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A deal hot off the grill.

A Deal Hot Off The Grill

It's taken more than nine months, a full complement of lawyers and accountants and lots of patience by everyone involved to work out an unusual and complicated transaction at Andy's Restaurants. In the next few days, the Little Rock-based fast-food chain will have created a corporate rarity in Arkansas - an Employee Stock Ownership Plan.

Garland Street, the owner of Andy's, is serving up 70 percent of his company stock to his 300 employees. The deal will ring up a tab of more than $5 million and provide a slice of the corporate pie to fry cooks and pencil pushers alike.

"It's an opportunity for these kids - and there's only three or four of us who aren't kids - to own a piece of the corporation, even if it's a small piece," Streett remarks.

On the front end, those pieces will vary in size from several hundred dollars to the $30,000 range for some of the top-end execs. These equity stakes in the company are doled out on paper immediