENT SCHEDULES The financial statement schedules to this Report are listed under Item 14(a)(2) above. 43 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RARE Hospitality International, Inc. By: /s/ ANNE D. HUEMME ------------------------------------ Anne D. Huemme Chief Financial Officer Date: April 7, 1997 44 EX-10.A 2 CREDIT AGREEMENT DATED 12/18/96 1 EXHIBIT 10(a) - -------------------------------------------------------------------------------- LINE OF CREDIT AGREEMENT DATED AS OF DECEMBER 18, 1996 BY AND AMONG LONGHORN STEAKS, INC. AS BORROWER, AND FIRST UNION NATIONAL BANK OF GEORGIA AS LENDER - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS....................................................................... 1 SECTION 1.1 Definitions.............................................................. 1 SECTION 1.2 Miscellaneous............................................................ 4 ARTICLE II CREDIT FACILITY................................................................... 4 SECTION 2.1 Loans.................................................................... 4 SECTION 2.2 Interest................................................................. 4 SECTION 2.3 Requests for Advances, Disbursements..................................... 4 SECTION 2.4 Payment of Principal..................................................... 4 SECTION 2.5 Note..................................................................... 5 SECTION 2.6 Use of Proceeds.......................................................... 5 SECTION 2.7 Default Rate............................................................. 5 SECTION 2.8 Maximum Rate............................................................. 5 SECTION 2.9 Date for Payments........................................................ 5 SECTION 2.10 Changed Circumstances.................................................... 6 SECTION 2.11 Capital Requirements..................................................... 7 SECTION 2.12 Taxes.................................................................... 8 ARTICLE III CLOSING; CONDITIONS OF CLOSING AND ISSUING LETTERS OF CREDIT...................... 9 SECTION 3.1 Closing.................................................................. 9 SECTION 3.2 Conditions to Closing and Initial Loans.................................. 9 SECTION 3.3 Conditions to All Loans.................................................. 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BORROWER.................................... 10 SECTION 4.1 Representations and Warranties........................................... 10 SECTION 4.2 Survival of Representations and Warranties, Etc.......................... 10 ARTICLE V FINANCIAL INFORMATION AND NOTICES................................................. 10 ARTICLE VI COVENANTS......................................................................... 11 ARTICLE VII DEFAULT AND REMEDIES.............................................................. 11 SECTION 7.1 Events of Default........................................................ 11 SECTION 7.2 Remedies................................................................. 14 SECTION 7.3 Rights and Remedies Cumulative; Non-Waiver; etc.......................... 14
3 ARTICLE VIII MISCELLANEOUS..................................................................... 14 SECTION 8.1 Notices.................................................................. 14 SECTION 8.2 Expenses; Indemnity...................................................... 15 SECTION 8.3 Set-off.................................................................. 16 SECTION 8.4 Governing Law............................................................ 16 SECTION 8.5 Consent to Jurisdiction.................................................. 16 SECTION 8.6 Binding Arbitration; Waiver of Jury Trial................................ 17 SECTION 8.7 Reversal of Payments..................................................... 18 SECTION 8.8 Punitive Damages......................................................... 18 SECTION 8.9 Accounting Matters....................................................... 18 SECTION 8.10 Successors and Assigns. ................................................ 19 SECTION 8.11 Performance of Duties.................................................... 19 SECTION 8.12 All Powers Coupled with Interest......................................... 19 SECTION 8.13 Survival of Indemnities.................................................. 19 SECTION 8.14 Titles and Captions...................................................... 19 SECTION 8.15 Severability of Provisions............................................... 19 SECTION 8.16 Counterparts............................................................. 19 SECTION 8.17 Term of Agreement........................................................ 20
ii 4 EXHIBITS Exhibit A - Form of Note Exhibit B - Revolving Credit Agreement iii 5 Exhibit A NOTE $1,000,000 December __, 1996 FOR VALUE RECEIVED, the undersigned, LONGHORN STEAKS, INC., a corporation organized under the laws of Georgia (the "Borrower") hereby promises to pay to the order of FIRST UNION NATIONAL BANK OF GEORGIA (the "Lender"), at the times, at the place and in the manner provided in the Credit Agreement hereinafter referred to, the principal sum of up to One Million and No/100 Dollars ($1,000,000), or, if less, the aggregate unpaid principal amount of all Loans disbursed by the Lender under the Credit Agreement referred to below, together with interest at the rates as in effect from time to time with respect to each portion of the principal amount hereof, determined and payable as provided in Article II of the Credit Agreement. This Note is the Note referred to in, and is entitled to the benefits of, the Line of Credit Agreement dated as of December __, 1996 (as amended, restated or otherwise modified, the "Credit Agreement") between Borrower and the Lender. The Credit Agreement contains, among other things, provisions for the time, place and manner of payment of this Note, the determination of the interest rate borne by and fees payable in respect of this Note, acceleration of the payment of this Note upon the happening of certain stated events and the mandatory repayment of this Note under certain circumstances. The Borrower agrees to pay on demand all actual costs of collection, including reasonable attorneys' fees, if any part of this Note, principal or interest, is collected after maturity with the aid of an attorney. Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived. THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA. The Debt evidenced by this Note is senior in right of payment to all Subordinated Debt referred to in the Credit Agreement. 1 6 IN WITNESS WHEREOF, the Borrower has caused this Note to be executed under seal by a duly authorized officer as of the day and year first above written. [CORPORATE SEAL] LONGHORN STEAKS, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- 2 7 Exhibit B Revolving Credit Agreement 3 8 LINE OF CREDIT AGREEMENT, dated as of the 18th day of December, 1996, by and among LONGHORN STEAKS, INC., a corporation organized under the laws of Georgia ("Longhorn" or the "Borrower"), and FIRST UNION NATIONAL BANK OF GEORGIA, as Lender. STATEMENT OF PURPOSE The Borrower has requested, and the Lender has agreed to extend, certain Loans to the Borrower on the terms and conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Revolving Credit Agreement. In addition, the following terms when used in this Agreement shall have the meanings assigned to them below: "Agreement" means this Line of Credit Agreement, as amended, restated, or otherwise modified. "Base Rate" means, at any time, the higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take effect simultaneously with the corresponding change or changes in the Prime Rate or the Federal Funds Rate. "Borrower" means Longhorn Steaks, Inc. in its capacity as borrower hereunder. "Business Day" means (a) for all purposes other than as set forth in clause (b) below, any day other than a Saturday, Sunday or legal holiday on which banks in Charlotte, North Carolina and New York, New York, are open for the conduct of their commercial banking business, and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, any Loan bearing interest based on the LIBOR Rate, any day that is a Business Day described in clause (a) and that is also a day for trading by and between banks in Dollar deposits in the London interbank market. "Closing Date" means the date of this Agreement. 1 9 "Commitment" means the obligation of the Lender to make Loans to the Borrower hereunder in an aggregate principal amount at any time outstanding not to exceed $1,000,000. "Credit Facility" means the credit facility established pursuant to Article II hereof. "Default" means any of the events specified in Section 7.1 which with the passage of time, the giving of notice or any other condition, would constitute an Event of Default. "Event of Default" means any of the events specified in Section 7.1; provided, that any requirement for passage of time, giving of notice, or any other condition, has been satisfied. "Federal Funds Rate" means, the rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) representing the daily effective federal funds rate as quoted by the Lender and confirmed in Federal Reserve Board Statistical Release H.15 (519) or any successor or substitute publication selected by the Lender. If, for any reason, such rate is not available, then "Federal Funds Rate" shall mean a daily rate which is determined, in the opinion of the Lender, to be the rate at which federal funds are being offered for sale in the national federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends or holidays shall be the same as the rate for the immediately preceding Business Day. "Lender" means First Union National Bank of Georgia in its capacity as lender hereunder. "LIBOR Rate" means the percentage rate of interest per annum which is: (a) the rate for deposits in United States dollars which appears on the Telerate Page 3750 at approximately 11:00 a.m. (London time) for a term equal to one month, from time to time, with each change in such rate to be effective as of the opening of business on the effective date of the change in such rate. (b) If, for any reason, the rate described in clause (a) is not available, such rate shall be the rate per annum at which, in the reasonable opinion of the Lender, United States dollars in an amount substantially equal to the amount of the applicable Loan are being offered by leading reference banks for settlement in the London interbank market at approximately 11:00 a.m. (London time), on the second Business Day next preceding the applicable date for a term equal to one month. 2 10 "Loan" means any loan made to the Borrower pursuant to Section 2.1, and all such Loans collectively as the context requires. "Loan Documents" means, collectively, this Agreement, the Note, and each other document, instrument and agreement executed and delivered by the Borrower in connection with this Agreement or otherwise referred to herein or contemplated hereby, all as may be amended, restated or otherwise modified. "Master Agreement" means the Repurchase Master Agreement between the Borrower and the Lender dated as of July 29, 1996 and the Controlled Cash Flow Plus Services Description offered by the Lender in connection therewith. "Note" means the separate Note made by the Borrower payable to the order of the Lender, substantially in the form of Exhibit A hereto, evidencing the Credit Facility, and any amendments and modifications thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part. "Obligations" means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Loans and (b) all other fees and commissions (including attorney's fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by the Borrower to the Lender, of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, but only to the extent owing under or in respect of this Agreement, the Note or any of the other Loan Documents. "Prime Rate" means, at any time, the rate of interest per annum publicly announced from time to time by the Lender as its prime rate. Each change in the Prime Rate shall be effective as of the opening of business on the day such change in the Prime Rate occurs. The parties hereto acknowledge that the rate announced publicly by the Lender as its Prime Rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks. "Revolving Credit Agreement" means the credit agreement of even date herewith, by and among Longhorn Steaks, Inc. and certain Subsidiaries thereof listed on the signature pages 3 11 thereto, as Borrowers, the lenders referred to therein, and First Union National Bank of Georgia, as Agent for the lenders. "Termination Date" means December 1, 1997. SECTION 1.2 Miscellaneous. (a) General. Unless otherwise specified, a reference in this Agreement to a particular section, subsection, Schedule or Exhibit is a reference to that section, subsection, schedule or Exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Any reference herein to "Charlotte time" shall refer to the applicable time of day in Charlotte, North Carolina. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) Revolving Credit Agreement. The terms and conditions of the Revolving Credit Agreement, a copy of which is attached hereto as Exhibit B, are hereby incorporated herein by this reference as if fully set forth herein and such terms and conditions shall continue irrespective of any termination thereof. ARTICLE II CREDIT FACILITY SECTION 2.1 Loans. Subject to the terms and conditions of this Agreement, the Lender agrees to make Loans to the Borrower from time to time from the Closing Date through the Termination Date as requested by the Borrower in accordance with the terms of Section 2.3; provided, that the aggregate principal amount of all outstanding Loans (after giving effect to any amount requested) shall not exceed the Commitment. SECTION 2.2 Interest. Subject to Section 2.7, the Loans shall bear interest on the unpaid principal balance outstanding from time to time at the LIBOR Rate plus 1.25%. Interest shall be payable daily pursuant to the terms and conditions of the Master Agreement. Interest shall be calculated on the basis of a year of 360 days and actual days elapsed. 4 12 SECTION 2.3 Requests for Advances; Disbursements. Loans shall be requested and advanced pursuant to the terms and conditions of the Master Agreement. Each Loan will be advanced in the minimum principal amount of $1,000 or any integral multiple thereof. SECTION 2.4 Payment of Principal. Principal shall be paid daily pursuant to the terms and conditions of the Master Agreement. Unless sooner paid pursuant to the provisions hereof or the provisions of the Master Agreement, the principal of the Loans shall be paid in full together with accrued interest thereon on the Termination Date. SECTION 2.5 Note. The Lender's Loans and the obligation of the Borrower to repay such Loans shall be evidenced by a Note executed by the Borrower payable to the order of the Lender representing the Borrower's obligation to pay the Commitment or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower hereunder, plus interest and all other fees, charges and other amounts due thereon. The Note shall be dated the date hereof and shall bear interest on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 2.2. SECTION 2.6 Use of Proceeds. The Borrower shall use the proceeds of the Loans for working capital and general corporate requirements of the Borrower. SECTION 2.7 Default Rate. Upon the occurrence and during the continuance of an Event of Default, all outstanding Loans shall bear interest at a rate per annum two percent (2%) in excess of the rate then applicable. Interest shall continue to accrue on the Note after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any act or law pertaining to insolvency or debtor relief, whether state, federal or foreign. SECTION 2.8 Maximum Rate. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder or under the Note charged or collected pursuant to the terms of this Agreement or pursuant to the Note exceed the highest rate permissible under any Applicable Law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Lender has charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by Applicable Law and the Lender shall promptly refund to the Borrower any interest received by the Lender in excess of the maximum lawful rate or shall apply such excess to the 5 13 principal balance of the Obligations. It is the intent hereof that the Borrower not pay nor contract to pay, and that the Lender not receive nor contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by the Borrower under Applicable Law. SECTION 2.9 Date for Payments. Whenever any payment hereunder, including, without limitation, payment of principal or interest, shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next Business Day and interest shall continue to accrue on any principal amount for which the payment date is so extended. SECTION 2.10 Changed Circumstances. (a) Circumstances Affecting LIBOR Rate Availability. If the Lender shall reasonably determine that, by reason of circumstances affecting the foreign exchange and interbank markets generally, deposits in eurodollars, in the applicable amounts are not being quoted via Telerate Page 3750 or offered to the Lender, then the Lender shall forthwith give notice thereof to the Borrower. Thereafter, until the Lender notifies the Borrower that such circumstances no longer exist (which the Lender agrees to do; provided, that the Lender shall have no liability for any failure to do so), the Loans shall bear interest based on the Base Rate. (b) Laws Affecting LIBOR Rate Availability. If, after the date hereof, the introduction of, or any change in, any Applicable Law or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, shall make it unlawful or impossible for the Lender to honor its obligations hereunder to make or maintain any Loan bearing interest based on the LIBOR Rate, the Lender shall promptly give notice thereof to the Borrower. Thereafter, until the Lender notifies the Borrower that such circumstances no longer exist (which the Lender agrees to do; provided, that the Lender shall have no liability for any failure to do so), the Loans shall bear interest based on the Base Rate. (c) Increased Costs. If, after the date hereof, the introduction of, or any change in, any Applicable Law, or in the interpretation or administration thereof by any Governmental 6 14 Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) of such Governmental Authority, central bank or comparable agency: (i) shall subject the Lender to any tax, duty or other charge with respect to the Note or shall change the basis of taxation of payments to the Lender of the principal of or interest on the Note or any other amounts due under this Agreement in respect thereof (except for changes in the rate of or additional taxes imposed on or measured by the overall net income of the Lender imposed by the jurisdiction in which the Lender is organized or is or should be qualified to do business); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System but excluding any such reserve included in the definition of LIBOR Rate), special deposit, insurance or capital or similar requirement against assets of, deposits with or for the account of, or credit extended by the Lender or shall impose on the Lender or the foreign exchange and interbank markets any other condition affecting the Note; and the result of any of the foregoing is to increase the costs to the Lender of maintaining Loans bearing interest based on the LIBOR Rate or to reduce the yield or amount of any sum received or receivable by the Lender under this Agreement or under the Note in respect of a Loan bearing interest based on the LIBOR Rate, then the Lender shall promptly notify the Borrower of such fact and demand compensation therefor and, within fifteen (15) days after such notice by the Lender, the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender for such increased cost or reduction. The Lender agrees to notify the Borrower of any event occurring after the Closing Date entitling the Lender to compensation under any of the preceding subsections of this Section as promptly as practicable; provided, that except as otherwise limited by the next sentence, the failure of the Lender to give such notice shall not result in any liability to the Lender or release the Borrower from any of its obligations hereunder. The Lender shall only be entitled to compensation under any of the preceding subsections of this Section for events occurring during the 120-day period ending on the date the Borrower receives the notice described in the immediately preceding sentence. The Lender agrees to furnish to the Borrower a certificate setting forth the basis and amount of each request by the Lender for compensation under this Section, which certificate shall be prima facie 7 15 evidence of the matters stated therein. Determinations by the Lender of the effect of any of the events described in this subsection shall be made on a reasonable basis and in good faith and using any reasonable attribution or averaging methods which the Lender deems appropriate and practical. (d) Eurodollar Reserve Requirements. In the event that the Lender shall determine at any time that by reason of Regulation D, the Lender is required to maintain Eurodollar Reserve Requirements during any period that it has any Loans outstanding bearing interest based on the LIBOR Rate, then the Lender shall promptly notify the Borrower by written notice (or telephonic notice promptly confirmed in writing) specifying the additional amounts reasonably determined by the Lender to be required to indemnify the Lender against the cost of maintaining such Eurodollar Reserve Requirements (such written notice to provide a computation of such additional amounts) and the Borrower shall directly pay to the Lender such specified amounts as additional interest. SECTION 2.11 Capital Requirements. If either (a) the introduction of, or any change in, or in the interpretation of, any Applicable Law or (b) compliance with any guideline or request issued after the date hereof from any central bank or comparable agency or other Governmental Authority (whether or not having the force of law), has or would have the effect of reducing the rate of return on the capital of, or has affected or would affect the amount of capital required to be maintained by, the Lender or any corporation controlling the Lender as a consequence of, or with reference to the Commitment and other commitments of this type, below the rate which the Lender or such other corporation could have achieved but for such introduction, change or compliance, then within five (5) Business Days after written demand by the Lender, the Borrower shall pay to the Lender from time to time as specified by the Lender additional amounts sufficient to compensate the Lender or other corporation for such reduction. The Lender shall furnish to the Borrower a certificate setting forth the basis and amount of such request, which certificate shall be prima facie evidence of the matters stated therein. Determinations by the Lender of the amount of any claim for compensation under this Section shall be made on a reasonable basis and in good faith. SECTION 2.12 Taxes. (a) Payments Free and Clear. Any and all payments by the Borrower hereunder or under the Note shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholding, and all liabilities with respect thereto excluding, (i) income and 8 16 franchise taxes imposed by the jurisdiction under the laws of which the Lender is organized or is or should be qualified to do business or any political subdivision thereof and (ii) income and franchise taxes imposed by the United States of America or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the Note to the Lender, (A) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) the Lender receives an amount equal to the amount such party would have received had no such deductions been made, (B) the Borrower shall make such deductions, (C) the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (D) the Borrower shall deliver to the Lender evidence of such payment to the relevant taxing authority or other authority in the manner provided in Section 2.12(d). (b) Stamp and Other Taxes. In addition, the Borrower shall pay any present or future stamp, registration, recordation or documentary taxes or any other similar fees or charges or excise or property taxes, levies of the United States or any state or political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Loans, the other Loan Documents, or the perfection of any rights or security interest in respect thereto (hereinafter referred to as "Other Taxes"). (c) Indemnity. The Borrower shall indemnify the Lender for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by the Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Such indemnification shall be made within thirty (30) days from the date the Lender makes written demand therefor. (d) Evidence of Payment. Within thirty (30) days after the date of any payment of Taxes or Other Taxes, the Borrower shall furnish to the Lender the original or a certified copy of a receipt evidencing payment thereof or other evidence of payment satisfactory to the Lender. (e) Tax Credits. In the event that an additional payment is made under Section 2.12(a) or (c) for the account of 9 17 the Lender and the Lender receives or is granted a credit against or release or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, the Lender shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrower such amount as is attributable to such deduction or withholding as will leave the Lender (after such payment) in no better or worse position than it would have been in if the Borrower had not been required to make such deduction or withholding. ARTICLE III CLOSING; CONDITIONS OF CLOSING AND ISSUING LETTERS OF CREDIT SECTION 3.1. Closing. The closing shall take place at the offices of Kennedy Covington Lobdell & Hickman, L.L.P., 100 North Tryon Street, Charlotte, North Carolina at 10:00 a.m. on December 18, 1996, or on such other date as the parties hereto shall mutually agree. SECTION 3.2. Conditions to Closing and Initial Loans. The obligation of the Lender to close this Agreement and to extend the initial Loan is subject to the satisfaction of each of the conditions set forth in Section 4.2 of the Revolving Credit Agreement. SECTION 3.3. Conditions to All Loans. The obligations of the Lender to extend any Loan is subject to the satisfaction of the following conditions precedent on the relevant borrowing date: (a) Continuation of Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct in all material respects on and as of such borrowing date with the same effect as if made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date). (b) No Existing Default. No Default or Event of Default shall have occurred and be continuing hereunder on the borrowing date with respect to such Loan or after giving effect to the Loans to be made on such date. 10 18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BORROWER SECTION 4.1. Representations and Warranties. To induce the Lender to enter into this Agreement and to extend the Loans, the Borrower hereby represents and warrants to the Lender that each and every representation and warranty of the Borrower set forth in Article V of the Revolving Credit Agreement is true, correct and complete in all material respects. SECTION 4.2. Survival of Representations and Warranties, Etc. All representations and warranties set forth in this Article IV and all representations and warranties contained in any certificate, or any of the Loan Documents (including but not limited to any such representation or warranty made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Closing Date, shall survive the Closing Date and shall not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lender or any borrowing hereunder. ARTICLE V FINANCIAL INFORMATION AND NOTICES Until all the Loans have been finally and indefeasibly paid and satisfied in full and the Commitment terminated, the Borrower will furnish or cause to be furnished to the Lender each and every financial statement, certificate or other document or instrument required to be delivered to the Lenders pursuant to Article VI of the Revolving Credit Agreement. So long as the Lender is the "Agent" under the Revolving Credit Agreement, the Borrower's furnishing of all such financial statements, certificates and other documents or instruments to the Agent which are required to be delivered to the Agent under the Revolving Credit Agreement shall constitute delivery to the Lender under this Article V. ARTICLE VI COVENANTS Until all of the Loans have been finally and indefeasibly paid and satisfied in full and the Commitment terminated, the Borrower will, and will cause each of its Subsidiaries to comply with each and every covenant and agreement set forth in Articles VII, VIII, and IX of the Revolving Credit Agreement. 11 19 ARTICLE VII DEFAULT AND REMEDIES SECTION 7.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any Governmental Authority or otherwise: (a) Default in Payment of Principal of Loans. The Borrower shall default in any payment of principal of any Loan or the Note when and as due (whether at maturity, by reason of acceleration or otherwise). (b) Other Payment Default. The Borrower shall default in the payment when and as due (whether at maturity, by reason of acceleration or otherwise) of interest on any Loan or the Note or the payment of any other Obligation, and such default shall continue unremedied for three (3) Business Days. (c) Misrepresentation. Any representation or warranty made or deemed to be made by the Borrower or any of its Subsidiaries under this Agreement, any Loan Document or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made or deemed made. (d) Default in Performance of Certain Covenants. The Borrower shall default in the performance or observance of any covenant or agreement contained in Sections 6.2 and 6.4(e) or Articles VIII or IX (excluding Sections 9.8 and 9.9) of the Revolving Credit Agreement, as incorporated herein by reference. (e) Default in Performance of Other Covenants and Conditions. The Borrower or any Subsidiary thereof shall default in the performance or observance of any term, covenant, condition or agreement contained in this Agreement (other than as specifically provided for otherwise in this Section 7.1) or any other Loan Document and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the Borrower by the Lender. (f) Cross-Default to Revolving Credit Agreement. An Event of Default shall have occurred under the Revolving Credit Agreement. (g) Debt Cross-Default. The Borrower or any of its Subsidiaries shall (i) default in the payment of any Debt (other than the Note) the aggregate outstanding amount of which Debt is in excess of $500,000 beyond the period of grace if any, provided 12 20 in the instrument or agreement under which such Debt was created, or (ii) default in the observance or performance of any other agreement or condition relating to any Debt (other than the Note) the aggregate outstanding amount of which Debt is in excess of $500,000 or contained in any instrument or agreement evidencing, securing or relating thereto or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, any such Debt to become due prior to its stated maturity (any applicable grace period having expired). (h) Other Cross-Defaults. The Borrower or any of its Subsidiaries shall default in the payment when due, or in the performance or observance, of any obligation or condition of any Material Contract unless, but only as long as, the existence of any such default is being contested by the Borrower or such Subsidiary in good faith by appropriate proceedings and adequate reserves in respect thereof have been established on the books of the Borrower or such Subsidiary to the extent required by GAAP. (i) Change in Control. Any person or group of persons shall obtain "beneficial ownership" (within the meaning of Section 13 (d) of the Securities Exchange Act of 1934, as amended) in one or more series of transactions of more than thirty percent (30%) of the voting power of the Borrower entitled to vote in the election of members of the board of directors of the Borrower or there shall have occurred under any indenture or other instrument evidencing any Debt in excess of $500,000 any "change in control" (as defined in such indenture or other evidence of Debt) obligating the Borrower to repurchase, redeem or repay all or any part of the Debt or capital stock provided for therein (any such event, a "Change in Control"). (j) Voluntary Bankruptcy Proceeding. The Borrower shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit 13 21 of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (k) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against the Borrower in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like for the Borrower or for all or any substantial part of its assets, domestic or foreign, and such case or proceeding shall continue without dismissal or stay for a period of sixty (60) consecutive days, or an order granting the relief requested in such case or proceeding (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (l) Termination Event. The occurrence of any of the following events that, individually or in the aggregate, results in or could reasonably be expected to result in a Material Adverse Effect: (i) the Borrower or any ERISA Affiliate fails to make full payment when due of all amounts which, under the provisions of any Pension Plan or Section 412 of the Code, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, (ii) an accumulated funding deficiency in excess of $250,000 occurs or exists, whether or not waived, with respect to any Pension Plan, (iii) a Termination Event or (iv) the Borrower or any ERISA Affiliate as employer under one or more Multiemployer Plans makes a complete or partial withdrawal from any such Multiemployer Plan and the plan sponsor of any such Multiemployer Plan notifies such withdrawing employer that such employer has incurred a withdrawal liability requiring payments in an amount exceeding $250,000. (n) Judgment. A judgment or order for the payment of money which causes the aggregate amount of all such judgments to exceed $250,000 in any Fiscal Year (excluding any amounts which the Borrower's insurance carrier has affirmatively agreed in writing are covered by insurance) shall be entered against the Borrower or any Subsidiary thereof by any court and such judgment or order shall continue without discharge or stay for a period of thirty (30) days. SECTION 7.2 Remedies. Upon the occurrence of an Event of Default, the Lender may, by notice to the Borrower: (a) Acceleration; Termination of Facility. Declare the principal of and interest on the Loans and the Note at the time outstanding, and all other amounts owed to the Lender under 14 22 this Agreement or any of the other Loan Documents and all other Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Loan Documents to the contrary notwithstanding, and terminate the Commitment and any right of the Borrower to request borrowings thereunder; provided, that upon the occurrence of an Event of Default specified in Section 7.1(j) or (k), the Commitment shall be automatically terminated and all Obligations shall automatically become due and payable. (b) Other Rights. Exercise all of its other rights and remedies under this Agreement, the other Loan Documents and Applicable Law, in order to satisfy all of the Borrower's Obligations. SECTION 7.3 Rights and Remedies Cumulative; Non-Waiver; etc. The enumeration of the rights and remedies of the Lender set forth in this Agreement is not intended to be exhaustive and the exercise by the Lender of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the Loan Documents or that may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Event of Default. No course of dealing between the Borrower and the Lender or its agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any of the other Loan Documents or to constitute a waiver of any Event of Default. ARTICLE VIII MISCELLANEOUS SECTION 8.1 Notices. (a) Method of Communication. Except as otherwise provided in this Agreement, all notices and communications hereunder shall be in writing, or by telephone subsequently confirmed in writing. Any notice shall be effective if delivered by hand delivery or sent via telecopy, recognized overnight courier service or certified mail, return receipt requested, and shall be presumed to be received by a party hereto (i) on the date of delivery if delivered by hand or sent by telecopy, (ii) 15 23 on the next Business Day if sent by recognized overnight courier service and (iii) on the third Business Day following the date sent by certified mail, return receipt requested. A telephonic notice to the Lender as understood by the Lender will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address as to which all the other parties are notified in writing. If to the Borrower: Longhorn Steaks, Inc. 8215 Roswell Road Bldg. #200 Atlanta, Georgia 30350 Attention: Anne D. Huemme Telephone No.: (770) 551-5445 Telecopy No.: (770) 399-7796 With copies to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309 Attention: Paul Cushing Telephone No.: (404) 881-7578 Telecopy No.: (404) 881-7777 If to the Lender: First Union National Bank of Georgia 999 Peachtree Street, N.E. 9th Floor Atlanta, Georgia 30309 Attention: Portfolio Management Telecopy No.: (404) 827-7199 SECTION 8.2 Expenses; Indemnity. The Borrower will (a) pay all reasonable out-of-pocket expenses of the Lender actually incurred in connection with: (i) the preparation, execution and delivery of this Agreement and each other Loan Document, whenever the same shall be executed and delivered, including without limitation all out-of-pocket due diligence expenses and reasonable fees and disbursements of counsel for the Lender, (ii) the preparation, execution and delivery of any waiver, amendment or consent by the Lender relating to this Agreement or any other Loan Document, including without limitation reasonable fees and disbursements of counsel for the Lender and (iii) the enforcement of any rights and remedies of the Lender hereunder and under the Loan Documents, including consulting with appraisers, 16 24 accountants, engineers, attorneys and other Persons concerning the nature, scope or value of any right or remedy of the Lender hereunder or under any other Loan Document or any factual matters in connection therewith, which expenses shall include without limitation the reasonable fees and disbursements of such Persons, and (b) defend, indemnify and hold harmless the Lender, and its parents, Subsidiaries, Affiliates, employees, agents, officers and directors, from and against any losses, penalties, fines, liabilities, settlements, damages, costs and expenses, suffered by any such Person in connection with any claim, investigation, litigation or other proceeding (whether or not the Lender is a party thereto) and the prosecution and defense thereof, arising out of or in any way connected with the Agreement, any other Loan Document or the Loans, including without limitation reasonable attorney's and consultant's fees, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. SECTION 8.3 Set-off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, upon and during the continuance of any Event of Default, the Lender is hereby authorized by the Borrower at any time or from time to time, without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, time or demand, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Lender to or for the credit or the account of the Borrower against and on account of the obligations irrespective of whether or not (a) the Lender shall have made any demand under this Agreement or any of the other Loan Documents or (b) the Lender shall have declared any or all of the Obligations to be due and payable as permitted by Section 7.2 and although such Obligations shall be contingent or unmatured. If the Lender shall exercise any of the rights referred to in this Section, the Lender shall promptly notify the Borrower; provided, that the failure to give such notice shall not result in any liability to the Lender or in any way affect the validity of the exercise of such right. SECTION 8.4 Governing Law. This Agreement, the Note and the other Loan Documents, unless otherwise expressly set forth therein, shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina, without reference to the conflicts or choice of law principles thereof. SECTION 8.5 Consent to Jurisdiction. The Borrower hereby irrevocably consents to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, 17 25 in any action, claim or other proceeding arising out of any dispute in connection with this Agreement, the Note and the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations. The Borrower hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Lender in connection with this Agreement, the Note or the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner specified in Section 8.1. Nothing in this Section 8.5 shall affect the right of the Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Lender to bring any action or proceeding against any Borrower or its properties in the courts of any other jurisdictions. SECTION 8.6 Binding Arbitration; Waiver of Jury Trial. (a) Binding Arbitration. Upon demand of any party, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to the Note or any other Loan Documents ("Disputes"), between or among parties to the Note or any other Loan Document shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims concerning any aspect of the past, present or future relationships arising out of or connected with the Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. Notwithstanding the foregoing, this paragraph shall not apply to any Hedging Agreement that is a Loan Document. 18 26 (b) Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE LENDER AND THE BORROWER HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. (c) Preservation of Certain Remedies. Notwithstanding the preceding binding arbitration provisions, the parties hereto and to the other Loan Documents preserve, without diminution, certain remedies that such Persons may employ or exercise freely, either alone or in conjunction with or during a Dispute. Each such Person shall have and hereby reserves the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in the Loan Documents or under applicable law or by judicial foreclosure and sale, (ii) all rights of self help including peaceful occupation of property and collection of rents, set off, and peaceful possession of property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. SECTION 8.7 Reversal of Payments. To the extent the Borrower makes a payment or payments to the Lender or the Lender receives any payment or proceeds of the collateral which payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds repaid, the Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or proceeds had not been received by the Lender. SECTION 8.8 Punitive Damages. The Lender and the Borrower (on behalf of itself and its Subsidiaries) hereby agree that no such Person shall have a remedy of punitive or exemplary damages against any other party to a Loan Document and each such Person hereby waives any right or claim to punitive or exemplary damages that they may now have or may arise in the future in connection with any Dispute, whether such Dispute is resolved through arbitration or judicially. 19 27 SECTION 8.9 Accounting Matters. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by the Borrower or any Subsidiary thereof to determine compliance with any covenant contained herein, shall, except as otherwise expressly contemplated hereby or unless there is an express written direction by the Lender to the contrary agreed to by the Borrower, be performed in accordance with GAAP as in effect on the Closing Date. In the event that changes in GAAP shall be mandated by the Financial Accounting Standards Board, or any similar accounting body of comparable standing, or shall be recommended by the Borrower's certified public accountants, to the extent that such changes would modify such accounting terms or the interpretation or computation thereof, such changes shall be followed in defining such accounting terms only from and after the date the Borrower and the Lender shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants and other terms and conditions of this Agreement. SECTION 8.10 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender, all future holders of the Note, and their respective successors and assigns, except that the Borrower shall not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender. SECTION 8.11 Performance of Duties. The Borrower's obligations under this Agreement and each of the Loan Documents shall be performed by the Borrower at its sole cost and expense. SECTION 8.12 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Lender and any Persons designated by the Lender pursuant to any provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied or the Commitment has not been terminated. SECTION 8.13 Survival of Indemnities. Notwithstanding any termination of this Agreement, the indemnities to which the Lender is entitled under the provisions of this Article VIII and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Lender against events arising after such termination as well as before. SECTION 8.14 Titles and Captions. Titles and captions of Articles, Sections and subsections in this Agreement are for 20 28 convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 8.15 Severability of Provisions. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 8.16 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 8.17 Term of Agreement. This Agreement shall remain in effect from the Closing Date through and including the date upon which all Obligations shall have been indefeasibly and irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. 21 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, all as of the day and year first written above. [CORPORATE SEAL] LONGHORN STEAKS, INC. By: /s/ Richard E. Rivera --------------------------- Name: Richard E. Rivera ------------------------- Title: President ------------------------ FIRST UNION NATIONAL BANK OF GEORGIA By: /s/ Nicholas Mark DiLuzio --------------------------- Name: Nicholas Mark DiLuzio ------------------------- Title: Senior Vice President ------------------------ 22 EX-10.B 3 CREDIT AGREEMENT DATED 12/18/96 1 EXHIBIT 10(b) - -------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of December 18, 1996 by and among LONGHORN STEAKS, INC. and certain Subsidiaries thereof listed on the signature pages hereto, as Borrowers, the Lenders referred to herein, FIRST UNION NATIONAL BANK OF GEORGIA, as Agent and FLEET NATIONAL BANK, as Co-Agent - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS .................................................................... 1 SECTION 1.1 Definitions............................................................ 1 SECTION 1.2 General................................................................ 12 SECTION 1.3 Other Definitions and Provisions....................................... 13 ARTICLE II REVOLVING CREDIT/TERM FACILITY.................................................. 13 SECTION 2.1 Credit Loans........................................................... 13 SECTION 2.2 Procedure for Advances of Loans........................................ 13 SECTION 2.3 Repayment of Loans..................................................... 14 SECTION 2.4 Notes.................................................................. 15 SECTION 2.5 Permanent Reduction of the Aggregate Commitment........................................................... 15 SECTION 2.6 Termination of Credit Facility; Term-Out of Loans ............................................................ 15 SECTION 2.7 Use of Proceeds........................................................ 16 SECTION 2.8 Limitation of Liability................................................ 16 SECTION 2.9 Agreements for Contribution............................................ 16 ARTICLE III GENERAL LOAN PROVISIONS......................................................... 18 SECTION 3.1 Interest............................................................... 18 SECTION 3.2 Notice and Manner of Conversion or Continuation of Loans................................................ 21 SECTION 3.3 Fees................................................................... 21 SECTION 3.4 Manner of Payment...................................................... 22 SECTION 3.5 Crediting of Payments and Proceeds..................................... 22 SECTION 3.6 Adjustments............................................................ 22 SECTION 3.7 Nature of Obligations of Lenders Regarding Loans; Assumption by the Agent.................................................................. 23 SECTION 3.8 Changed Circumstances.................................................. 24 SECTION 3.9 Indemnity.............................................................. 26 SECTION 3.10 Capital Requirements................................................... 26 SECTION 3.11 Taxes.................................................................. 27 SECTION 3.12 Affected Lenders....................................................... 29 ARTICLE IV CLOSING; CONDITIONS OF CLOSING AND BORROWING.................................... 30 SECTION 4.1 Closing................................................................ 30 SECTION 4.2 Conditions to Closing and Initial Loan................................. 30 SECTION 4.3 Conditions to All Loans................................................ 33 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BORROWERS................................. 34 SECTION 5.1 Representations and Warranties......................................... 34 SECTION 5.2 Survival of Representations and Warranties, Etc...................................................... 41 ARTICLE VI FINANCIAL INFORMATION AND NOTICES...................................... 42 SECTION 6.1 Financial Statements and Projections................................... 42
3 SECTION 6.2 Officer's Compliance Certificate........................................ 43 SECTION 6.3 Other Reports........................................................... 43 SECTION 6.4 Notice of Litigation and Other Matters.................................. 44 SECTION 6.5 Accuracy of Information................................................. 45 ARTICLE VII AFFIRMATIVE COVENANTS............................................................ 45 SECTION 7.1 Preservation of Corporate Existence and Related Matters....................................................... 45 SECTION 7.2 Maintenance of Property................................................. 45 SECTION 7.3 Insurance............................................................... 46 SECTION 7.4 Accounting Methods and Financial Records............................................................... 46 SECTION 7.5 Payment and Performance of Obligations.................................. 46 SECTION 7.6 Compliance With Laws and Approvals...................................... 46 SECTION 7.7 Environmental Laws...................................................... 46 SECTION 7.8 Compliance with ERISA................................................... 47 SECTION 7.9 Compliance With Agreements.............................................. 47 SECTION 7.10 Conduct of Business..................................................... 48 SECTION 7.11 Visits and Inspections.................................................. 48 SECTION 7.12 Additional Borrowers.................................................... 48 SECTION 7.13 Further Assurances...................................................... 48 ARTICLE VIII FINANCIAL COVENANTS.............................................................. 49 SECTION 8.1 Leverage Ratio.......................................................... 49 SECTION 8.2 Minimum Net Worth....................................................... 49 SECTION 8.3 Interest Coverage Ratio................................................. 49 SECTION 8.4 Capital Expenditures; Investments....................................... 49 SECTION 8.5 Debt to Capitalization.................................................. 50 ARTICLE IX NEGATIVE COVENANTS............................................................... 50 SECTION 9.1 Limitations on Debt..................................................... 50 SECTION 9.2 Limitations on Contingent Obligations................................... 51 SECTION 9.3 Limitations on Liens.................................................... 52 SECTION 9.4 Limitations on Loans, Advances, Investments and Acquisitions.......................................... 53 SECTION 9.5 Limitations on Mergers and Liquidation.................................. 54 SECTION 9.6 Limitations on Sale of Assets........................................... 55 SECTION 9.7 Limitations on Dividends and Distributions......................................................... 55 SECTION 9.8 Transactions with Affiliates............................................ 56 SECTION 9.9 Certain Accounting Changes.............................................. 56 SECTION 9.10 Amendments; Payments and Prepayments of Subordinated Debt..................................................... 56 SECTION 9.11 Restrictive Agreements.................................................. 56 ARTICLE X DEFAULT AND REMEDIES............................................................. 57 SECTION 10.1 Events of Default....................................................... 57 SECTION 10.2 Remedies................................................................ 59 SECTION 10.3 Rights and Remedies Cumulative; Non- Waiver; etc........................................................... 60 ARTICLE XI THE AGENT........................................................................ 60 SECTION 11.1 Appointment............................................................. 60
ii 4 SECTION 11.2 Delegation of Duties..................................................... 61 SECTION 11.3 Exculpatory Provisions................................................... 61 SECTION 11.4 Reliance by the Agent.................................................... 61 SECTION 11.5 Notice of Default........................................................ 62 SECTION 11.6 Non-Reliance on the Agent and Other Lenders................................................................ 62 SECTION 11.7 Indemnification.......................................................... 63 SECTION 11.8 The Agent in Its Individual Capacity..................................... 63 SECTION 11.9 Resignation of the Agent; Successor Agent.................................................................. 63 SECTION 11.10 Co-Agent ................................................................ 64 ARTICLE XII MISCELLANEOUS..................................................................... 64 SECTION 12.1 Notices.................................................................. 64 SECTION 12.2 Expenses; Indemnity...................................................... 65 SECTION 12.3 Set-off.................................................................. 66 SECTION 12.4 Governing Law............................................................ 66 SECTION 12.5 Consent to Jurisdiction.................................................. 66 SECTION 12.6 Binding Arbitration; Waiver of Jury Trial.................................................................. 67 SECTION 12.7 Reversal of Payments..................................................... 68 SECTION 12.8 Punitive Damages......................................................... 68 SECTION 12.9 Accounting Matters....................................................... 68 SECTION 12.10 Successors and Assigns; Participations................................... 69 SECTION 12.11 Amendments, Waivers and Consents......................................... 72 SECTION 12.12 Performance of Duties.................................................... 72 SECTION 12.13 All Powers Coupled with Interest......................................... 72 SECTION 12.14 Survival of Indemnities.................................................. 73 SECTION 12.15 Titles and Captions...................................................... 73 SECTION 12.16 Severability of Provisions............................................... 73 SECTION 12.17 Counterparts............................................................. 73 SECTION 12.18 Longhorn as Agent for Borrowers.......................................... 73 SECTION 12.19 Term of Agreement........................................................ 73
iii 5 EXHIBITS Exhibit A - Form of Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Notice of Prepayment Exhibit D - Form of Notice of Conversion/Continuation Exhibit E - Form of Officer's Compliance Certificate Exhibit F - Form of Assignment and Acceptance Exhibit G - Form of Notice of Account Designation Exhibit H - Form of Joinder Agreement SCHEDULES Schedule 1 - Lenders and Commitments Schedule 5.1(a) - Jurisdictions of Organization and Qualification; Subsidiaries and Capitalization Schedule 5.1(g) - Intellectual Property Matters Schedule 5.1(i) - ERISA Plans Schedule 5.1(k) - Government Regulation Schedule 5.1(l) - Material Contracts Schedule 5.1(t) - Debt and Contingent Obligations Schedule 5.1(u) - Litigation Schedule 9.1 - Permitted Debt Schedule 9.2 - Contingent Obligations Schedule 9.3 - Existing Liens Schedule 9.4 - Existing Loans, Advances and Investments iv EXHIBITS 6 7 CREDIT AGREEMENT, dated as of the 18th day of December, 1996, by and among LONGHORN STEAKS, INC., a corporation organized under the laws of Georgia ("Longhorn"), certain Subsidiaries of Longhorn listed on the signature pages hereto (the "Subsidiary Borrowers" and, together with Longhorn, the "Borrowers"), the Lenders who are or may become a party to this Agreement, and FIRST UNION NATIONAL BANK OF GEORGIA, as Agent for the Lenders and FLEET NATIONAL BANK, as Co-Agent for the Lenders. STATEMENT OF PURPOSE The Borrowers have requested, and the Lenders have agreed to extend, certain Loans to the Borrowers on the terms and conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below: "Adjustment Date" shall have the meaning assigned thereto in Section 3.1. "Affiliate" means, with respect to any Person, any other Person (other than a Subsidiary) which directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person or any of its Subsidiaries. The term "control" means (a) the power to vote ten percent (10%) or more of the securities or other equity interests of a Person having ordinary voting power, or (b) the possession, directly or indirectly, of any other power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agent" means First Union in its capacity as Agent hereunder, and any successor thereto appointed pursuant to Section 11.9. "Agent's Office" means the office of the Agent specified in or determined in accordance with the provisions of Section 12.1. "Aggregate Commitment" means the aggregate amount of the Lenders' Commitments hereunder, as such amount may be reduced or 1 8 modified at any time or from time to time pursuant to the terms hereof. On the Closing Date, the Aggregate Commitment shall be sixty million dollars ($60,000,000). "Agreement" means this Credit Agreement, as amended, amended and restated, modified or supplemented from time to time. "Applicable Law" means all applicable provisions of constitutions, statutes, laws, rules, treaties, regulations and orders of all Governmental Authorities and all orders and decrees of all courts and arbitrators. "Applicable Margin" shall have the meaning assigned thereto in Section 3.1(c). "Assignment and Acceptance" shall have the meaning assigned thereto in Section 12.10. "Base Rate" means, at any time, the higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take effect simultaneously with the corresponding change or changes in the Prime Rate or the Federal Funds Rate. "Base Rate Loan" means any Loan bearing interest at a rate based upon the Base Rate as provided in Section 3.1(a). "Borrowers" means Longhorn Steaks, Inc. and each of its Subsidiaries that is or becomes a party hereto. "Business Day" means (a) for all purposes other than as set forth in clause (b) below, any day other than a Saturday, Sunday or legal holiday on which banks in Charlotte, North Carolina and New York, New York, are open for the conduct of their commercial banking business, and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, any LIBOR Rate Loan, any day that is a Business Day described in clause (a) and that is also a day for trading by and between banks in Dollar deposits in the London interbank market. "Capital Asset" means, with respect to Longhorn and its Subsidiaries, any asset that should, in accordance with GAAP, be classified and accounted for as a capital asset on a Consolidated balance sheet of Longhorn and its Subsidiaries. "Capital Expenditures" means, with respect to Longhorn and its Subsidiaries for any period, the aggregate cost of all Capital Assets acquired by Longhorn and its Subsidiaries during such period, as determined in accordance with GAAP. 2 9 "Capital Lease" means, with respect to Longhorn and its Subsidiaries, any lease of any property that should, in accordance with GAAP, be classified and accounted for as a capital lease on a Consolidated balance sheet of Longhorn and its Subsidiaries. "Change in Control" shall have the meaning assigned thereto in Section 10.1(i). "Closing Date" means the date of this Agreement. "Co-Agent" means Fleet National Bank in its capacity as Co-Agent hereunder. "Code" means the Internal Revenue Code of 1986, and the rules and regulations thereunder, each as amended or supplemented from time to time. "Commitment" means, as to any Lender, the obligation of such Lender to make Loans to the Borrowers hereunder in an aggregate principal or face amount at any time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1 hereto, as the same may be reduced or modified at any time or from time to time pursuant to the terms hereof. "Commitment Percentage" means, as to any Lender at any time, the ratio of (a) the amount of the Commitment of such Lender to (b) the Aggregate Commitment of all of the Lenders. "Consolidated" means, when used with reference to financial statements or financial statement items of Longhorn and its Subsidiaries, such statements or items on a consolidated basis in accordance with applicable principles of consolidation under GAAP. "Contingent Obligation" means, with respect to Longhorn and its Subsidiaries, without duplication, any obligation, contingent or otherwise, of any such Person pursuant to which such Person has directly or indirectly guaranteed any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of any such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement condition or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, that the term Contingent Obligation shall not include 3 10 endorsements for collection or deposit in the ordinary course of business. Contingent Obligations shall be valued at the full amount of the underlying Debt guaranteed. "Credit Facility" means the revolving/term credit facility established pursuant to Article II hereof. "Debt" means, with respect to any Person and its Subsidiaries at any date, the sum, without duplication, of the following calculated in accordance with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person, (b) all obligations to pay the deferred purchase price of property or services of any such Person (including, without limitation, all obligations under non-competition agreements), except trade payables arising in the ordinary course of business not more than 90 days past due, (c) all obligations of any such Person as lessee under Capital Leases required under GAAP to be capitalized, (d) all Debt of any other Person secured by a Lien on any asset of such Person, (e) all Contingent Obligations of any such Person, (f) all obligations, contingent or otherwise, of any such Person relative to the undrawn amount of letters of credit and banker's acceptances issued for the account of any such Person valued at the face amount of such letters of credit and banker's acceptances, (g) all obligations to redeem, repurchase, exchange, defease or otherwise make payments in respect of capital stock or other securities of such Person; provided, that such obligation has vested and (h) all termination payments which would be due and payable by any such Person pursuant to Hedging Agreements. "Default" means any of the events specified in Section 10.1 which with the passage of time, the giving of notice or any other condition, would constitute an Event of Default. "Dollars" or "$" means, unless otherwise qualified, dollars in lawful currency of the United States. "EBITDAR" means, with respect to Longhorn and its Subsidiaries for any period, the sum of (a) Net Income for such period, plus (b) the sum of the following to the extent deducted in the determination of Net Income: (i) income and franchise taxes, (ii) Interest Expense, (iii) amortization, depreciation and other non-cash charges (including amortization of goodwill, transaction expenses, covenants not to compete and other intangible assets), and (iv) Rental Expense less (c) any items of gain (or plus any non-cash items of loss) which were included in determining Net Income and were not realized in the ordinary 4 11 course of business, all determined for such period on a Consolidated basis in accordance with GAAP. "EBITR" means, with respect to Longhorn and its Subsidiaries for any period, the sum of (a) Net Income for such period, plus (b) the sum of the following to the extent deducted in the determination of Net Income: (i) income and franchise taxes, (ii) Interest Expense and (iii) Rental Expense less (c) any items of gain (or plus any non-cash items of loss) which were included in determining Net Income and were not realized in the ordinary course of business, all determined for such period on a Consolidated basis in accordance with GAAP. "Eligible Assignee" means, with respect to any assignment of the rights, interest and obligations of a Lender hereunder, a Person that is at the time of such assignment (a) a commercial bank organized under the laws of the United States or any state thereof, having combined capital and surplus in excess of $500,000,000, (b) a finance company, insurance company or other financial institution which in the ordinary course of business extends credit of the type extended hereunder and that has total assets in excess of $1,000,000,000, (c) already a Lender hereunder (whether as an original party to this Agreement or as the assignee of another Lender), (d) the successor (whether by transfer of assets, merger or otherwise) to all or substantially all of the commercial lending business of the assigning Lender, or (e) any other Person that has been approved in writing as an Eligible Assignee by Longhorn and the Agent. "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of any Borrower or any ERISA Affiliate or (b) has at any time within the preceding six years been maintained for the employees of any Borrower or any current or former ERISA Affiliate. "Environmental Laws" means any and all federal, state and local laws, statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders of courts or Governmental Authorities, relating to the protection of the environment, including, but not limited to, requirements pertaining to the use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, and the rules and regulations thereunder, each as amended or modified from time to time. 5 12 "ERISA Affiliate" means any Person who together with any Borrower (i) is treated as a single employer within the meaning of Section 414(b) or (c) of the Code and (ii) solely for purposes of potential liability under ERISA Section 302(c)(11) and Code Section 412(c)(11) and the lien created under ERISA Section 302(f) or Code Section 412(n), is treated as a single employer within the meaning of Code Sections 414(b), (c), (m) or (o). "Eurodollar Reserve Requirements" means, for any day and with respect to any Lender, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the actual reserve requirement (including without limitation any basic, supplemental or emergency reserves) for such Lender in respect of Eurocurrency liabilities as specified in Regulation D of the Board of Governors of the Federal Reserve System (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined). "Event of Default" means any of the events specified in Section 10.1; provided, that any requirement for passage of time, giving of notice, or any other condition, has been satisfied. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Federal Funds Rate" means, the rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) representing the daily effective federal funds rate as quoted by the Agent and confirmed in Federal Reserve Board Statistical Release H.15 (519) or any successor or substitute publication selected by the Agent. If, for any reason, such rate is not available, then "Federal Funds Rate" shall mean a daily rate which is determined, in the opinion of the Agent, to be the rate at which federal funds are being offered for sale in the national federal funds market at 9: 00 a.m. (Charlotte time). Rates for weekends or holidays shall be the same as the rate for the most immediate preceding Business Day. "First Union" means First Union National Bank of Georgia, a national banking association, and its successors. "Fiscal Year" means the fiscal year of Longhorn and its Subsidiaries, ending on the last Sunday of December. "GAAP" means generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, 6 13 consistently applied and maintained on a consistent basis for Longhorn and its Subsidiaries throughout the period indicated and consistent with the prior financial practice of Longhorn and its Subsidiaries. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all Governmental Authorities. "Governmental Authority" means any nation, province, state or political subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Materials" means any substances or materials (a) which are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants, chemical substances or mixtures or toxic substances under any Environmental Law, (b) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human health or the environment and are or become regulated by any Governmental Authority, (c) the presence of which require investigation or remediation under any Environmental Law, (d) the discharge or emission or release of which requires a permit or license under any Environmental Law or other Governmental Approval, (e) which are materials consisting of underground or aboveground storage tanks, whether empty, filled or partially filled with any substance, or (f) which contain asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas. "Hedging Agreement" means any agreement with respect to an interest rate swap, collar, cap, floor or a forward rate agreement or other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of the Borrowers under this Agreement, and any confirming letter executed pursuant to such hedging agreement, all as amended, restated or otherwise modified. "Interest Expense" means, with respect to Longhorn and its Subsidiaries for any period, the gross interest expense (including without limitation, interest expense attributable to Capital Leases and all net obligations pursuant to Hedging Agreements) of Longhorn and its Subsidiaries, less interest income of Longhorn and its Subsidiaries, all determined for such period on a Consolidated basis in accordance with GAAP. 7 14 "Interest Period" shall have the meaning assigned thereto in Section 3.1(b). "Joinder Agreement" means a Joinder Agreement substantially in the form of Exhibit H executed by each new Material Subsidiary in accordance with Section 7.12, as amended, restated or otherwise modified. "Lender" means each Person executing this Agreement as a Lender set forth on the signature pages hereto (unless such Lender assigns its entire right and interest hereunder pursuant to Section 12.10) and each Person that hereafter becomes a party to this Agreement as a Lender pursuant to Section 12.10. "Lending Office" means, with respect to any Lender, the office of such Lender maintaining such Lender's Commitment Percentage of the Loans. "Leverage Ratio" means the ratio calculated pursuant to Section 8.1 hereof. "LIBOR Rate" means the rate for deposits in Dollars for a period equal to the Interest Period selected which appears on the Telerate Page 3750 at approximately 11:00 a.m. London time, two (2) Business Days prior to the commencement of the applicable Interest Period (rounded upward, if necessary, to the nearest one-sixteenth of one percent (1/16%)). In the event that such rate does not appear on Telerate Page 3750, the rate shall be determined by the Agent to be the arithmetic average (rounded upward, if necessary, to the nearest one-sixteenth of one percent (1/16%)) of the rate per annum at which Dollars in the amount of $5,000,000 would be offered to the Agent at approximately 11:00 a.m. London time, two (2) Business Days prior to the commencement of the applicable Interest Period for settlement in immediately available funds by leading banks in the London interbank market for a period equal to the Interest Period selected. "LIBOR Rate Loan" means any Loan bearing interest at a rate based upon the LIBOR Rate as provided in Section 3.1(a). "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such asset. "Limited Liability Borrower" shall have the meaning assigned thereto in Section 2.8. 8 15 "Loan" means any loan made to the Borrowers pursuant to Section 2.1, and all such Loans collectively as the context requires. "Loan Documents" means, collectively, this Agreement, the Notes, any Hedging Agreement between any Borrower and any Lender permitted pursuant to Section 9.1(b), and each other document, instrument and agreement executed and delivered by any Borrower or any of their respective Subsidiaries in connection with this Agreement or otherwise referred to herein or contemplated hereby, all as may be amended, restated or otherwise modified. "Material Adverse Effect" means a material adverse effect on (a) the properties, business, prospects, operations or condition (financial or otherwise) of the Borrowers and their respective Subsidiaries, taken as a whole, or (b) the ability of any Borrower or any Subsidiary thereof party to a Loan Document to perform its obligations under the Loan Documents to which it is a party. "Material Contract" means any contract or agreement, written or oral, of Longhorn or any of its Subsidiaries the failure to comply with which could reasonably be expected to have a Material Adverse Effect. "Material Subsidiary" means any Subsidiary of Longhorn with Net Restaurant Sales in an amount greater than 20% of the Consolidated Net Restaurant Sales of Longhorn and its Subsidiaries; in each case calculated for the period of four (4) consecutive fiscal quarters ending on the last day of the most recently ended fiscal quarter. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which any Borrower or any ERISA Affiliate is making, or is accruing an obligation to make, contributions within the preceding six years. "Net Income" means, with respect to Longhorn and its Subsidiaries for any period, the Consolidated net income (or loss) of Longhorn and its Subsidiaries for such period determined in accordance with GAAP; provided, that there shall be excluded from net income (or loss) the income (or loss) of any Person (other than a Wholly-Owned Subsidiary of such Person) in which such Person has an ownership interest unless received by such Person in a cash distribution. "Net Restaurant Sales" means, with respect to any Person for any period, net restaurant sales of such Person determined for such period in a manner consistent with the financial statements 9 16 of the Borrower and its Subsidiaries delivered to the Agent and the Lenders prior to the Closing Date. "Net Worth" means, with respect to Longhorn at any date, the stockholders' equity (including capital stock, additional paid in capital and retained earnings, after deducting treasury stock) of Longhorn on such date determined in accordance with GAAP. "Non-Controlled Joint Venture" shall have the meaning assigned thereto in Section 8.4. "Notes" means the separate Revolving Credit Notes made by the Borrowers payable to the order of each Lender, substantially in the form of Exhibit A hereto, evidencing the Credit Facility, and any amendments and modifications thereto, any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part; "Note" means any of such Notes. "Notice of Account Designation" shall have the meaning assigned thereto in Section 4.2(e)(i). "Notice of Borrowing" shall have the meaning assigned thereto in Section 2.2(a). "Notice of Conversion/Continuation" shall have the meaning assigned thereto in Section 3.2. "Notice of Prepayment" shall have the meaning assigned thereto in Section 2.3(c). "Obligations" means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Loans, (b) all payment and other obligations owing by any Borrower to any Lender or the Agent under any Hedging Agreement permitted pursuant to Section 9.1 to which a Lender is a party and (c) all other fees and commissions (including attorney's fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by any Borrower to the Lenders or the Agent, of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note, and whether or not for the payment of money, but only to the extent owing under or in respect of this Agreement, any Note or any of the other Loan Documents. "Officer's Compliance Certificate" shall have the meaning assigned thereto in Section 6.2. 10 17 "Other Taxes" shall have the meaning assigned thereto in Section 3.11(b). "PBGC" means the Pension Benefit Guaranty Corporation or any successor agency. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of the Code and which (a) is maintained for employees of any Borrower or any ERISA Affiliate or (b) has at any time within the preceding six years been maintained for the employees of any Borrower or any of their current or former ERISA Affiliates. "Person" means an individual, corporation, limited liability company, partnership, association, trust, business trust, joint venture, joint stock company, pool, syndicate, sole proprietorship, unincorporated organization, Governmental Authority or any other form of entity or group thereof. "Prime Rate" means, at any time, the rate of interest per annum publicly announced from time to time by First Union as its prime rate. Each change in the Prime Rate shall be effective as of the opening of business on the day such change in the Prime Rate occurs. The parties hereto acknowledge that the rate announced publicly by First Union as its Prime Rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks. "Register" shall have the meaning assigned thereto in Section 12.10(d). "Rental Expense" means, with respect to Longhorn and its Subsidiaries for any period, all base rental expenses with respect to operating leases of Longhorn and its Subsidiaries for such period, determined on a Consolidated basis in accordance with GAAP. "Required Lenders" means, at any date, any combination of holders of at least sixty-six and two-thirds percent (66-2/3%) of the aggregate unpaid principal amount of the Notes, or if no amounts are outstanding under the Notes, any combination of Lenders whose Commitment Percentages aggregate at least sixty-six and two-thirds percent (66-2/3%). "Revolving Credit Termination Date" means the earliest of the dates referred to in Section 2.6(a). "Solvent" means, as to Longhorn and its Subsidiaries on a 11 18 particular date, that any such Person (a) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage and is able to pay its debts as they mature, (b) owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its probable liabilities (including contingencies), and (c) does not believe that it will incur debts or liabilities beyond its ability to pay such debts or liabilities as they mature. "Subordinated Debt" means the collective reference to Debt on Schedule 5.1(t) hereof designated as Subordinated Debt and any other Debt of Longhorn or any of its Subsidiaries subordinated in right and time of payment to the Obligations on terms satisfactory to the Required Lenders. "Subsidiary" means as to any Person, any corporation, partnership or other entity of which more than fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such corporation, partnership or other entity is at the time, directly or indirectly, owned by or the management is otherwise controlled by such Person (irrespective of whether, at the time, capital stock or other ownership interests of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency). Unless otherwise qualified, references to "Subsidiary" or "Subsidiaries" herein shall refer to those of the Borrowers. "Taxes" shall have the meaning assigned thereto in Section 3.11(a). "Termination Event" means: (a) a "Reportable Event" described in Section 4043 of ERISA, or (b) the withdrawal of any Borrower or any ERISA Affiliate from a Pension Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate, or the appointment of a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan, or (f) the partial or complete withdrawal of any Borrower or any ERISA Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition which results in the reorganization or insolvency of 12 19 a Multiemployer Plan under Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA. "Term-Out Amount" shall have the meaning assigned thereto in Section 2.6(b). "Term-Out Maturity Date" means December 18, 2001 "Total Capital" means, as of any date, the sum of Net Worth as of such date plus the Consolidated Debt of Longhorn and its Subsidiaries as of such date. "United States" means the United States of America. "Wholly-Owned" means, with respect to a Subsidiary, a Subsidiary all of the shares of capital stock or other ownership interests of which are, directly or indirectly, owned or controlled by Longhorn and/or one or more of its Wholly-Owned Subsidiaries. SECTION 1.2 General. Unless otherwise specified, a reference in this Agreement to a particular section, subsection, Schedule or Exhibit is a reference to that section, subsection, Schedule or Exhibit of this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Any reference herein to "Charlotte time" shall refer to the applicable time of day in Charlotte, North Carolina. SECTION 1.3 Other Definitions and Provisions. (a) Use of Capitalized Terms. Unless otherwise defined therein, all capitalized terms defined in this Agreement shall have the defined meanings when used in this Agreement, the Notes and the other Loan Documents or any certificate, report or other document made or delivered pursuant to this Agreement. (b) Miscellaneous. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 13 20 ARTICLE II REVOLVING CREDIT/TERM FACILITY SECTION 2.1 Credit Loans. Subject to the terms and conditions of this Agreement, each Lender severally agrees to make Loans to the Borrowers from time to time from the Closing Date through the Revolving Credit Termination Date as requested by the Borrowers in accordance with the terms of Section 2.2; provided, that (a) the aggregate principal amount of all outstanding Loans (after giving effect to any amount requested) shall not exceed the Aggregate Commitment and (b) the principal amount of outstanding Loans from any Lender to the Borrowers shall not at any time exceed such Lender's Commitment. Each Loan by a Lender shall be in a principal amount equal to such Lender's Commitment Percentage of the aggregate principal amount of Loans requested on such occasion. Subject to the terms and conditions hereof, the Borrowers may borrow, repay and reborrow Loans hereunder until the Revolving Credit Termination Date. SECTION 2.2 Procedure for Advances of Loans. (a) Requests for Borrowing. Longhorn, on behalf of the Borrowers, shall give the Agent irrevocable prior written notice (or telephonic notice, confirmed in writing), such written notice or written confirmation to be in the form attached hereto as Exhibit B (a "Notice of Borrowing") not later than 11:00 a.m. (Charlotte time) (i) one Business Day before each Base Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan, of its intention to borrow, specifying (A) the date of such borrowing, which shall be a Business Day, (B) the amount of such borrowing, which shall be (x) with respect to Base Rate Loans in an aggregate principal amount of $500,000 or a whole multiple of $100,000 in excess thereof and (y) with respect to LIBOR Rate Loans in an aggregate principal amount of $1,000,000 or a whole multiple of $500,000 in excess thereof, (C) whether the Loans are to be LIBOR Rate Loans or Base Rate Loans, and (D) in the case of a LIBOR Rate Loan, the duration of the Interest Period applicable thereto. Notices received after 11:00 a.m. (Charlotte time) shall be deemed received on the next Business Day. The Agent shall promptly notify the Lenders of each Notice of Borrowing. (b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time) on the proposed borrowing date, each Lender will make available to the Agent, for the account of the Borrowers, at the office of the Agent in funds immediately available to the Agent, such Lender's Commitment Percentage of the Loans to be made on such borrowing date. The Borrowers hereby irrevocably authorize the Agent to disburse the proceeds of each borrowing requested pursuant to this Section 2.2 in immediately available funds by crediting such proceeds to a deposit account of Longhorn maintained with the Agent or by wire transfer to such account as may be agreed upon by Longhorn and the Agent from time to time. 14 21 Subject to Section 3.7 hereof, the Agent shall not be obligated to disburse the portion of the proceeds of any Loan requested pursuant to this Section 2.2 to the extent that any Lender has not made available to the Agent its Commitment Percentage of such Loan. SECTION 2.3 Repayment of Loans. (a) Repayment on Termination Date. The Borrowers shall repay the outstanding principal amount of all Loans in full, together with all accrued but unpaid interest thereon, on the Revolving Credit Termination Date, or, if the election is made pursuant to Section 2.6, on the Term-Out Maturity Date. (b) Mandatory Repayment of Excess Loans. If at any time the outstanding principal amount of all Loans exceeds the Aggregate Commitment, the Borrowers shall repay immediately upon notice from the Agent, by payment to the Agent for the account of the Lenders, the Loans in an amount equal to such excess. Each such repayment shall be accompanied by any amount required to be paid pursuant to Section 3.9 hereof. (c) Optional Repayments. The Borrowers may at any time and from time to time repay the Loans, in whole or in part, upon at least three (3) Business Days' irrevocable notice to the Agent with respect to LIBOR Rate Loans and one (1) Business Day irrevocable notice with respect to Base Rate Loans, in the form attached hereto as Exhibit C (a "Notice of Prepayment") specifying the date and amount of repayment and whether the repayment is of LIBOR Rate Loans, Base Rate Loans, or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of such notice, the Agent shall promptly notify each Lender. If any such notice is given, the amount specified in such notice shall be due and payable on the date set forth in such notice. Partial repayments shall be in an aggregate amount of $500,000 or a whole multiple of $100,000 in excess thereof with respect to Base Rate Loans and $1,000,000 or a whole multiple of $500,000 in excess thereof with respect to LIBOR Rate Loans. Each such repayment shall be accompanied by any amount required to be paid pursuant to Section 3.9 hereof. (d) Limitation on Repayment of LIBOR Rate Loans. The Borrowers may not repay any LIBOR Rate Loan on any day other than on the last day of the Interest Period applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 3.9 hereof. SECTION 2.4 Notes. Each Lender's Loans and the obligation of the Borrowers to repay such Loans shall be evidenced by a Note executed by the Borrowers existing on the 15 22 Closing Date payable to the order of such Lender representing the Borrowers' obligation to pay such Lender's Commitment or, if less, the aggregate unpaid principal amount of all Loans made and to be made by such Lender to the Borrowers hereunder, plus interest and all other fees, charges and other amounts due thereon. Each Note shall be dated the date hereof and shall bear interest on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 3.1. SECTION 2.5 Permanent Reduction of the Aggregate Commitment. (a) The Borrowers shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Agent, to permanently reduce, in whole at any time or in part from time to time, without premium or penalty, the Aggregate Commitment in an aggregate principal amount not less than $1,000,000 or any whole multiple of $500,000 in excess thereof. (b) Each permanent reduction permitted pursuant to this Section 2.5 shall be accompanied by a payment of principal sufficient to reduce the aggregate outstanding Loans of the Lenders after such reduction to the Aggregate Commitment as so reduced. Any reduction of the Aggregate Commitment to zero shall be accompanied by payment of all outstanding Obligations and, if such reduction is permanent, termination of the Commitments and Credit Facility. If the reduction of the Aggregate Commitment requires the repayment of any LIBOR Rate Loan, such reduction may be made only on the last day of the then current Interest Period applicable thereto unless such repayment is accompanied by any amount required to be paid pursuant to Section 3.9 hereof. SECTION 2.6. Termination of Credit Facility; Term-Out of Loans. (a) The Credit Facility shall terminate on the earliest of (i) December 18, 1999, (ii) the date of permanent reduction of the Aggregate Commitment in whole pursuant to Section 2.5 and (iii) the date of termination by the Agent on behalf of the Lenders pursuant to Section 10.2(a). (b) Upon the date set forth in Section 2.6(a)(i) above, so long as each condition set forth in Section 4.3 hereof has been satisfied as of such date, Longhorn, on behalf of the Borrowers, may elect to term out the aggregate principal balance of Loans then outstanding (the "Term-Out Amount"). If Longhorn, on behalf of the Borrowers, so elects, the Term-Out Amount shall be payable in eight (8) equal consecutive quarterly principal installments, commencing on March 31, 2000 and continuing on the last Business 16 23 Day of each calendar quarter thereafter. On the Term-Out Maturity Date, all outstanding principal of the Loans, together with all accrued but unpaid interest thereon, shall be due and payable in full. SECTION 2.7 Use of Proceeds. The Borrowers shall use the proceeds of the Loans (a) to finance acquisitions permitted hereunder and (b) for working capital and general corporate requirements of the Borrowers and their Subsidiaries, including the payment of certain fees and expenses incurred in connection with the transactions. SECTION 2.8 Limitation of Liability. The Obligations of the Borrowers under this Agreement and the Notes shall be joint and several; provided, that the Obligations of any non-Wholly-Owned Subsidiary which is a Borrower (a "Limited Liability Borrower") shall be limited to an amount equal to (a) the aggregate proceeds of the Loans received by such Limited Liability Borrower, directly or indirectly through an advance by Longhorn or another Borrower plus (b) the aggregate interest of Longhorn in the capital and profits of such Limited Liability Borrower. Notwithstanding any other provision of this Agreement or any other Loan Document to the contrary, no Person (other than Longhorn or any of its Subsidiaries) that is a general partner or otherwise owns any equity interest in any Limited Liability Borrower (such Person referred to as a "Non-Recourse Partner") shall have any liability or other obligation whatsoever with respect to any of the Obligations if (i) such Non-Recourse Partner owns 25% or less of the total equity ownership interest in such Limited Liability Borrower or (ii) such Non-Recourse Partner has made capital contributions to such Limited Liability Borrower at least pro rata in accordance with its respective equity ownership interest in such Limited Liability Borrower. If a Non-Recourse Partner shall not satisfy both of the conditions specified in the immediately preceding clauses (i) and (ii), then the Obligations of such Non-Recourse Partner shall be limited to an amount equal to the amount of the capital contribution required to be made by such Non-Recourse Partner so that its capital contributions shall be at least pro rata in accordance with its respective equity ownership interest in such Limited Liability Borrower. SECTION 2.9 Agreements for Contribution. (a) To the extent any Borrower is required, by reason of its Obligations hereunder, to pay to the Agent and the Lenders an amount greater than the amount of Loans actually made available to or for the benefit of such Borrower, such Borrower shall have an enforceable right of contribution against the remaining Borrowers, and the remaining Borrowers shall be jointly and 17 24 severally liable (subject to the limitations set forth in subsection (e) below), for repayment of the full amount of such excess payment. Subject only to the subordination provided in the following subsection (d), such Borrower further shall be subrogated to any and all rights of the Agent and the Lenders against the remaining Borrowers to the extent of such excess payment. (b) To the extent that any Borrower would, but for the operation of this Section 2.9 and by reason of its Obligations hereunder or its obligations to other Borrowers under this Section 2.9, be rendered insolvent for any purpose under Applicable Law, each of the Borrowers hereby agrees (subject to the limitations set forth in subsection (e) below) to indemnify such Borrower and commits to make a contribution to such Borrower's capital in an amount at least equal to the amount necessary to prevent such Borrower from having been rendered insolvent by reason of the incurring of any such obligations. (c) To the extent that any Borrower would, but for the operation of this Section 2.9, be rendered insolvent under any Applicable Law by reason of its incurring of obligations to any other Borrower under the foregoing subsections (a) and (b) above, such Borrower shall, in turn, have rights of contribution and indemnity, to the full extent provided in the foregoing subsections (a) and (b) above, against the remaining Borrowers, such that all Obligations of all of the Borrowers hereunder and under this Section 2.9 shall be allocated in a manner such that no Borrower shall be rendered insolvent for any purpose under Applicable Law by reason of its incurring of such obligations. (d) The rights of any Borrower to contribution, subrogation and indemnity under this Section 2.9 or under Applicable Law shall in all events and all respects be subject and subordinate to the rights of the Agent and the Lenders under this Agreement and subject to the prior full, final and indefeasible payment to the Agent and the Lenders of all Obligations and no such right may be exercised until all of such Obligations have been fully, finally and indefeasibly paid and such payments are in no event subject to avoidance under Title 11 of the United States Code or any other Applicable Law. (e) Notwithstanding anything to the contrary set forth in this Section 2.9, no Limited Liability Borrower shall have any obligation of contribution or indemnity to any other Borrower pursuant to this Section 2.9 in an amount greater than such Limited Liability Borrower's Obligations as limited pursuant to Section 2.8. 18 25 ARTICLE III GENERAL LOAN PROVISIONS SECTION 3.1 Interest. (a) Interest Rate Options. Subject to the provisions of this Section 3.1, at the election of Longhorn, on behalf of the Borrowers, the aggregate principal balance of the Notes or any portion thereof shall bear interest at the Base Rate or the LIBOR Rate plus, in each case, the Applicable Margin as set forth below; provided, that the LIBOR Rate shall not be available until three (3) Business Days after the Closing Date. Longhorn, on behalf of the Borrowers, shall select the rate of interest and Interest Period, if any, applicable to any Loan at the time a Notice of Borrowing is given pursuant to Section 2.2 or at the time a Notice of Conversion/Continuation is given pursuant to Section 3.2. Each Loan or portion thereof bearing interest based on the Base Rate shall be a "Base Rate Loan" and each Loan or portion thereof bearing interest based on the LIBOR Rate shall be a "LIBOR Rate Loan". Any Loan or any portion thereof as to which Longhorn, on behalf of the Borrowers, has not duly specified an interest rate as provided herein shall be deemed a Base Rate Loan. (b) Interest Periods. In connection with each LIBOR Rate Loan, Longhorn, on behalf of the Borrowers, by giving notice at the times described in Section 3.1(a), shall elect an interest period (each, an "Interest Period") to be applicable to such Loan, which Interest Period shall be a period of one (1), two (2), three (3), or six (6) months; provided, that: (i) the Interest Period shall commence on the date of advance of or conversion to any LIBOR Rate Loan and, in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the date on which the next preceding Interest Period expires; (ii) if any Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided, that if any Interest Period with respect to a LIBOR Rate Loan would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iii) any Interest Period with respect to a LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in 19 26 the calendar month at the end of such Interest Period) shall end on the last Business Day of the relevant calendar month at the end of such Interest Period; (iv) no Interest Period shall extend beyond the Revolving Credit Termination Date; provided, that if the Borrowers elect to term out the Loans pursuant to Section 2.6(b), Interest Periods with respect to the Term-Out Amount may be extended beyond the Revolving Credit Termination Date, so long as such Interest Periods shall not extend beyond the Term-Out Maturity Date; and (v) there shall be no more than five (5) Interest Periods outstanding at any time. (c)Applicable Margin. The Applicable Margin provided for in Section 3.1(a) with respect to the Loans (the "Applicable Margin") shall: (i) for the period commencing on the Closing Date and ending on the date immediately preceding the initial Adjustment Date (as hereinafter defined) following the delivery of the financial statements for the fiscal quarter ending September 29, 1996 and the accompanying Officer's Compliance Certificate, be 0.75% in the case of LIBOR Rate Loans and 0.00% in the case of Base Rate Loans; (ii) for the period commencing on the initial Adjustment Date following delivery of the financial statements for the fiscal quarter ending September 29, 1996 and the accompanying Officer's Compliance Certificate and ending on the Revolving Credit Termination Date, be determined by reference to the Leverage Ratio in accordance with the following chart:
Applicable Margin Per Annum Leverage Ratio Base Rate + LIBOR Rate + -------------- ---------------------------- greater than or equal to 2.75 0.00% 1.25% greater than or equal to 2.25 but less than 2.75 0.00% 1.00% less than 2.25 0.00% 0.75%
(iii) for the period commencing on the Revolving Credit Termination Date and ending on the Term-Out Maturity Date, 20 27 be equal to the sum of (A) the rate determined by reference to the Leverage Ratio in accordance with the chart above plus (B) 0.25%. Adjustments, if any, in the Applicable Margin shall be made by the Agent on the tenth (10th) Business Day (the "Adjustment Date") after receipt by the Agent of financial statements for Longhorn and its Subsidiaries delivered under Section 6.1(a) or (b), as applicable, and the accompanying Officer's Compliance Certificate setting forth the Leverage Ratio of Longhorn and its Subsidiaries as of the most recent fiscal quarter end. The Agent agrees to give the Borrowers and the Lenders notice of any adjustment in the Applicable Margin within two (2) Business Days of such adjustment; provided, that the Agent's failure to give such notice shall not result in any liability to the Agent or in any way effect the validity of any such adjustment. In the event Longhorn fails to deliver such financial statements and certificate within the time required by Sections 6.1(a) and 6.2 hereof, the Applicable Margin shall be the highest Applicable Margin set forth above until the delivery of such financial statements and certificate unless at such time the outstanding principal balance of the Loans are bearing interest at the "default rate" set forth in Section 3.1(d) below in which case the Applicable Margin shall not be increased pursuant to this sentence. (d) Default Rate. Upon the occurrence and during the continuance of an Event of Default, (i) the Borrowers shall no longer have the option to request LIBOR Rate Loans, (ii) all outstanding LIBOR Rate Loans shall bear interest at a rate per annum two percent (2%) in excess of the rate then applicable to LIBOR Rate Loans until the end of the applicable Interest Period and thereafter at a rate equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans, and (iii) all outstanding Base Rate Loans shall bear interest at a rate per annum equal to two percent (2%) in excess of the rate then applicable to Base Rate Loans. Interest shall continue to accrue on the Notes after the filing by or against any Borrower of any petition seeking any relief in bankruptcy or under any act or law pertaining to insolvency or debtor relief, whether state, federal or foreign. (e) Interest Payment and Computation. Accrued and unpaid interest on each Base Rate Loan shall be payable in arrears on the last Business Day of each calendar quarter commencing March 31, 1997; accrued and unpaid interest on each LIBOR Rate Loan shall be payable on the last day of each Interest Period applicable thereto, and if such Interest Period extends over three (3) months, at the end of each three (3) month interval during such Interest Period. All interest rates, fees and 21 28 commissions provided hereunder shall be computed on the basis of a 360-day year and assessed for the actual number of days elapsed. (f) Maximum Rate. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder or under any of the Notes charged or collected pursuant to the terms of this Agreement or pursuant to any of the Notes exceed the highest rate permissible under any Applicable Law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Lenders have charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by Applicable Law and the Lenders shall at the Agent's option promptly refund to the Borrowers any interest received by Lenders in excess of the maximum lawful rate or shall apply such excess to the principal balance of the Obligations. It is the intent hereof that the Borrowers not pay or contract to pay, and that neither the Agent nor any Lender receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by the Borrowers under Applicable Law. SECTION 3.2 Notice and Manner of Conversion or Continuation of Loans. Provided that no Event of Default has occurred and is then continuing, the Borrowers shall have the option to (a) convert at any time all or any portion of their outstanding Base Rate Loans in an aggregate principal amount equal to $1,000,000 or any whole multiple of $500,000 in excess thereof into one or more LIBOR Rate Loans or (b) upon the expiration of any Interest Period, (i) convert all or any part of their outstanding LIBOR Rate Loans in an aggregate principal amount equal to $500,000 or a whole multiple of $100,000 in excess thereof into Base Rate Loans or (ii) continue such LIBOR Rate Loans as LIBOR Rate Loans. Whenever the Borrowers desire to convert or continue Loans as provided above, Longhorn, on behalf of the Borrowers, shall give the Agent irrevocable prior written notice in the form attached as Exhibit D (a "Notice of Conversion/ Continuation") not later than 11:00 a.m. (Charlotte time) three (3) Business Days before the day on which a proposed conversion or continuation of such Loan is to be effective specifying (A) the Loans to be converted or continued, and, in the case of any LIBOR Rate Loan to be converted or continued, the last day of the Interest Period thereof, (B) the effective date of such conversion or continuation (which shall be a Business Day), (C) the principal amount of such Loans to be converted or continued, and (D) the Interest Period to be applicable to such converted or continued LIBOR Rate Loan. The Agent shall promptly notify the Lenders of such Notice of Conversion/Continuation. 22 29 SECTION 3.3 Fees. (a) Commitment Fee. Commencing on the Closing Date, the Borrowers shall pay to the Agent, for the account of the Lenders, a non-refundable commitment fee at a rate per annum equal to 0.25% on the average daily unused portion of the Aggregate Commitment. The commitment fee shall be payable in arrears on the last Business Day of each calendar quarter during the term of this Agreement commencing March 31, 1997 and on the Revolving Credit Termination Date. Such commitment fee shall be distributed by the Agent to the Lenders pro rata in accordance with the Lenders' respective Commitment Percentages. (b) Agent's and Other Fees. In order to compensate the Agent for structuring and syndicating the Loans and for its obligations hereunder, the Borrowers agree to pay to the Agent, for its account, the fees set forth in the separate fee letter agreement executed by Longhorn dated October 30, 1996. SECTION 3.4 Manner of Payment. Each payment by the Borrowers on account of the principal of or interest on the Loans or of any fee, commission or other amounts payable to the Lenders under this Agreement or any Note shall be made not later than 1:00 p.m. (Charlotte time) on the date specified for payment under this Agreement to the Agent at the Agent's Office for the account of the Lenders (other than as set forth below) pro rata in accordance with their respective Commitment Percentages, in Dollars, in immediately available funds and shall be made without any set-off, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. (Charlotte time) on such day shall be deemed a payment on such date for the purposes of Section 10.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. Any payment received after 2:00 p.m. (Charlotte time) shall be deemed to have been made on the next succeeding Business Day for all purposes. Upon receipt by the Agent of each such payment, the Agent shall distribute to each Lender at its address for notices set forth herein its pro rata share of such payment in accordance with such Lender's Commitment Percentage and shall wire advice of the amount of such credit to each Lender. Each payment to the Agent of Agent's fees or expenses shall be made for the account of the Agent and any amount payable to any Lender under Sections 3.8, 3.9, 3.10, 3.11 or 12.2 shall be paid to the Agent for the account of the applicable Lender. Other than as set forth in Section 3.1(b), if the due date of any payment under this Agreement or any other Loan Document would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for the period of such extension. 23 30 SECTION 3.5 Crediting of Payments and Proceeds. In the event that the Borrowers shall fail to pay any of the Obligations when due and the Obligations have been accelerated pursuant to Section 10.2, all payments received by the Lenders upon the Notes and the other Obligations and all net proceeds from the enforcement of the Obligations shall be applied first to all expenses then due and payable by the Borrowers hereunder, then to all indemnity obligations then due and payable by the Borrowers hereunder, then to all Agent's fees then due and payable, then to all commitment and other fees and commissions then due and payable, then to accrued and unpaid interest on the Notes and any termination payments due in respect of a Hedging Agreement with any Lender permitted pursuant to Section 9.1 (pro rata in accordance with all such amounts due) and then to the principal amount of the Notes. SECTION 3.6 Adjustments. If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Loans or interest thereon, or if any Lender shall at any time receive any collateral in respect to its Loans (whether voluntarily or involuntarily, by setoff or otherwise) in a greater proportion than any such payment to and collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Loans, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned to the extent of such recovery, but without interest. The Borrowers agree that each Lender so purchasing a portion of another Lender's Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. SECTION 3.7 Nature of Obligations of Lenders Regarding Loans; Assumption by the Agent. The obligations of the Lenders under this Agreement to make the Loans are several and are not joint or joint and several. Unless the Agent shall have received notice from a Lender prior to a proposed borrowing date that such Lender will not make available to the Agent such Lender's ratable portion of the amount to be borrowed on such date (which notice shall not release such Lender of its obligations hereunder), the Agent may assume that such Lender has made such portion available 24 31 to the Agent on the proposed borrowing date in accordance with Section 2.2(b) and the Agent may, in reliance upon such assumption, make available to the Borrowers on such date a corresponding amount. If such amount is made available to the Agent on a date after such borrowing date, such Lender shall pay to the Agent on demand an amount, until paid, equal to the product of (a) the amount of such Lender's Commitment Percentage of such borrowing, times (b) the daily average Federal Funds Rate during such period as determined by the Agent, times (c) a fraction the numerator of which is the number of days that elapse from and including such borrowing date to the date on which such Lender's Commitment Percentage of such borrowing shall have become immediately available to the Agent and the denominator of which is 360. A certificate of the Agent with respect to any amounts owing under this Section shall be conclusive, absent manifest error. If such Lender's Commitment Percentage of such borrowing is not made available to the Agent by such Lender within three (3) Business Days of such borrowing date, the Agent shall be entitled to recover such amount made available by the Agent with interest thereon at the rate per annum applicable to Base Rate Loans hereunder, on demand, from the Borrowers. The failure of any Lender to make its Commitment Percentage of any Loan available shall not relieve it or any other Lender of its obligation, if any, hereunder to make its Commitment Percentage of such Loan available on such borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Commitment Percentage of such Loan available on the borrowing date. SECTION 3.8 Changed Circumstances. (a) Circumstances Affecting LIBOR Rate Availability. If with respect to any Interest Period the Agent shall reasonably determine that, by reason of circumstances affecting the foreign exchange and interbank markets generally, deposits in eurodollars, in the applicable amounts are not being quoted via Telerate Page 3750 or offered to the Agent or any Lender for such Interest Period, then the Agent shall forthwith give notice thereof to the Borrowers. Thereafter, until the Agent notifies the Borrowers that such circumstances no longer exist (which the Agent agrees to do; provided, that the Agent shall have no liability for any failure to do so), the obligation of the Lenders to make LIBOR Rate Loans and the right of the Borrowers to convert any Loan to or continue any Loan as a LIBOR Rate Loan shall be suspended, and the Borrowers shall repay in full (or cause to be repaid in full) the then outstanding principal amount of each such LIBOR Rate Loans together with accrued interest thereon, on the last day of the then current Interest Period applicable to such LIBOR Rate Loan or convert the then 25 32 outstanding principal amount of each such LIBOR Rate Loan to a Base Rate Loan as of the last day of such Interest Period. (b) Laws Affecting LIBOR Rate Availability. If, after the date hereof, the introduction of, or any change in, any Applicable Law or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any of their respective Lending Offices) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, shall make it unlawful or impossible for any of the Lenders (or any of their respective Lending Offices) to honor its obligations hereunder to make or maintain any LIBOR Rate Loan, such Lender shall promptly give notice thereof to the Agent and the Agent shall promptly give notice to the Borrowers and the other Lenders. Thereafter, until the Agent notifies the Borrowers that such circumstances no longer exist (which the Agent agrees to do; provided, that the Agent shall have no liability for any failure to do so), (i) the obligations of the Lenders to make LIBOR Rate Loans and the right of the Borrowers to convert any Loan or continue any Loan as a LIBOR Rate Loan shall be suspended and thereafter the Borrowers may select only Base Rate Loans hereunder, and (ii) if any of the Lenders may not lawfully continue to maintain a LIBOR Rate Loan to the end of the then current Interest Period applicable thereto as a LIBOR Rate Loan, the applicable LIBOR Rate Loan shall immediately be converted to a Base Rate Loan for the remainder of such Interest Period. (c) Increased Costs. If, after the date hereof, the introduction of, or any change in, any Applicable Law, or in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any of the Lenders (or any of their respective Lending Offices) with any request or directive (whether or not having the force of law) of such Governmental Authority, central bank or comparable agency: (i) shall subject any of the Lenders (or any of their respective Lending Offices) to any tax, duty or other charge with respect to any Note or shall change the basis of taxation of payments to any of the Lenders (or any of their respective Lending Offices) of the principal of or interest on any Note or any other amounts due under this Agreement in respect thereof (except for changes in the rate of or additional taxes imposed on or measured by the overall net income of any of the Lenders or any of their respective Lending Offices imposed by the jurisdiction in which such Lender is organized or is or should be qualified to do business or such Lending Office is located); or 26 33 (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System but excluding any such reserve included in the definition of Eurodollar Reserve Requirements), special deposit, insurance or capital or similar requirement against assets of, deposits with or for the account of, or credit extended by any of the Lenders (or any of their respective Lending Offices) or shall impose on any of the Lenders (or any of their respective Lending Offices) or the foreign exchange and interbank markets any other condition affecting any Note; and the result of any of the foregoing is to increase the costs to any of the Lenders of maintaining any LIBOR Rate Loan or to reduce the yield or amount of any sum received or receivable by any of the Lenders under this Agreement or under the Notes in respect of a LIBOR Rate Loan, then such Lender shall promptly notify the Agent, and the Agent shall promptly notify the Borrowers of such fact and demand compensation therefor and, within fifteen (15) days after such notice by the Agent, the Borrowers shall pay to such Lender such additional amount or amounts as will compensate such Lender or Lenders for such increased cost or reduction. Each Lender agrees to notify the Borrowers of any event occurring after the Closing Date entitling such Lender to compensation under any of the preceding subsections of this Section as promptly as practicable; provided, that except as otherwise limited by the next sentence, the failure of any Lender to give such notice shall not result in any liability to such Lender or release the Borrowers from any of their obligations hereunder. A Lender shall only be entitled to compensation under any of the preceding subsections of this Section for events occurring during the 120-day period ending on the date the Borrowers receive the notice described in the immediately preceding sentence. Such Lender agrees to furnish to the Borrowers a certificate setting forth the basis and amount of each request by such Lender for compensation under this Section, which certificate shall be prima facie evidence of the matters stated therein. Determinations by any Lender of the effect of any of the events described in this subsection shall be made on a reasonable basis and in good faith, based upon the assumption that such Lender funded its Commitment Percentage of the LIBOR Rate Loans in the London interbank market, and using any reasonable attribution or averaging methods which such Lender deems appropriate and practical. (d) Eurodollar Reserve Requirements. In the event that any Lender shall determine at any time that by reason of Regulation D, such Lender is required to maintain Eurodollar Reserve Requirements during any period that it has any LIBOR Rate Loans 27 34 outstanding, then such Lender shall promptly notify the Borrowers by written notice (or telephonic notice promptly confirmed in writing) specifying the additional amounts reasonably determined by the Lender to be required to indemnify such Lender against the cost of maintaining such Eurodollar Reserve Requirements (such written notice to provide a computation of such additional amounts) and the Borrowers shall directly pay to such Lender such specified amounts as additional interest. SECTION 3.9 Indemnity. The Borrowers hereby indemnify each of the Lenders against any loss or expense which may arise or be attributable to each Lender's obtaining, liquidating or employing deposits or other funds acquired to effect, fund or maintain any Loan (a) as a consequence of any failure by the Borrowers to make any payment when due of any amount due hereunder in connection with a LIBOR Rate Loan, (b) due to any failure of the Borrowers to borrow on a date specified therefor in a Notice of Borrowing or Notice of Continuation/Conversion or (c) due to any payment, prepayment or conversion of any LIBOR Rate Loan on a date other than the last day of the Interest Period therefor other than as a result of Section 3.8(b)(ii). Any Lender requesting indemnification under this Section shall furnish to the Borrowers a certificate setting forth the basis and amount of such request, which certificate shall be prima facie evidence of the matters stated therein. Determinations by any Lender of the amount of any claim for indemnification under this Section shall be made on a reasonable basis and in good faith, based upon the assumption that such Lender funded its Commitment Percentage of the LIBOR Rate Loans in the London interbank market, and using any reasonable attribution or averaging methods which such Lender deems appropriate and practical. SECTION 3.10 Capital Requirements. If either (a) the introduction of, or any change in, or in the interpretation of, any Applicable Law or (b) compliance with any guideline or request issued after the date hereof from any central bank or comparable agency or other Governmental Authority (whether or not having the force of law), has or would have the effect of reducing the rate of return on the capital of, or has affected or would affect the amount of capital required to be maintained by, any Lender or any corporation controlling such Lender as a consequence of, or with reference to the Commitments and other commitments of this type, below the rate which the Lender or such other corporation could have achieved but for such introduction, change or compliance, then within five (5) Business Days after written demand by any such Lender, the Borrowers shall pay to such Lender from time to time as specified by such Lender additional amounts sufficient to compensate such Lender or other corporation for such reduction. Any Lender requesting 28 35 compensation under this Section shall furnish to the Borrowers a certificate setting forth the basis and amount of such request, which certificate shall be prima facie evidence of the matters stated therein. Determinations by any Lender of the amount of any claim for compensation under this Section shall be made on a reasonable basis and in good faith. SECTION 3.11 Taxes. (a) Payments Free and Clear. Any and all payments by the Borrowers hereunder or under the Notes shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholding, and all liabilities with respect thereto excluding, (i) in the case of each Lender and the Agent, income and franchise taxes imposed by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or is or should be qualified to do business or any political subdivision thereof and (ii) in the case of each Lender, income and franchise taxes imposed by the United States of America, any political subdivision thereof, the jurisdiction of such Lender's Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Agent, (A) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.11) such Lender or the Agent (as the case may be) receives an amount equal to the amount such party would have received had no such deductions been made, (B) the Borrowers shall make such deductions, (C) the Borrowers shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (D) the Borrowers shall deliver to the Agent evidence of such payment to the relevant taxing authority or other authority in the manner provided in Section 3.11(d). (b) Stamp and Other Taxes. In addition, the Borrowers shall pay any present or future stamp, registration, recordation or documentary taxes or any other similar fees or charges or excise or property taxes, levies of the United States or any state or political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Loans, the other Loan Documents, or the perfection of any rights or security interest in respect thereto (hereinafter referred to as "Other Taxes"). 29 36 (c) Indemnity. The Borrowers shall indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.11) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Such indemnification shall be made within thirty (30) days from the date such Lender or the Agent (as the case may be) makes written demand therefor. (d) Evidence of Payment. Within thirty (30) days after the date of any payment of Taxes or Other Taxes, Longhorn, on behalf of the Borrowers, shall furnish to the Agent, at its address referred to in Section 12.1, the original or a certified copy of a receipt evidencing payment thereof or other evidence of payment satisfactory to the Agent. (e) Delivery of Tax Forms. Each Lender organized under the laws of a jurisdiction other than the United States or any state thereof shall deliver to the Borrowers, with a copy to the Agent, on the Closing Date or concurrently with the delivery of the relevant Assignment and Acceptance, as applicable, (i) two United States Internal Revenue Service Forms 4224 or Forms 1001, as applicable (or successor forms) properly completed and certifying in each case that such Lender is entitled to a complete exemption from withholding or deduction for or on account of any United States federal income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States backup withholding taxes. Each such Lender further agrees to deliver to the Borrowers, with a copy to the Agent, a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms or manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrowers, certifying in the case of a Form 1001 or 4224 that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes (unless in any such case an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders such forms inapplicable or the exemption to which such forms relate unavailable and such Lender notifies the Borrowers and the Agent that it is not entitled to receive payments without deduction or withholding of United States federal income taxes) and, in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax. 30 37 (f) Survival. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 3.11 shall survive the payment in full of the Obligations and the termination of the Commitments. (g) Change of Lending Office, etc. Any Lender claiming additional amounts payable pursuant to this Section 3.11 shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to file any certificate or document requested by the Borrowers or to change the jurisdiction of its Lending Office if the making of such filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the judgment of such Lender, be disadvantageous to such Lender. (h) Tax Credits. In the event that an additional payment is made under Section 3.11(a) or (c) for the account of any Lender and such Lender receives or is granted a credit against or release or remission for, or repayment of, any tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, such Lender shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to the Borrowers such amount as is attributable to such deduction or withholding as will leave such Lender (after such payment) in no better or worse position than it would have been in if the Borrowers had not been required to make such deduction or withholding. SECTION 3.12 Affected Lenders. If any Lender requests compensation pursuant to Section 3.8(c), 3.8(d), 3.10 or 3.11, or the obligation of the Lenders to make LIBOR Rate Loans or to continue, or to convert Base Rate Loans into, LIBOR Rate Loans shall be suspended pursuant to Section 3.8(a) or (b) due to an event affecting any Lender, then, so long as there does not then exist any Default or Event of Default, the Borrowers may either (a) demand that such Lender (the "Affected Lender"), and upon such demand the Affected Lender shall promptly, assign its Commitment to another financial institution subject to and in accordance with the provisions of Section 12.10(b) for a purchase price equal to the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon, accrued but unpaid fees and any other amounts owing to the Affected Lender hereunder, or (b) pay to the Affected Lender the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon, accrued but unpaid fees and any other amounts owing to the Affected Lender hereunder, whereupon the Affected Lender shall no 31 38 longer be a party hereto or have any rights or obligations hereunder or under any of the other Loan Documents and the Aggregate Commitment shall immediately and permanently be reduced by an amount equal to the amount of the Affected Lender's Commitment. The Agent shall cooperate in effectuating the replacement of an Affected Lender under this Section, but at no time shall the Agent be obligated in any way whatsoever to initiate any such replacement. The exercise by the Borrowers of their rights under this Section shall be at the Borrowers' sole cost and expense (including with respect to the assignment fee required pursuant to Section 12.10(b)(v)), and at no cost or expense to the Agent, the Affected Lender or any of the other Lenders. ARTICLE IV CLOSING; CONDITIONS OF CLOSING AND BORROWING SECTION 4.1. Closing. The closing shall take place at the offices of Kennedy Covington Lobdell & Hickman, L.L.P., 100 North Tryon Street, Suite 4200, Charlotte, North Carolina 28202 at 10:00 a.m. on December 18, 1996, or on such other date as the parties hereto shall mutually agree. SECTION 4.2. Conditions to Closing and Initial Loan. The obligation of the Lenders to close this Agreement and to make the initial Loan is subject to the satisfaction of each of the following conditions: (a) Executed Loan Documents. This Agreement and the Notes shall have been duly authorized, executed and delivered to the Agent by the parties thereto, shall be in full force and effect and no Default shall exist thereunder, and the Borrowers shall have delivered original counterparts thereof to the Agent. (b) Closing Certificates; etc. (i) Officer's Certificate of the Borrowers. The Agent shall have received a certificate from the chief executive officer or chief financial officer of Longhorn, on behalf of the Borrowers, in form and substance satisfactory to the Agent, to the effect that all representations and warranties of the Borrowers contained in this Agreement and the other Loan Documents are true, correct and complete in all material respects; that the Borrowers are not in violation of any of the covenants contained in this Agreement and the other Loan Documents; that, after giving effect to the transactions contemplated by this Agreement, no Default or Event of Default has occurred and is continuing; and that the Borrowers have satisfied each of the closing conditions. 32 39 (ii) Certificate of Secretaries of the Borrowers. The Agent shall have received a certificate of the secretary or assistant secretary of each Borrower certifying that attached thereto is a true and complete copy of the articles of incorporation of such Borrower and all amendments thereto, certified as of a recent date by the appropriate Governmental Authority in its jurisdiction of incorporation; that attached thereto is a true and complete copy of the bylaws of such Borrower as in effect on the date of such certification; that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Borrower authorizing the borrowings contemplated hereunder and the execution, delivery and performance of this Agreement and the other Loan Documents; and as to the incumbency and genuineness of the signature of each officer of such Borrower. (iii) Certificates of Good Standing. The Agent shall have received a long-form certificate as of a recent date of the good standing of each Borrower under the laws of the jurisdiction of organization of such Borrower and each other jurisdiction where such Borrower is qualified to do business and a certificate of the relevant taxing authorities of such jurisdictions certifying that such Borrower has filed required tax returns and owes no delinquent taxes. (iv) Opinions of Counsel. The Agent shall have received favorable opinions of counsel to the Borrowers addressed to the Agent and the Lenders with respect to the Borrowers, the Loan Documents and such other matters as the Lenders shall reasonably request. (v) Tax Forms. The Agent shall have received on behalf of the Borrowers the United States Internal Revenue Service forms required by Section 3.11(e) hereof. (c) Consents; Defaults. (i) Governmental and Third Party Approvals. All necessary approvals, authorizations and consents, if any are required, of any Person, any shareholder of any Borrower, and of all Governmental Authorities and courts having jurisdiction with respect to the transactions contemplated by this Agreement and the other Loan Documents shall have been obtained. (ii) Permits and Licenses. All permits and licenses, including permits and licenses required under Applicable Laws, necessary to the conduct of business by the Borrowers shall have been obtained and remain in full force and effect. 33 40 (iii) No Injunction, Etc. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any Governmental Authority to enjoin, restrain, or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of this Agreement or the other Loan Documents or the consummation of the transactions contemplated hereby or thereby, or which, in the Agent's discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement and such other Loan Documents. (iv) No Material Adverse Change. Since December 31, 1995, there shall not have occurred any event, condition or state of facts that could reasonably be expected to have a Material Adverse Effect. (v) No Event of Default. No Default or Event of Default shall have occurred and be continuing. (d) Financial Matters. (i) Financial Statements. The Agent and each Lender shall have received recent annual and interim financial statements and other financial information with respect to the Longhorn and its Subsidiaries prepared in accordance with GAAP. Without limitation of the foregoing, the Agent and each Lender shall have received audited financial statements for the Fiscal Year ended December 31, 1995 and unaudited financial statements for the nine month period ending September 30, 1996. (ii) Financial Condition Certificate. Longhorn, on behalf of the Borrowers, shall have delivered to the Agent a certificate, in form and substance satisfactory to the Agent, and certified as accurate by the chief executive officer or chief financial officer of Longhorn, that (A) Longhorn and each of its Subsidiaries are Solvent, (B) the payables of Longhorn and each other Borrower are current and not more than ninety (90) days past due the invoice date, (C) attached thereto is a pro forma balance sheet of Longhorn and its Subsidiaries setting forth on a pro forma basis the financial condition of Longhorn and its Subsidiaries on a Consolidated basis as of November 24, 1996 and reflecting on a pro forma basis the effect of the transactions contemplated herein, including all fees and expenses in connection therewith, and evidencing compliance on a pro forma basis with the covenants contained in Articles VIII and IX hereof and (D) attached thereto are the financial projections previously delivered to the Agent representing the good faith opinions of Longhorn and senior management thereof as to the projected results contained therein. 34 41 (iii) Payment at Closing. There shall have been paid by the Borrowers to the Agent and the Lenders the fees set forth or referenced in Section 3.3 and any other accrued and unpaid fees or commissions due hereunder (including, without limitation, legal fees and expenses), and to any other Person such amount as may be due thereto in connection with the transactions contemplated hereby, including all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of any of the Loan Documents. (e) Miscellaneous. (i) Notice of Borrowing. The Agent shall have received a Notice of Borrowing from Longhorn, on behalf of the Borrowers, in accordance with Section 2.2(a), and a written notice in the form attached hereto as Exhibit G (a "Notice of Account Designation") specifying the account or accounts to which the proceeds of any Loans made after the Closing Date are to be disbursed. (ii) Proceedings and Documents. All opinions, certificates and other instruments and all proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to the Lenders. The Lenders shall have received copies of all other instruments and other evidence as the Lenders may reasonably request, in form and substance satisfactory to the Lenders, with respect to the transactions contemplated by this Agreement and the taking of all actions in connection therewith. (iii) Due Diligence and Other Documents. Longhorn, on behalf of the Borrowers, shall have delivered to the Agent such other documents, certificates and opinions as the Agent reasonably requests, certified by a secretary or assistant secretary of the applicable Borrower as a true and correct copy thereof. SECTION 4.3. Conditions to All Loans. The obligations of the Lenders to make any Loan are subject to the satisfaction of the following conditions precedent on the relevant borrowing date: (a) Continuation of Representations and Warranties. The representations and warranties contained in Article V shall be true and correct in all material respects on and as of such borrowing date with the same effect as if made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date (in which case 35 42 such representations and warranties shall have been true and correct in all material respects on and as of such earlier date). (b) No Existing Default. No Default or Event of Default shall have occurred and be continuing hereunder on the borrowing date with respect to such Loan or after giving effect to the Loans to be made on such date. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BORROWERS SECTION 5.1 Representations and Warranties. To induce the Agent to enter into this Agreement and the Lenders to make the Loans, the Borrowers hereby represent and warrant to the Agent and Lenders that: (a) Organization; Power; Qualification. Each of Longhorn and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, has the power and authority to own its properties and to carry on its business as now being and hereafter proposed to be conducted and is duly qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification and authorization, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. The jurisdictions in which Longhorn and its Subsidiaries are organized and qualified to do business as of the Closing Date are described on Schedule 5.1 (a). (b) Ownership. Each Subsidiary of Longhorn as of the Closing Date is listed on Schedule 5.1 (a). The capitalization of Longhorn and its Subsidiaries as of the Closing Date consists of the number of shares, authorized, issued and outstanding, of such classes and series, with or without par value, (or in the case of Subsidiaries which are not corporations, comparable information regarding equity interests therein) described on Schedule 5.1(a). All outstanding shares or other equity interests have been duly authorized and validly issued and, with respect to capital stock, are fully paid and nonassessable. The holders of the capital stock or other equity interests of the Subsidiaries of Longhorn as of the Closing Date and the amount of capital stock or other equity interest owned by each as of the Closing Date are described on Schedule 5.1(a). As of the Closing Date, there are no outstanding stock purchase warrants, subscriptions, options, securities, instruments or other rights of any type or nature 36 43 whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of capital stock or other equity interest of Longhorn or its Subsidiaries, except as described on Schedule 5.1(a). (c) Authorization of Agreement, Loan Documents and Borrowing. Each of Longhorn and its Subsidiaries has the right, power and authority and has taken all necessary corporate and other action to authorize the execution, delivery and performance of this Agreement and each of the other Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the other Loan Documents have been duly executed and delivered by the duly authorized officers of Longhorn and each of its Subsidiaries party thereto, and each such document constitutes the legal, valid and binding obligation of Longhorn or its Subsidiary party thereto, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal debtor relief laws from time to time in effect which affect the enforcement of creditors' rights in general and the availability of equitable remedies. (d) Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc. The execution, delivery and performance by Longhorn and its Subsidiaries of the Loan Documents to which each such Person is a party, in accordance with their respective terms, the borrowings hereunder and the transactions contemplated hereby do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to Longhorn or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of Longhorn or any of its Subsidiaries or any indenture, agreement or other instrument to which such Person is a party or by which any of its properties may be bound or any Governmental Approval relating to such Person, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Person other than Liens arising under the Loan Documents. (e) Compliance with Law; Governmental Approvals. Each of Longhorn and its Subsidiaries (i) has all Governmental Approvals required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any pending or, to the best of its knowledge, threatened attack by direct or collateral proceeding, except for such Governmental Approvals the absence of which could not reasonably be expected to have a Material Adverse Effect and (ii) is in compliance with 37 44 each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it or any of its respective properties, except in each case where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. (f) Tax Returns and Payments. Each of Longhorn and its Subsidiaries has duly filed or caused to be filed all material federal, state, local and other tax returns required by Applicable Law to be filed, and has paid, or made adequate provision for the payment of, all material federal, state, local and other taxes, assessments and governmental charges or levies upon it and its property, income, profits and assets which are due and payable except any nonpayment permitted under Section 7.5. No Governmental Authority has asserted any Lien or other material claim against Longhorn or any Subsidiary thereof with respect to unpaid taxes which could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of Longhorn and its Subsidiaries in respect of federal, state, local and other taxes for all Fiscal Years and portions thereof since the organization of Longhorn and its Subsidiaries are in the judgment of Longhorn and its Subsidiaries adequate, and the Borrowers do not anticipate any additional taxes or assessments for any of such years, the result of which could reasonably be expected to have a Material Adverse Effect. (g) Intellectual Property Matters. Except for matters existing on the Closing Date and set forth on Schedule 5.1(g), each of Longhorn and its Subsidiaries owns or possesses rights to use all franchises, licenses, copyrights, copyright applications, patents, patent rights or licenses, patent applications, trademarks, trademark rights, trade names, trade name rights, copyrights and rights with respect to the foregoing which are required to conduct its business, except where the failure to so own or possess such rights could not reasonably be expected to have a Material Adverse Effect. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such rights, and except for matters existing on the Closing Date and set forth on Schedule 5.1(g), neither Longhorn nor any Subsidiary thereof is liable to any Person for infringement under Applicable Law with respect to any such rights as a result of its business operations, the result of which could reasonably be expected to have a Material Adverse Effect. (h) Environmental Matters. Except for matters which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, 38 45 (i) The properties of Longhorn and its Subsidiaries do not contain, and to their knowledge have not previously contained, any Hazardous Materials in amounts or concentrations which (A) constitute or constituted a violation of, or (B) could give rise to liability under, applicable Environmental Laws; (ii) Such properties and all operations conducted in connection therewith are in compliance, and have been in compliance, with all applicable Environmental Laws, and there is no contamination by Hazardous Materials at, under or about such properties or such operations which could interfere with the continued operation of such properties or impair the fair saleable value thereof; (iii) Neither Longhorn nor any Subsidiary thereof has received any notice of violation, alleged violation, noncompliance, liability or potential liability regarding environmental matters or compliance with applicable Environmental Laws with regard to any of their properties or the operations conducted in connection therewith, nor does Longhorn or any Subsidiary thereof have knowledge or reason to believe that any such notice will be received or is being threatened; (iv) Hazardous Materials have not been transported or disposed of for, on behalf of, for the benefit of, or for the account of Longhorn or any Subsidiary thereof from the properties of Longhorn and its Subsidiaries in violation of, or in a manner or to a location which could give rise to liability under, applicable Environmental Laws, nor have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of such properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Laws; (v) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of Longhorn or any of its Subsidiaries threatened, under any applicable Environmental Law to which Longhorn or any Subsidiary thereof is or will be named as a party with respect to such properties or operations conducted in connection therewith, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any applicable Environmental Law with respect to such properties or such operations; and (vi) There has been no release, or to the best of the knowledge of Longhorn and its Subsidiaries, the threat of release, of Hazardous Materials at or from such properties, in 39 46 violation of or in amounts or in a manner that could give rise to liability under applicable Environmental Laws. (i) ERISA. Except for matters which, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect: (i) As of the Closing Date, no Borrower nor any ERISA Affiliate maintains or contributes to, or has any obligation under, (a) any Pensions Plans or Multiemployer Plans or (B) any Employee Benefit Plans intended to comply with Section 401(a) of the Code other than those identified on Schedule 5.1(i); (ii) each Borrower and each ERISA Affiliate is in compliance in all material respects with all applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans except for any required amendments f or which the remedial amendment period as defined in Section 401 (b) of the Code has not yet expired. Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and each trust related to such plan has been determined to be exempt under Section 501(a) of the Code. No liability has been incurred by any Borrower or any ERISA Affiliate which remains unsatisfied for any taxes or penalties with respect to any Employee Benefit Plan or any Multiemployer Plan; (iii) No Pension Plan has been terminated, nor has any accumulated funding deficiency (as defined in Section 412 of the Code) been incurred (without regard to any waiver granted under Section 412 of the Code), nor has any funding waiver from the Internal Revenue Service been received or requested with respect to any Pension Plan, nor has any Borrower or any ERISA Affiliate failed to make any contributions or to pay any amounts due and owing as required by Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan prior to the due dates of such contributions under Section 412 of the Code or Section 302 of ERISA, nor has there been any event requiring any disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension Plan; (iv) No Borrower nor any ERISA Affiliate has: (A) incurred any liability to the PBGC which remains outstanding other than the payment of premiums and there are no premium payments which are due and unpaid, (B) failed to make a required contribution or payment to a Multiemployer Plan, or (C) failed to make a required installment or other required payment under Section 412 of the Code; 40 47 (v) No Termination Event has occurred or is reasonably expected to occur; and (vi) No proceeding, claim, lawsuit and/or investigation is existing or, to the best knowledge of the Borrowers after due inquiry, threatened concerning or involving any (A) employee welfare benefit plan (as defined in Section 3 (1) of ERISA) currently maintained or contributed to by any Borrower or (B) Pension Plan maintained by any Borrower. (vii)No Borrower has engaged in a nonexempt prohibited transaction described in ERISA Section 406 or Code Section 4975. (j) Margin Stock. Neither Longhorn nor any Subsidiary thereof is engaged principally or as one of its activities in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each such term is defined or used in Regulations G and U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans will be used for purchasing or carrying margin stock or for any purpose which violates, or which would be inconsistent with, the provisions of Regulation G, T, U or X of such Board of Governors. (k) Government Regulation. Except as set forth on Schedule 5.1(k), neither Longhorn nor any Subsidiary thereof is an "investment company" or a company "controlled" by an "investment company" (as each such term is defined or used in the Investment Company Act of 1940, as amended) and neither Longhorn nor any Subsidiary thereof is, or after giving effect to any Loan will be, subject to regulation under the Public Utility Holding Company Act of 1935 or the Interstate Commerce Act, each as amended, or any other Applicable Law which limits its ability to incur or consummate the transactions contemplated hereby. (l) Material Contracts. Schedule 5.1(l) sets forth a complete and accurate list of all Material Contracts of Longhorn and its Subsidiaries in effect as of the Closing Date not listed on any other Schedule hereto; other than as set forth in Schedule 5.1(l), each such Material Contract is, and after giving effect to the consummation of the transactions contemplated by the Loan Documents will be, in full force and effect in accordance with the terms thereof. Longhorn and its Subsidiaries have delivered to the Agent a true and complete copy of each Material Contract required to be listed on Schedule 5.1(l). (m) Employee Relations. Each of Longhorn and its Subsidiaries has an adequate work force in place and is not, as 41 48 of the Closing Date, party to any collective bargaining agreement nor has any labor union been recognized as the representative of its employees. The Borrowers know of no pending, threatened or contemplated strikes, work stoppage or other collective labor disputes involving their employees or the employees of their Subsidiaries. (n) Burdensome Provisions. Neither Longhorn nor any Subsidiary thereof is a party to any indenture, agreement, lease or other instrument, or subject to any corporate or partnership restriction, Governmental Approval or Applicable Law which is so unusual or burdensome as in the foreseeable future could be reasonably expected to have a Material Adverse Effect. Longhorn and its Subsidiaries do not presently anticipate that future expenditures needed to meet the provisions of any statutes, orders, rules or regulations of a Governmental Authority will be so burdensome as to have a Material Adverse Effect. (o) Financial Statements. The (i) audited Consolidated balance sheets of Longhorn and its Subsidiaries as of December 31, 1995 and the related statements of income and retained earnings and cash flows for the Fiscal Year then ended and (ii) unaudited Consolidated balance sheet of Longhorn and its Subsidiaries as of September 29, 1996 and related unaudited interim statements of income and retained earnings, copies of which have been furnished to the Agent and each Lender, are complete and correct and fairly present in all material respects, the assets, liabilities and financial position of Longhorn and its Subsidiaries as at such dates, and the results of the operations and changes of financial position for the periods then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP. Longhorn and its Subsidiaries have no Debt, obligation or other unusual forward or long-term commitment which is not fairly reflected in the foregoing financial statements or in the notes thereto. (p) No Material Adverse Change. Since December 31, 1995 (and with reference back to such date only) there has been no material adverse change in the properties, business, operations, prospects, or condition (financial or otherwise) of Longhorn and its Subsidiaries, taken as a whole, and no event has occurred or condition arisen that could reasonably be expected to have a Material Adverse Effect. (q) Solvency. As of the Closing Date and after giving effect to each Loan made hereunder, Longhorn and each of its Subsidiaries will be Solvent. 49 (r) Titles to Properties. Each of Longhorn and its Subsidiaries has such title to the real property owned by it as is necessary or desirable to the conduct of its business and valid and legal title to all of its personal property and assets, including, but not limited to, those reflected on the balance sheets of Longhorn and its Subsidiaries delivered pursuant to Section 5.1(o), except those which have been disposed of by Longhorn or its Subsidiaries subsequent to such date which dispositions have been in the ordinary course of business or as otherwise expressly permitted hereunder. (s) Liens. None of the properties and assets of Longhorn or any Subsidiary thereof is subject to any Lien, except Liens permitted pursuant to Section 9.3. No financing statement under the Uniform Commercial Code of any state which names Longhorn or any Subsidiary thereof or any of their respective trade names or divisions as debtor and which has not been terminated, has been filed in any state or other jurisdiction and neither Longhorn nor any Subsidiary thereof has signed any such financing statement or any security agreement authorizing any secured party thereunder to file any such financing statement, except to perfect those Liens permitted by Section 9.3 hereof. (t) Debt and Contingent Obligations. Schedule 5.1(t) is a complete and correct listing of all Debt and Contingent Obligations as of the Closing Date of Longhorn and its Subsidiaries in excess of $250,000. Longhorn and its Subsidiaries have performed and are in material compliance with all of the terms of such Debt and Contingent Obligations and all instruments and agreements relating thereto. (u) Litigation. Except for matters existing on the Closing Date and set forth on Schedule 5.1(u), there are no actions, suits or proceedings pending nor, to the knowledge of the Borrowers, threatened against or in any other way relating adversely to or affecting Longhorn or any Subsidiary thereof or any of their respective properties in any court or before any arbitrator of any kind or before or by any Governmental Authority which, if adversely determined, individually or in the aggregate could reasonably be expected to have a Material Adverse Effect. (v) Absence of Defaults. No event has occurred or is continuing which (i) constitutes a Default or an Event of Default, or (ii) constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by Longhorn or any Subsidiary thereof under any Material Contract or judgment, decree or order to which Longhorn or any of its Subsidiaries is a party or by which Longhorn or any of its Subsidiaries or any of their respective properties may be bound, which could reasonably be expected to have a Material 43 50 Adverse Effect or which would require Longhorn or any of its Subsidiaries to make any payment thereunder in excess of $250,000 prior to the scheduled maturity date therefor. (w) Accuracy and Completeness of Information. All written information, reports and other papers and data produced by or on behalf of Longhorn or any Subsidiary thereof and furnished to the Lenders were, at the time the same were so furnished, complete and correct in all material respects to the extent necessary to give the recipient a true and accurate knowledge of the subject matter. No document furnished or written statement made to the Agent or the Lenders by Longhorn or any Subsidiary thereof in connection with the negotiation, preparation or execution of this Agreement or any of the Loan Documents contains or will contain any untrue statement of a fact material to the creditworthiness of Longhorn or any of its Subsidiaries or omits or will omit to state a fact necessary in order to make the statements contained therein not materially misleading. Longhorn and its Subsidiaries are not aware of any events or circumstances which they have not disclosed in writing to the Agent having a Material Adverse Effect, or insofar as the Borrowers can now foresee, could reasonably be expected to have a Material Adverse Effect. SECTION 5.2 Survival of Representations and Warranties, Etc. All representations and warranties set forth in this Article V and all representations and warranties of the Borrowers or any of their respective Subsidiaries contained in any certificate, or any of the Loan Documents (including but not limited to any such representation or warranty made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Closing Date, shall survive the Closing Date and shall not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lenders or any borrowing hereunder. ARTICLE VI FINANCIAL INFORMATION AND NOTICES Until all the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 12.11 hereof, Longhorn, on behalf of the Borrowers, will furnish or cause to be furnished to the Agent at the Agent's Office at the address set forth in Section 12.1 hereof and to the Lenders at their respective addresses as set forth on Schedule 1, or such 44 51 other office as may be designated by the Agent and Lenders from time to time: SECTION 6.1 Financial Statements and Projections. (a) Quarterly Financial Statements. As soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter, an unaudited Consolidated balance sheet of Longhorn and its Subsidiaries as of the close of such fiscal quarter and unaudited Consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and that portion of the Fiscal Year then ended, including the notes thereto, all in reasonable detail setting forth in comparative form the corresponding figures for the preceding Fiscal Year and prepared by Longhorn in accordance with GAAP and, if applicable, containing disclosure of the effect on the financial position or results of operations of any change in the application of accounting principles and practices during the period, and certified by the chief financial officer of Longhorn to present fairly in all material respects the financial condition of Longhorn and its Subsidiaries as of their respective dates and the results of operations of Longhorn and its Subsidiaries for the respective periods then ended, subject to normal year end adjustments. (b) Annual Financial Statements. As soon as practicable and in any event within ninety (90) days after the end of each Fiscal Year, an audited Consolidated balance sheet of Longhorn and its Subsidiaries as of the close of such Fiscal Year and audited Consolidated statements of income, retained earnings and cash flows for the Fiscal Year then ended, including the notes thereto, all in reasonable detail setting forth in comparative form the corresponding figures for the preceding Fiscal Year and prepared by an independent certified public accounting firm acceptable to the Agent in accordance with GAAP and, if applicable, containing disclosure of the effect on the financial position or results of operation of any change in the application of accounting principles and practices during the year, and accompanied by a report thereon by such certified public accountants that is not qualified with respect to scope limitations imposed by Longhorn or any of its Subsidiaries or with respect to accounting principles followed by Longhorn or any of its Subsidiaries not in accordance with GAAP. (c) Annual Business Plan and Financial Projections. As soon as practicable and in any event within thirty (30) days prior to the beginning of each Fiscal Year, a business plan of Longhorn and its Subsidiaries for the ensuing Fiscal Year, such plan to be prepared in a manner consistent with GAAP and to include, on a quarterly basis, the following: a quarterly 45 52 operating and capital budget, a projected income statement, statement of cash flows and balance sheet and a report containing management's discussion and analysis of such projections, accompanied by a certificate from the chief financial officer of Longhorn to the effect that, to the best of such officer's knowledge, such projections are good faith estimates of the financial condition and operations of Longhorn and its Subsidiaries for such Fiscal Year. SECTION 6.2 Officer's Compliance Certificate. At each time financial statements are delivered pursuant to Sections 6.1(a) or (b) and at such other times as the Agent shall reasonably request, a certificate of the chief financial officer or the treasurer of Longhorn in the form of Exhibit E attached hereto (an "Officer's Compliance Certificate"): (a) stating that such officer has reviewed the financial statements of Longhorn and its Subsidiaries as of the end of the fiscal quarter or Fiscal Year most recently ended, as applicable, and such statements fairly present in all material respects the financial condition of Longhorn and its Subsidiaries as of the dates indicated and the results of their operations and cash flows for the periods indicated; (b) stating that to such officer's knowledge, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default; and (c) setting forth as at the end of such fiscal quarter or Fiscal Year, as applicable, (i) the calculations required to establish whether or not Longhorn and its Subsidiaries were in compliance with the financial covenants set forth in Article VIII hereof and (ii) the calculation of the Applicable Margin pursuant to Section 3.1(c) as at the end of such period. SECTION 6.3 Other Reports. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to Longhorn or any other Borrower or the Board of Directors thereof by their respective independent public accountants in connection with their auditing function, including, without limitation, any management report and any management responses thereto; and (b) Promptly but in any event within ten (10) Business Days after the filing thereof, a copy of (i) each report or other filing made by Longhorn or any of its Subsidiaries with the 46 53 Securities and Exchange Commission ("SEC") and required by the SEC to be delivered to the shareholders of Longhorn or any of its Subsidiaries, and (ii) each report made by Longhorn or any of its Subsidiaries to the SEC on Form 8-K and each final registration statement of Longhorn or any of its Subsidiaries filed with the SEC (excluding any registration statement on Form S-8 or its equivalent); and (c) Such other information regarding the operations, business affairs and financial condition of Longhorn or any of its Subsidiaries as the Agent or any Lender may reasonably request. SECTION 6.4 Notice of Litigation and Other Matters. Prompt (but in no event later than ten (10) days after the Chief Executive Officer, Chief Financial Officer, Vice President of Marketing, Vice President of Operations or Vice President of Real Estate and Development of Longhorn or the President of Bugaboo Creek Steakhouse, Inc. obtains knowledge thereof) telephonic and written notice of: (a) the commencement of all proceedings and investigations by or before any Governmental Authority and all actions and proceedings in any court or before any arbitrator against or involving any Borrower or any Subsidiary thereof or any of their respective properties, assets or businesses which if determined adversely to such Borrower or such Subsidiary, individually or in the aggregate could reasonably be expected to have a Material Adverse Effect; (b) any notice of any violation received by any Borrower or any Subsidiary thereof from any Governmental Authority including, without limitation, any notice of violation of Environmental Laws, which in any such case could reasonably be expected to have a Material Adverse Effect; (c) any labor controversy that has resulted in, or threatens to result in, a strike against any Borrower or any Subsidiary thereof; (d) any attachment, judgment, lien, levy or order exceeding $250,000 that may be assessed against any Borrower or any Subsidiary thereof; (e) any Default or Event of Default, or any event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default under any Material Contract to which any Borrower or any Subsidiary thereof is a party or by which any Borrower or any 47 54 Subsidiary thereof or any of their respective properties may be bound; (f) (i) any unfavorable determination letter from the Internal Revenue Service regarding the qualification of an Employee Benefit Plan under Section 401(a) of the Code (along with a copy thereof), (ii) all notices received by any Borrower or any ERISA Affiliate of the PBGC's intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, (iii) all notices received by any Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA and (iv) any Borrower obtaining knowledge or reason to know that any Borrower or any ERISA Affiliate has filed or intends to file a notice of intent to terminate any Pension Plan under a distress termination within the meaning of Section 4041(c) of ERISA; and (g) any event which makes any of the representations set forth in Section 5.1 inaccurate in any material respect. SECTION 6.5 Accuracy of Information. All written information, reports, statements and other papers and data furnished by or on behalf of any Borrower to the Agent or any Lender (other than financial forecasts) whether pursuant to this Article VI or any other provision of this Agreement, shall be, at the time the same is so furnished, complete and correct in all material respects to the extent necessary to give the Agent or any Lender complete, true and accurate knowledge of the subject matter based on the Borrowers' knowledge thereof. ARTICLE VII AFFIRMATIVE COVENANTS Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner provided for in Section 12.11, each Borrower will, and will cause each of its Subsidiaries to: SECTION 7.1 Preservation of Corporate Existence and Related Matters. Except as permitted by Section 9.5, preserve and maintain its separate existence as a corporation, partnership or other applicable form of business entity and all rights, franchises, licenses and privileges necessary to the conduct of its business, and qualify and remain qualified as a foreign corporation, partnership or other such entity and authorized to do business in each jurisdiction in which the failure to so 48 55 qualify could reasonably be expected to have a Material Adverse Effect. SECTION 7.2 Maintenance of Property. Protect and preserve all properties useful in and material to its business, including copyrights, patents, trade names and trademarks; maintain in good working order and condition all buildings, equipment and other tangible real and personal property; and from time to time make or cause to be made all renewals, replacements and additions to such property necessary for the conduct of its business, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; except in each case where the failure to take such action could not reasonably be expected to have a Material Adverse Effect. SECTION 7.3 Insurance. Maintain insurance with financially sound and reputable insurance companies against such risks and in such amounts as are customarily maintained by similar businesses and as may be required by Applicable Law, and on the Closing Date and from time to time thereafter deliver to the Agent upon its request a detailed list of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. SECTION 7.4 Accounting Methods and Financial Records. Maintain a system of accounting, and keep such books, records and accounts (which shall be true and complete in all material respects) as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and in compliance with the regulations of any Governmental Authority having jurisdiction over it or any of its properties. SECTION 7.5 Payment and Performance of Obligations. Pay and perform all Obligations under this Agreement and the other Loan Documents, and pay or perform (a) all material taxes, assessments and other governmental charges that may be levied or assessed upon it or any of its property, and (b) all other material indebtedness, obligations and liabilities in accordance with customary trade practices; provided, that such Borrower or such Subsidiary may contest any item described in clauses (a) and (b) of this Section 7.5 in good faith so long as adequate reserves are maintained with respect thereto in accordance with GAAP. SECTION 7.6 Compliance With Laws and Approvals. Observe and remain in compliance with all Applicable Laws and maintain in full force and effect all Governmental Approvals, in each case applicable to the conduct of its business except where the 49 56 failure to do so could not reasonably be expected to have a Material Adverse Effect. SECTION 7.7 Environmental Laws. In addition to and without limiting the generality of Section 7.6, (a) comply with, and use reasonable efforts to ensure such compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply with and maintain, and use reasonable efforts to ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by Environmental Laws applicable to Longhorn, its Subsidiaries and the conduct of their respective business, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required of Longhorn and its Subsidiaries under applicable Environmental Laws, and promptly comply with all lawful orders and directives of any Governmental Authority regarding Environmental Laws issued to Longhorn or any Subsidiary thereof, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, and (c) defend, indemnify and hold harmless the Agent and the Lenders, and their respective parents, Subsidiaries, Affiliates, employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Laws applicable to the operations of such Borrower or such Subsidiary, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney's fees actually incurred, consultant's fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. SECTION 7.8 Compliance with ERISA. In addition to and without limiting the generality of Section 7.6, and to the extent any of the following, individually or in the aggregate, results or could reasonably be expected to result in a Material Adverse Effect, (a) comply in all material respects with all applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans, (b) not take any action or fail to take action the result of which could be a liability to the PBGC or to a Multiemployer Plan, (c) not participate in any prohibited transaction that could result in any material civil penalty under ERISA or tax 50 57 under the Code, (d) operate each Employee Benefit Plan in such a manner that will not incur any material tax liability under Section 4980B of the Code or any liability to any qualified beneficiary as defined in Section 4980B of the Code and (e) furnish to the Agent upon the Agent's request such additional information about any Employee Benefit Plan as may be reasonably requested by the Agent. SECTION 7.9 Compliance With Agreements. Comply in all respects with each term, condition and provision of all leases, agreements and other instruments entered into in the conduct of its business including, without limitation, any Material Contract except where the failure to comply could not reasonably be expected to have a Material Adverse Effect; provided, that such Borrower or such Subsidiary may contest any such lease, agreement or other instrument in good faith through applicable proceedings so long as adequate reserves are maintained in accordance with GAAP. SECTION 7.10 Conduct of Business. Engage only in businesses in substantially the same fields as the businesses conducted on the Closing Date. SECTION 7.11 Visits and Inspections. Permit representatives of the Agent or any Lender, from time to time, upon reasonable prior notice, during normal business hours and, so long as no Default or Event of Default shall have occurred and be continuing, at the sole cost of the Agent or such Lender, to (a) visit and inspect its properties; (b) inspect, audit and make extracts from its books, records and files, including, but not limited to, management letters prepared by independent accountants; and (c) discuss with its principal officers, and its independent accountants, its business, assets, liabilities, financial condition, results of operations and business prospects. SECTION 7.12. Additional Borrowers. Upon the creation of any Material Subsidiary permitted by this Agreement or upon any Subsidiary becoming a Material Subsidiary, cause to be executed and delivered to the Agent within ten (10) Business Days after the creation of such Material Subsidiary or within ten (10) Business Days after the date upon which financial statements are required to be delivered pursuant to Section 6.1 which financial statements would evidence that a Subsidiary has become a Material Subsidiary, as applicable, (a) the joinder agreement attached as Exhibit H hereto executed by such new Subsidiary, (b) the closing documents and certificates required of each of the Borrowers pursuant to Section 4.2(b) and (e) hereof with respect to such new Subsidiary and (c) such other documents reasonably requested by the Agent in order that such Subsidiary shall become bound by 51 58 all of the terms, covenants and agreements contained in the Loan Documents. Upon satisfaction of the conditions set forth in this Section 7.12, such Subsidiary shall become a Borrower hereunder and under the other Loan Documents, as of such date, as if an original signatory hereto and to the other Loan Documents. Upon delivery to the Agent and the Lenders by Longhorn of the financial statements required to be delivered pursuant to Section 6.1, which financial statements evidence that a Subsidiary previously deemed to be a Material Subsidiary has ceased to be a Material Subsidiary, the Agent and the Lenders shall execute such release or cancellation documents necessary to evidence that such Subsidiary is no longer liable for the Obligations hereunder. SECTION 7.13 Further Assurances. Make, execute and deliver all such additional and further acts, things, deeds and instruments as the Agent or any Lender may reasonably require to document and consummate the transactions contemplated hereby and to vest completely in and insure the Agent and the Lenders their respective rights under this Agreement, the Notes and the other Loan Documents. ARTICLE VIII FINANCIAL COVENANTS Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 12.11 hereof, Longhorn and its Subsidiaries on a Consolidated basis will not: SECTION 8.1. Leverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) the sum of (i) the Consolidated Debt of Longhorn and its Subsidiaries as of such date plus (ii) the product of Rental Expense for the period of four (4) consecutive fiscal quarters ending on such date multiplied by eight (8) to (b) EBITDAR for the period of four (4) consecutive fiscal quarters ending on such date, to exceed 3.25 to 1.00. SECTION 8.2 Minimum Net Worth. Permit, at any time, Net Worth to be less than (a) $109,000,000 plus (b) 50% of cumulative quarterly Consolidated Net Income of Longhorn and its Subsidiaries commencing on September 30, 1996 (without deduction for any quarterly losses) plus (c) 100% of the net proceeds received by Longhorn or any of its Subsidiaries of any equity issuance by Longhorn or any of its Subsidiaries subsequent to the Closing Date. SECTION 8.3. Interest Coverage Ratio. As of the end of any fiscal quarter, permit the ratio of (a) EBITR for the period of 52 59 four (4) consecutive fiscal quarters ending on such date to (b) the sum of Interest Expense for such period plus Rental Expense for such period, to be less than 2.50 to 1.00. SECTION 8.4. Capital Expenditures; Investments. Permit Capital Expenditures and investments in joint ventures permitted pursuant to Section 9.4(e) to be greater than the following amounts in the aggregate during the following Fiscal Years: Fiscal Year Capital Expenditures ----------- -------------------- 1997 $55,000,000 1998 $70,000,000 1999 and each fiscal year thereafter $85,000,000
; provided, that (a) investments in any single Non-Controlled Joint Venture shall not exceed $3,500,000, (b) investments in Non-Controlled Joint Ventures shall not exceed $20,000,000 in the aggregate on any date of determination and (c) in no event shall more than sixty percent (60%) of aggregate Capital Expenditures and investments permitted in any Fiscal Year be used for Capital Expenditures or investments with respect to restaurants in any one specific restaurant concept (e.g. Longhorn Steakhouse, Bugaboo Creek Steak House or The Capital Grille). For the purposes of this Section 8.4 "Non-Controlled Joint Venture" shall mean a joint venture in which (a) Longhorn and its Subsidiaries own less than fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such Person or (b) Longhorn and its Subsidiaries own fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such Person and are not otherwise in control of the management of such Person. SECTION 8.5. Debt to Capitalization. As of the end of any fiscal quarter, permit the ratio of (a) the sum of (i) the Consolidated Debt of Longhorn and its Subsidiaries as of such date plus (ii) the product of Rental Expense for the period of four (4) consecutive fiscal quarters ending on such date multiplied by eight (8) to (b) the sum of (i) Total Capital as of such date plus (ii) the product of Rental Expense for the period of four (4) consecutive fiscal quarters ending on such date multiplied by eight (8), to exceed 0.55 to 1.00. ARTICLE IX NEGATIVE COVENANTS 53 60 Until all of the Obligations have been finally and indefeasibly paid and satisfied in full and the Commitments terminated, unless consent has been obtained in the manner set forth in Section 12.11 hereof, no Borrower will nor will permit any of its Subsidiaries to: SECTION 9.1 Limitations on Debt. Create, incur, assume or suffer to exist any Debt except: (a) the Obligations; (b) Debt incurred in connection with a Hedging Agreement with a counterparty and upon terms and conditions reasonably satisfactory to the Agent; (c) Debt existing on the Closing Date and not otherwise permitted under this Section 9.1, as set forth on Schedule 9.1 and the renewal and refinancing (but not the increase) thereof; (d) Debt of Longhorn and its Subsidiaries incurred in connection with Capitalized Leases in an aggregate amount not to exceed $500,000 on any date of determination; (e) purchase money Debt of Longhorn and its Subsidiaries in an aggregate amount not to exceed $500,000 on any date of determination; (f) Debt consisting of Contingent Obligations permitted by Section 9.2; (g) Debt owing to First Union pursuant to a line of credit facility in an amount not to exceed $2,000,000 and Debt owing to First Union in connection with letters of credit in an amount not to exceed $1,000,000; (h) intercompany Debt permitted pursuant to Section 9.4(c); (i) Debt of a Subsidiary outstanding at the time such Subsidiary becomes a Subsidiary; provided, that (i) such Debt shall not have been incurred in contemplation of such Subsidiary becoming a Subsidiary and (ii) immediately after such Subsidiary becomes a Subsidiary no Default or Event of Default shall exist; (j) Debt incurred by Longhorn or one or more of its Subsidiaries in connection with the purchase of joint venture interests in Persons in which Longhorn and its Subsidiaries 54 61 already own an equity interest in an aggregate amount not to exceed $4,000,000 on any date of determination; and (k) unsecured Debt not otherwise permitted hereunder in an aggregate amount not to exceed $500,000 on any date of determination; provided, that none of the instruments or agreements evidencing the Debt permitted to be incurred by this Section shall, by covenant, subordination provisions or other agreement, restrict, limit or otherwise encumber the ability of any Subsidiary of any Borrower to make any payment to any Borrower or any of its Subsidiaries (in the form of dividends, intercompany advances or otherwise) for the purpose of enabling the Borrowers to pay the Obligations. SECTION 9.2 Limitations on Contingent Obligations. Create, incur, assume or suffer to exist any Contingent Obligations except: (a) Contingent Obligations in favor of the Agent for the benefit of the Agent and the Lenders; (b) Contingent Obligations in an amount not to exceed $500,000 on any date of determination; (c) Contingent Obligations with respect to Debt permitted pursuant to Section 9.1; and (d) Contingent Obligations existing on the Closing Date and not otherwise permitted under this Section 9.2, as set forth on Schedule 9.2. SECTION 9.3 Limitations on Liens. Create, incur, assume or suffer to exist, any Lien on or with respect to any of its assets or properties (including without limitation shares of capital stock or other ownership interests), real or personal, whether now owned or hereafter acquired, except: (a) Liens for taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA or Environmental Laws) not yet due or as to which the period of grace (not to exceed thirty (30) days), if any, related thereto has not expired or which are being contested in good faith and by appropriate proceedings if adequate reserves are maintained to the extent required by GAAP; (b) the claims of materialmen, mechanics, carriers, warehousemen, processors or landlords for labor, materials, 55 62 supplies or rentals incurred in the ordinary course of business, (i) which are not overdue for a period of more than thirty (30) days or (ii) which are being contested in good faith and by appropriate proceedings; (c) Liens consisting of deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar legislation; (d) Liens constituting encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property, which in the aggregate are not substantial in amount and which do not, in any case, detract from the value of such property or impair the use thereof in the ordinary conduct of business; (e) Liens of the Agent for the benefit of the Agent and the Lenders; (f) any Lien existing on property of a Person immediately prior to its being consolidated with or merged into any Borrower or a Subsidiary or its becoming a Subsidiary, or any Lien existing on any property acquired by any Borrower or any Subsidiary at the time such property is so acquired (so long as the Debt secured thereby shall have been assumed and is otherwise permitted under Section 9.1 or 9.2); provided, that (i) no such Lien shall have been created or assumed in contemplation of such consolidation or merger or such Person's becoming a Subsidiary or such acquisition of property, and (ii) each such Lien shall extend solely to the item or items of property so acquired; (g) Liens not otherwise permitted by this Section 9.3 and in existence on the Closing Date and described on Schedule 9.3; and (h) Liens securing Debt permitted under Sections 9.1(d), (e) and (j); provided, that (i) such Liens shall be created substantially simultaneously with the acquisition or lease of the related asset, (ii) such Liens do not at any time encumber any property other than the property financed by such Debt, (iii) the amount of Debt secured thereby is not increased and (iv) the principal amount of Debt secured by any such Lien shall at no time exceed ninety percent (90%) of the original purchase price or lease payment amount of such property at the time it was acquired. SECTION 9.4 Limitations on Loans, Advances, Investments and Acquisitions. Purchase, own, invest in or otherwise acquire, directly or indirectly, any capital stock, 56 63 interests in any partnership or joint venture (including without limitation the creation or capitalization of any Subsidiary), evidence of Debt or other obligation or security, substantially all or a portion of the business or assets of any other Person or any other investment or interest whatsoever in any other Person, or make or permit to exist, directly or indirectly, any loans, advances or extensions of credit to, or any investment in cash or by delivery of property in, any Person, or enter into, directly or indirectly, any commitment or option in respect of the foregoing except: (a) investments in Subsidiaries existing on the Closing Date and the other existing loans, advances and investments described on Schedule 9.4; (b) investments in (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within 120 days from the date of acquisition thereof, (ii) commercial paper maturing no more than 120 days from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than 120 days from the date of creation thereof issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $500,000,000 and having a rating of "A" or better by a nationally recognized rating agency; provided, that the aggregate amount invested in such certificates of deposit shall not at any time exceed $5,000,000 for any one such certificate of deposit and $10,000,000 for any one such bank, or (iv) time deposits maturing no more than 30 days from the date of creation thereof with commercial banks or savings banks or savings and loan associations each having membership either in the FDIC or the deposits of which are insured by the FDIC and in amounts not exceeding the maximum amounts of insurance thereunder; (c) loans or advances by Longhorn or any other Borrower whose liability has not been limited pursuant to Section 2.8 to any Subsidiary of Longhorn; provided, that Longhorn controls, either directly or indirectly, the ability of such Subsidiary to make payments to Longhorn or such Borrower (in the form of dividends, intercompany advances, or otherwise); (d) acquisitions by Longhorn or any of its Subsidiaries (whether by the acquisition of equity interests, assets or any combination thereof) if each such acquisition meets all of the following requirements: (i) the Person whose equity interest is to be acquired shall be or, as a result of such 57 64 acquisition shall become, a Subsidiary, (ii) the Person whose equity interest is to be acquired shall engage in a business or the assets being acquired are to be used in a business described in Section 7.10, (iii) no Default or Event of Default shall have occurred and be continuing both before and after giving effect to the acquisition, (iv) the fair market value of all consideration paid (including, without limitation, cash consideration paid, Debt assumed and the value of any stock transferred in any "pooling of interests" or otherwise in connection with such acquisition or investment) in connection with any individual acquisition shall not exceed $10,000,000 and (v) the fair market value of all consideration paid (including, without limitation, cash consideration paid, Debt assumed and the value of any stock transferred in any "pooling of interests" or otherwise in connection with such acquisition) in connection with all such acquisitions in the aggregate shall not exceed $25,000,000 in any Fiscal Year; (e) investments by Longhorn or any of its Subsidiaries in joint ventures engaged in a business described in Section 7.10; provided, that the aggregate amount of investments made pursuant hereto, together with aggregate Capital Expenditures, shall not exceed the limitations set forth in Section 8.4; (f) loans by Longhorn to any Person with which Longhorn is diligently and in good faith negotiating a joint venture agreement in an aggregate amount not to exceed $2,000,000; and (g) loans and advances to employees in the ordinary course of business in an aggregate amount not to exceed $500,000 at any time. SECTION 9.5 Limitations on Mergers and Liquidation. Merge, consolidate or enter into any similar combination with any other Person or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) except: (a) any Wholly-Owned Subsidiary of Longhorn which is not a Borrower may merge with or wind-up into Longhorn or any other Wholly-owned Subsidiary of Longhorn; and (b) any Subsidiary may merge into the Person such Subsidiary was formed to acquire in connection with an acquisition permitted by Section 9.4(d). SECTION 9.6 Limitations on Sale of Assets. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, the 58 65 sale of any receivables and leasehold interests and any saleleaseback or similar transaction), whether now owned or hereafter acquired except: (a) the sale of inventory in the ordinary course of business; (b) the sale of obsolete assets no longer used or usable in the business of Longhorn or any of its Subsidiaries; (c) the transfer of assets to Longhorn or any Wholly-Owned Subsidiary of Longhorn pursuant to Section 9.5(a); (d) the sale or discount without recourse of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof; (e) the transfer of assets by any Subsidiary who is not a Borrower to any Wholly-Owned Subsidiary of Longhorn; and (f) the sale, lease, assignment or transfer of restaurants by Longhorn or any Subsidiary thereof to any non-Wholly-Owned Subsidiary; provided, that each such sale or transfer shall not include more than ten (10) restaurants; and (g) the sale, lease, assignment or transfer of restaurants not otherwise permitted hereunder; provided, that the aggregate number of restaurants so sold in any period of four (4) consecutive fiscal quarters shall not exceed five (5). SECTION 9.7 Limitations on Dividends and Distributions. Declare or pay any dividends upon any of its capital stock; purchase, redeem, retire or otherwise acquire, directly or indirectly, any shares of its capital stock, or make any distribution of cash, property or assets among the holders of shares of its capital stock, or make any change in its capital structure that could reasonably be expected to have a Material Adverse Effect; provided, that: (a) Longhorn or any Subsidiary may pay dividends in shares of its own capital stock; (b) any Subsidiary may pay cash dividends or make cash distributions to any Borrower; (c) any Subsidiary may make cash distributions to its equity holders; provided, that such distributions are made to each equity holder pro rata in accordance with its equity ownership interest; and 59 66 (d) Longhorn or any Subsidiary thereof may purchase joint venture interests to the extent permitted or required pursuant to any joint venture agreement to which such Person is a party; provided, that such acquisition would otherwise be permitted pursuant to Section 9.4(d). SECTION 9.8 Transactions with Affiliates. To the extent not otherwise expressly permitted herein, directly or indirectly: (a) make any loan or advance to, or purchase or assume any note or other obligation to or from, any of its officers, directors, shareholders or other Affiliates, or to or from any member of the immediate family of any of its officers, directors, shareholders or other Affiliates, or subcontract any operations to any of its Affiliates, or (b) enter into, or be a party to, any transaction with any of its Affiliates, except pursuant to the reasonable requirements of its business and upon fair and reasonable terms that are fully disclosed to the Required Lenders and are no less favorable to it than it would obtain in a comparable arm's length transaction with a Person not its Affiliate. SECTION 9.9 Certain Accounting Changes. Change its Fiscal Year end, or make any change in its accounting treatment and reporting practices except as required by GAAP. SECTION 9.10 Amendments; Payments and Prepayments of Subordinated Debt. Amend or modify (or permit the modification or amendment of) any of the terms or provisions of any Subordinated Debt, or cancel or forgive, make any voluntary or optional payment or prepayment on, or redeem or acquire for value (including without limitation by way of depositing with any trustee with respect thereto money or securities before due for the purpose of paying when due) any Subordinated Debt. SECTION 9.11 Restrictive Agreements. Enter into any Debt which contains any negative pledge on assets or any covenants more restrictive than the provisions of Articles VII, VIII and IX hereof, or which restricts, limits or otherwise encumbers its ability to incur Liens on or with respect to any of its assets or properties other than the assets or properties securing such Debt. ARTICLE X DEFAULT AND REMEDIES 60 67 SECTION 10.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule or regulation of any Governmental Authority or otherwise: (a) Default in Payment of Principal of Loans. The Borrowers shall default in any payment of principal of any Loan or Note when and as due (whether at maturity, by reason of acceleration or otherwise). (b) Other Payment Default. The Borrowers shall default in the payment when and as due (whether at maturity, by reason of acceleration or otherwise) of interest on any Loan or Note or the payment of any other Obligation, and such default shall continue unremedied for three (3) Business Days. (c) Misrepresentation. Any representation or warranty made or deemed to be made by any Borrower or any of its Subsidiaries under this Agreement, any Loan Document or any amendment hereto or thereto, shall at any time prove to have been incorrect or misleading in any material respect when made or deemed made. (d) Default in Performance of Certain Covenants. The Borrowers shall default in the performance or observance of any covenant or agreement contained in Sections 6.2 and 6.4(e) or Articles VIII or IX (excluding Sections 9.8 and 9.9) of this Agreement. (e) Default in Performance of Other Covenants and Conditions. Any Borrower or any Subsidiary thereof shall default in the performance or observance of any term, covenant, condition or agreement contained in this Agreement (other than as specifically provided for otherwise in this Section 10.1) or any other Loan Document and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the Borrowers by the Agent. (f) Hedging Agreement. Any termination payment shall be due by the Borrowers under any Hedging Agreement and such amount is not paid within ten (10) Business Days of the due date thereof. (g) Debt Cross-Default. Any Borrower or any of its Subsidiaries shall (i) default in the payment of any Debt (other than the Notes) the aggregate outstanding amount of which Debt is in excess of $500,000 beyond the period of grace if any, provided in the instrument or agreement under which such Debt was created, 61 68 or (ii) default in the observance or performance of any other agreement or condition relating to any Debt (other than the Notes) the aggregate outstanding amount of which Debt is in excess of $500,000 or contained in any instrument or agreement evidencing, securing or relating thereto or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Debt (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice if required, any such Debt to become due prior to its stated maturity (any applicable grace period having expired). (h) Other Cross-Defaults. Any Borrower or any of its Subsidiaries shall default in the payment when due, or in the performance or observance, of any obligation or condition of any Material Contract unless, but only as long as, the existence of any such default is being contested by such Borrower or such Subsidiary in good faith by appropriate proceedings and adequate reserves in respect thereof have been established on the books of such Borrower or such Subsidiary to the extent required by GAAP. (i) Change in Control. Any person or group of persons shall obtain "beneficial ownership" (within the meaning of Section 13 (d) of the Securities Exchange Act of 1934, as amended) in one or more series of transactions of more than thirty percent (30%) of the voting power of Longhorn entitled to vote in the election of members of the board of directors of Longhorn or there shall have occurred under any indenture or other instrument evidencing any Debt in excess of $500,000 any "change in control" (as defined in such indenture or other evidence of Debt) obligating any Borrower to repurchase, redeem or repay all or any part of the Debt or capital stock provided for therein (any such event, a "Change in Control"). (j) Voluntary Bankruptcy Proceeding. Any Borrower or any Material Subsidiary shall (i) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to take advantage of any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or composition for adjustment of debts, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit 62 69 of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing. (k) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against any Borrower or any Material Subsidiary in any court of competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or hereafter in effect) or under any other laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like for such Borrower or Material Subsidiary or for all or any substantial part of their respective assets, domestic or foreign, and such case or proceeding shall continue without dismissal or stay for a period of sixty (60) consecutive days, or an order granting the relief requested in such case or proceeding (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered. (l) Termination Event. The occurrence of any of the following events that, individually or in the aggregate, results in or could reasonably be expected to result in a Material Adverse Effect: (i) any Borrower or any ERISA Affiliate fails to make full payment when due of all amounts which, under the provisions of any Pension Plan or Section 412 of the Code, such Borrower or any ERISA Affiliate is required to pay as contributions thereto, (ii) an accumulated funding deficiency in excess of $250,000 occurs or exists, whether or not waived, with respect to any Pension Plan, (iii) a Termination Event or (iv) any Borrower or any ERISA Affiliate as employer under one or more Multiemployer Plans makes a complete or partial withdrawal from any such Multiemployer Plan and the plan sponsor of any such Multiemployer Plan notifies such withdrawing employer that such employer has incurred a withdrawal liability requiring payments in an amount exceeding $250,000. (n) Judgment. A judgment or order for the payment of money which causes the aggregate amount of all such judgments to exceed $250,000 in any Fiscal Year (excluding any amounts which any Borrower's insurance carrier has affirmatively agreed in writing are covered by insurance) shall be entered against any Borrower or any Subsidiary thereof by any court and such judgment or order shall continue without discharge or stay for a period of thirty (30) days. SECTION 10.2 Remedies. Upon the occurrence of an Event of Default, with the consent of the Required Lenders, the Agent may, or upon the request of the Required Lenders, the Agent shall, by notice to the Borrowers: 63 70 (a) Acceleration; Termination of Facilities. Declare the principal of and interest on the Loans and the Notes at the time outstanding, and all other amounts owed to the Lenders and to the Agent under this Agreement or any of the other Loan Documents and all other Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or the other Loan Documents to the contrary notwithstanding, and terminate the Credit Facility and any right of the Borrowers to request borrowings thereunder; provided, that upon the occurrence of an Event of Default specified in Section 10.1(j) or (k), the Credit Facility shall be automatically terminated and all Obligations shall automatically become due and payable. (b) Other Rights. Exercise on behalf of the Lenders all of its other rights and remedies under this Agreement, the other Loan Documents and Applicable Law, in order to satisfy all of the Borrowers' Obligations. SECTION 10.3 Rights and Remedies Cumulative; Non-Waiver; etc. The enumeration of the rights and remedies of the Agent and the Lenders set forth in this Agreement is not intended to be exhaustive and the exercise by the Agent and the Lenders of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the Loan Documents or that may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Event of Default. No course of dealing between any Borrower, the Agent and the Lenders or their respective agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any of the other Loan Documents or to constitute a waiver of any Event of Default. ARTICLE XI THE AGENT SECTION 11.1 Appointment. Each of the Lenders hereby irrevocably designates and appoints First Union as Agent of such Lender under this Agreement and the other Loan Documents and each such Lender irrevocably authorizes First Union as Agent for such 64 71 Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or such other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. SECTION 11.2 Delegation of Duties. The Agent may execute any of its respective duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by the Agent with reasonable care. SECTION 11.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for actions occasioned solely by its or such Person's own gross negligence or willful misconduct), or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Borrower or any of its Subsidiaries or any officer thereof contained in this Agreement or the other Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or for any failure of any Borrower or any of its Subsidiaries to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of any Borrower or any of their respective Subsidiaries. SECTION 11.4 Reliance by the Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or 65 72 teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless such Note shall have been transferred in accordance with Section 12.10 hereof. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders (or, when expressly required hereby or by the relevant other Loan Document, all the Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action except for its own gross negligence or willful misconduct. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes in accordance with a request of the Required Lenders (or, when expressly required hereby, all the Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. SECTION 11.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it has received notice from a Lender or the Borrowers referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, it shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. SECTION 11.6 Non-Reliance on the Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of Longhorn or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, 66 73 independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of Longhorn and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of Longhorn and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or by the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of any Borrower or any Subsidiary which may come into the possession of the Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates. SECTION 11.7 Indemnification. The Lenders agree to indemnify the Agent in its capacity as such and (to the extent not reimbursed by the Borrowers and without limiting the obligation of the Borrowers to do so), ratably according to the respective amounts of their Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's bad faith, gross negligence or willful misconduct. The agreements in this Section 11.7 shall survive the payment of the Notes and all other amounts payable hereunder and the termination of this Agreement. SECTION 11.8 The Agent in Its Individual Capacity. The Agent and its respective Subsidiaries and Affiliates may make 67 74 loans to, accept deposits from and generally engage in any kind of business with the Borrowers as though the Agent were not an Agent hereunder. With respect to any Loans made or renewed by it and any Note issued to it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. SECTION 11.9 Resignation of the Agent; Successor Agent. Subject to the appointment and acceptance of a successor as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Agent, which successor shall have minimum capital and surplus of at least $500,000,000. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the Agent's giving of notice of resignation, then the Agent may, on behalf of the Lenders, appoint a successor Agent, which successor shall have minimum capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 11.9 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. SECTION 11.10 Co-Agent. The Co-Agent, in its capacity as co-agent, shall have no duties or responsibilities under this Agreement or any other Loan Document. ARTICLE XII MISCELLANEOUS SECTION 12.1 Notices. (a) Method of Communication. Except as otherwise provided in this Agreement, all notices and communications hereunder shall be in writing, or by telephone subsequently confirmed in writing. Any notice shall be effective if delivered by hand delivery or sent via telecopy, recognized overnight courier 68 75 service or certified mail, return receipt requested, and shall be presumed to be received by a party hereto (i) on the date of delivery if delivered by hand or sent by telecopy, (ii) on the next Business Day if sent by recognized overnight courier service and (iii) on the third Business Day following the date sent by certified mail, return receipt requested. A telephonic notice to the Agent as understood by the Agent will be deemed to be the controlling and proper notice in the event of a discrepancy with or failure to receive a confirming written notice. (b) Addresses for Notices. Notices to any party shall be sent to it at the following addresses, or any other address as to which all the other parties are notified in writing. If to the Borrowers: Longhorn Steaks, Inc. 8215 Roswell Road Bldg. #200 Atlanta, Georgia 30350 Attention: Anne D. Huemme Telephone No.: (770) 551-5445 Telecopy No.: (770) 399-7796 With copies to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309 Attention: Paul Cushing Telephone No.: (404) 881-7578 Telecopy No.: (404) 881-7777 If to First Union as First Union National Bank of Agent: Georgia 999 Peachtree Street, N.E. 9th Floor Atlanta, Georgia 30309 Attention: Portfolio Management Telecopy No.: (404) 827-7199 and First Union National Bank of North Carolina One First Union Center, TW-10 301 South College Street Charlotte, North Carolina 28288-0608 Attention: Syndication Agency Services Telephone No.: (704) 383-0281 Telecopy No.: (704) 383-0288 If to any Lender: To the Address set forth on Schedule 1 hereto 69 76 (c) Agent's Office. The Agent hereby designates its office located at the address set forth above, or any subsequent office which shall have been specified for such purpose by written notice to the Borrowers and Lenders, as the Agent's Office referred to herein, to which payments due are to be made and at which Loans will be disbursed. SECTION 12.2 Expenses; Indemnity. The Borrowers will (a) pay all reasonable out-of-pocket expenses of the Agent actually incurred in connection with: (i) the preparation, execution and delivery of this Agreement and each other Loan Document, whenever the same shall be executed and delivered, including without limitation all out-of-pocket syndication and due diligence expenses and reasonable fees and disbursements of counsel for the Agent, (ii) the preparation, execution and delivery of any waiver, amendment or consent by the Agent or the Lenders relating to this Agreement or any other Loan Document, including without limitation reasonable fees and disbursements of counsel for the Agent (b) pay all reasonable out-of-pocket expenses of the Agent and each Lender actually incurred in connection with the administration and enforcement of any rights and remedies of the Agent and Lenders under the Credit Facility, including consulting with appraisers, accountants, engineers, attorneys and other Persons concerning the nature, scope or value of any right or remedy of the Agent or any Lender hereunder or under any other Loan Document or any factual matters in connection therewith, which expenses shall include without limitation the reasonable fees and disbursements of such Persons, and (c) defend, indemnify and hold harmless the Agent and the Lenders, and their respective parents, Subsidiaries, Affiliates, employees, agents, officers and directors, from and against any losses, penalties, fines, liabilities, settlements, damages, costs and expenses, suffered by any such Person in connection with any claim, investigation, litigation or other proceeding (whether or not the Agent or any Lender is a party thereto) and the prosecution and defense thereof, arising out of or in any way connected with the Agreement, any other Loan Document or the Loans, including without limitation reasonable attorney's and consultant's fees, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. SECTION 12.3 Set-off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, upon and during the continuance of any Event of Default, the Lenders and any assignee or participant of a Lender in accordance with Section 12.10 are hereby 70 77 authorized by the Borrowers at any time or from time to time, without notice to the Borrowers or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, time or demand, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Lenders, or any such assignee or participant to or for the credit or the account of any Borrower against and on account of the obligations irrespective of whether or not (a) the Lenders shall have made any demand under this Agreement or any of the other Loan Documents or (b) the Agent shall have declared any or all of the Obligations to be due and payable as permitted by Section 10.2 and although such Obligations shall be contingent or unmatured. If any Lender (or assignee or participant) shall exercise any of the rights referred to in this Section, such Lender (or assignee) shall promptly notify the Borrowers, all other Lenders and the Agent thereof; provided, that the failure to give such notice shall not result in any liability to such Lender or in any way affect the validity of the exercise of such right. SECTION 12.4 Governing Law. This Agreement, the Notes and the other Loan Documents, unless otherwise expressly set forth therein, shall be governed by, construed and enforced in accordance with the laws of the State of North Carolina, without reference to the conflicts or choice of law principles thereof. SECTION 12.5 Consent to Jurisdiction. Each Borrower hereby irrevocably consents to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of any dispute in connection with this Agreement, the Notes and the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations. Each Borrower hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Agent or any Lender in connection with this Agreement, the Notes or the other Loan Documents, any rights or obligations hereunder or thereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner specified in Section 12.1. Nothing in this Section 12.5 shall affect the right of the Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Agent or any Lender to bring any action or proceeding against any Borrower or its properties in the courts of any other jurisdictions. SECTION 12.6 Binding Arbitration; Waiver of Jury Trial. 71 78 (a) Binding Arbitration. Upon demand of any party, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to the Notes or any other Loan Documents ("Disputes"), between or among parties to the Notes or any other Loan Document shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from Loan Documents executed in the future, or claims concerning any aspect of the past, present or future relationships arising out of or connected with the Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. Notwithstanding the foregoing, this paragraph shall not apply to any Hedging Agreement that is a Loan Document. (b) Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE AGENT, EACH LENDER AND EACH BORROWER HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. (c) Preservation of Certain Remedies. Notwithstanding the preceding binding arbitration provisions, the parties hereto and to the other Loan Documents preserve, without diminution, certain remedies that such Persons may employ or exercise freely, either alone or in conjunction with or during a Dispute. Each such Person shall have and hereby reserves the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in the Loan Documents or under applicable law or by judicial foreclosure and sale, (ii) all rights of self help including peaceful occupation of property and 72 79 collection of rents, set off, and peaceful possession of property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. SECTION 12.7 Reversal of Payments. To the extent the Borrowers make a payment or payments to the Agent for the ratable benefit of the Lenders or the Agent receives any payment or proceeds of the collateral which payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds repaid, the Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or proceeds had not been received by the Agent. SECTION 12.8 Punitive Damages. The Agent, Lenders and Borrowers (on behalf of themselves and their Subsidiaries) hereby agree that no such Person shall have a remedy of punitive or exemplary damages against any other party to a Loan Document and each such Person hereby waives any right or claim to punitive or exemplary damages that they may now have or may arise in the future in connection with any Dispute, whether such Dispute is resolved through arbitration or judicially. SECTION 12.9 Accounting Matters. All financial and accounting calculations, measurements and computations made for any purpose relating to this Agreement, including, without limitation, all computations utilized by Longhorn or any Subsidiary thereof to determine compliance with any covenant contained herein, shall, except as otherwise expressly contemplated hereby or unless there is an express written direction by the Agent to the contrary agreed to by Longhorn, be performed in accordance with GAAP as in effect on the Closing Date. In the event that changes in GAAP shall be mandated by the Financial Accounting Standards Board, or any similar accounting body of comparable standing, or shall be recommended by Longhorn's certified public accountants, to the extent that such changes would modify such accounting terms or the interpretation or computation thereof, such changes shall be followed in defining such accounting terms only from and after the date the Borrowers and the Lenders shall have amended this Agreement to the extent necessary to reflect any such changes in the financial covenants and other terms and conditions of this Agreement. 73 80 SECTION 12.10 Successors and Assigns; Participations. (a) Benefit of Agreement. This Agreement shall be binding upon and inure to the benefit of the Borrowers, the Agent and the Lenders, all future holders of the Notes, and their respective successors and assigns, except that the Borrowers shall not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of each Lender. (b) Assignment by Lenders. Each Lender may, with the consent of the Agent and Longhorn, which consents shall not be unreasonably withheld or delayed, assign to one or more Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of the Loans at the time owing to it and the Notes held by it); provided, that: (i) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement; (ii) if less than all of the assigning Lender's Commitment is to be assigned, neither the Commitment so assigned nor the Commitment retained shall be less than $5,000,000; (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance in the form of Exhibit F attached hereto (an "Assignment and Acceptance"), together with any Note or Notes subject to such assignment; (iv) such assignment shall not, without the consent of Longhorn, require any Borrower to file a registration statement with the Securities and Exchange Commission or apply to or qualify the Loans or the Notes under the blue sky laws of any state; and (v) the assigning Lender shall pay to the Agent an assignment fee of $3,000 upon the execution by such Lender of the Assignment and Acceptance; provided, that no such fee shall be payable upon any assignment by a Lender to an Affiliate thereof. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (A) the assignee thereunder 74 81 shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereby and (B) the Lender thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement. (c) Rights and Duties Upon Assignment. By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as set forth in such Assignment and Acceptance. (d) Register. The Agent shall maintain a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the amount of the Loans with respect to each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Agent and the Lenders may treat each person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Issuance of New Notes. Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Eligible Assignee together with any Note or Notes subject to such assignment and the written consent to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is substantially in the form of Exhibit F: (i) accept such Assignment and Acceptance; (ii) record the information contained therein in the Register; (iii) give prompt notice thereof to the Lenders and the Borrowers; and (iv) promptly deliver a copy of such Assignment and Acceptance to the Borrowers. Within five (5) Business Days after receipt of notice, the Borrowers shall execute and deliver to the Agent, in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Eligible Assignee in amounts equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and a new Note or Notes to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the 75 82 aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the assigned Notes delivered to the assigning Lender. Each surrendered Note or Notes shall be canceled and returned to the Borrowers. (f) Participations. Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Loans and the Notes held by it); provided, that: (i) each such participation shall be in an amount not less than $5,000,000; (ii) such Lender's obligations under this Agreement (including, without limitation, its Commitment) shall remain unchanged; (iii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iv) such Lender shall remain the holder of the Notes held by it for all purposes of this Agreement; (v) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement; (vi) such Lender shall not permit such participant the right to approve any waivers, amendments or other modifications to this Agreement or any other Loan Document other than waivers, amendments or modifications which would reduce the principal of or the interest rate on any Loan, extend the term or increase the amount of the Commitment, reduce the amount of any fees to which such participant is entitled, extend any scheduled payment date for principal of any Loan or, except as expressly contemplated hereby or thereby, release substantially all of the collateral securing the Loans at any time; and (vii) any such disposition shall not, without the consent of Longhorn, require any Borrower to file a registration statement with the Securities and Exchange Commission to apply to qualify the Loans or the Notes under the blue sky law of any state. 76 83 (g) Disclosure of Information; Confidentiality. The Agent and the Lenders shall hold all non-public information with respect to Longhorn or any of its Subsidiaries or Affiliates obtained pursuant to the Loan Documents in accordance with their customary procedures for handling confidential information. Any Lender may, in connection with any assignment, proposed assignment, participation or proposed participation pursuant to this Section 12.10, disclose to the assignee, participant, proposed assignee or proposed participant, any information relating to Longhorn or any of its Subsidiaries or Affiliates furnished to such Lender by or on behalf of Longhorn or any of its Subsidiaries or Affiliates; provided, that prior to any such disclosure, each such assignee, proposed assignee, participant or proposed participant shall agree in writing with the Borrowers or such Lender to preserve the confidentiality of any confidential information relating to Longhorn and any of its Subsidiaries and Affiliates received from such Lender. (h) Certain Pledges or Assignments. Nothing herein shall prohibit any Lender from pledging or assigning any Note to any Federal Reserve Bank in accordance with Applicable Law. SECTION 12.11 Amendments, Waivers and Consents. Except as set forth below, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived by the Lenders, and any consent given by the Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders (or by the Agent with the consent of the Required Lenders) and delivered to the Agent and, in the case of an amendment, signed by Longhorn, on behalf of itself and the Borrowers; provided, that no amendment, waiver or consent shall (a) increase the amount or extend the time of the obligation of the Lenders to make Loans (including without limitation pursuant to Section 2.6), (b) extend the originally scheduled time or times of payment of the principal of any Loan or the time or times of payment of interest on any Loan, (c) reduce the rate of interest or fees payable on any Loan, (d) permit any subordination of the principal or interest on any Loan, (e) waive or amend the provisions of Section 8.1 or (f) amend the provisions of this Section 12.11 or the definition of Required Lenders, without the prior written consent of each Lender. In addition, no amendment, waiver or consent to the provisions of Article XI shall be made without the written consent of the Agent. SECTION 12.12 Performance of Duties. The Borrowers' obligations under this Agreement and each of the Loan Documents shall be performed by the Borrowers at their sole cost and expense. 77 84 SECTION 12.13 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Lenders, the Agent and any Persons designated by the Agent or any Lender pursuant to any provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied or the Credit Facility has not been terminated. SECTION 12.14 Survival of Indemnities. Notwithstanding any termination of this Agreement, the indemnities to which the Agent and the Lenders are entitled under the provisions of this Article XII and any other provision of this Agreement and the Loan Documents shall continue in full force and effect and shall protect the Agent and the Lenders against events arising after such termination as well as before. SECTION 12.15 Titles and Captions. Titles and captions of Articles, Sections and subsections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 12.16 Severability of Provisions. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 12.17 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of which taken together shall constitute one and the same agreement. SECTION 12.18 Longhorn as Agent for Borrowers. Each Borrower hereby irrevocably appoints and authorizes Longhorn (a) to provide the Agent with all notices with respect to Loans obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (b) to take such action on behalf of the Borrowers as Longhorn deems appropriate on its behalf to obtain Loans and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. SECTION 12.19 Term of Agreement. This Agreement shall remain in effect from the Closing Date through and including the date upon which all Obligations shall have been indefeasibly and 78 85 irrevocably paid and satisfied in full. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination. 79 86 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, all as of the day and year first written above. [CORPORATE SEAL] LONGHORN STEAKS, INC. By: /s/ Richard E. Rivera ---------------------------- Name: Richard E. Rivera -------------------------- Title: President ------------------------- [CORPORATE SEAL] BUGABOO CREEK STEAK HOUSE, INC. ATTEST: By: /s/ Anne D. Huemme By: /s/ Richard E. Rivera --------------------- ----------------------------- Name: Anne D. Huemme Name: Richard E. Rivera ------------------- --------------------------- Title: Secretary Title: President ------------------ -------------------------- [SIGATURES CONTINUE ON FOLLOWING PAGE] 80 87 FIRST UNION NATIONAL BANK OF GEORGIA, as Agent and Lender By: /s/ Nicholas Mark DiLuzio ------------------------------ Name: Nicholas Mark DiLuzio ---------------------------- Title: Senior Vice President --------------------------- FLEET NATIONAL BANK, as Lender By: /s/ Oliver Bennett ------------------------------ Name: Oliver Bennett ---------------------------- Title: Vice President --------------------------- AMSOUTH BANK OF ALABAMA, as Lender By: /s/ Alan D. Lott ------------------------------ Name: Alan D. Lott ---------------------------- Title: Vice President --------------------------- 81 88 SCHEDULE 1: LENDERS AND COMMITMENTS
COMMITMENT AND COMMITMENT LENDER PERCENTAGE - ------ ---------- First Union National Bank $30,000,000 of Georgia 50% 999 Peachtree Street, N.E 9th Floor Atlanta, GA 30309 Attention: Portfolio Management Telecopy No.: (404) 827-7199 Fleet National Bank $20,000,000 111 Westminster Street 33.33% Providence, RI 02903 Attention: Oliver Bennett Vice President Telephone: (401) 278-5289 Telecopy: (401) 278-5726 AmSouth Bank of Alabama $10,000,000 1900 5th Avenue, North 66.66% 7th Floor Birmingham, Alabama 35203 Attention: Alan Lott Vice President Telephone: (205) 583-4474 Telecopy: (205) 583-4436
EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 Legend: "C" = corporation "GP" = general partnership "LP" = limited partnership
Jurisdiction of Name Type Formation Bugaboo Creek Steak House, Inc. C Delaware WHIP Pooling Corporation C Georgia The Capital Grille, Inc. C Rhode Island The Capital Grille of Beverly Hills, Inc. C California The Capital Grille of Boston, Inc. C Massachusetts The Capital Grille of Chestnut Hill, Inc. C Massachusetts The Capital Grille of Chicago, Inc. C Illinois The Capital Grille of Houston, Inc. C Texas The Capital Grille of Miami, Inc. C Florida The Capital Grille of New York, Inc. C New York The Capital Grille of Philadelphia, Inc. C Pennsylvania The Capital Grille of Scottsdale, Inc. C Arizona The Capital Grille of Troy, Inc. C Michigan The Capital Grille of Washington, Inc. C District of Columbia Bugaboo Creek of Abington, Inc. C Pennsylvania Bugaboo Creek of Albany, Inc. C New York Bugaboo Creek of Braintree, Inc. C Massachusetts Bugaboo Creek of East Longmeadow, Inc. C Massachusetts Bugaboo Creek of Framingham, Inc. C Massachusetts Bugaboo Creek of Gaithersburg, Inc. C Maryland Bugaboo Creek of Henrietta, Inc. C New York Bugaboo Creek of Hicksville, Inc. C New York Bugaboo Creek of Manchester, Inc. C Connecticut Bugaboo Creek of Newington, Inc. C New Hampshire Bugaboo Creek of Norwood, Inc. C Massachusetts Bugaboo Creek of Peabody, Inc. C Massachusetts Bugaboo Creek of Philadephia, Inc. C Pennsylvania Bugaboo Creek of Portland, Inc. C Maine Bugaboo Creek of Poughkeepsie, Inc. C New York Bugaboo Creek of Seekonk, Inc. C Massachusetts Bugaboo Creek of Virginia, Inc. C Virginia Bugaboo Creek of Warwick, Inc. C Rhode Island Bugaboo Creek of Watertown, Inc. C Massachusetts Bugaboo Creek of West Orange, Inc. C New Jersey Bugaboo Investments, Inc. C Delaware Rare Capital, Inc. C Delaware
2 Buckeye Steak Ventures GP Georgia Carolina Steakhouse Ventures GP Georgia Eagle Ventures GP Georgia Gold Coast Restaurant Group GP Georgia LSI-Elias Partners GP Florida LSI-Elias Partners II GP Florida LSI Portrush Joint Venture GP Georgia LSI Royal Joint Venture II GP Georgia LSI Royal Joint Venture III GP Georgia LSI Royal Joint Venture IV GP Georgia RARE-HVI Joint Venture GP Georgia RMA-LSI Joint Venture GP Georgia RTL Joint Venture GP Georgia 6201 Airport Blvd. Limited Partnership LP Georgia -2- 3 4095 Eastern Blvd. Limited Partnership LP Georgia 3411 Ross Clark Circle Limited Partnership LP Georgia 323 Northwestern Blvd., Ltd. LP Georgia 1630 Beacon Center Limited Partnership LP Florida 505 North Congress, Ltd. LP Florida 2375 S. University Limited LP Florida 2260 University Limited LP Florida 13701 S. Tamiami Trail Limited Partnership LP Florida 15135 N. Kendall Drive Limited Partnership LP Florida 2901 Federal Highway Limited Partnership LP Georgia 20999 Center Ridge Road Limited Partnership LP Ohio 443 Howe Avenue Limited Partnership LP Georgia 5440 Fruitville Road Limited Partnership LP Georgia 11102 Causeway Blvd. Limited Partnership LP Georgia 9557 Mentor Avenue Limited Partnership LP Georgia 1110 Augstine Road Limited Partnership LP Georgia 34863 Emerald Coast Parkway Limited Partnership LP Georgia
EX-23.A 5 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23(A) INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors RARE Hospitality International, Inc. We consent to incorporation by reference in the registration statements No. 333-11983, No. 333-11963, No. 333-11969, No. 333-11977, No. 333-1028, No. 333-1030, and No. 33-57900 on Form S-8 of Longhorn Steaks, Inc. of our report dated January 31, 1997, relating to the consolidated balance sheets of RARE Hospitality International, Inc. as of December 29, 1996 and December 31, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 29, 1996, which report appears in the December 29, 1996 annual report on Form 10-K of RARE Hospitality International, Inc. KPMG Peat Marwick LLP Atlanta, Georgia March 28, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 29, 1996 AND THE CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEAR ENDED DECEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K FOR THE YEAR ENDED DECEMBER 29, 1996. 1,000 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 6,478 861 2,522 0 7,883 21,874 120,431 0 151,594 19,809 7,100 0 0 100,180 21,204 151,594 215,441 215,749 81,128 81,128 107,012 0 (79) 8,413 3,170 5,243 0 0 0 5,243 .46 0 ASSET VALUES REPRESENT NET AMOUNTS.
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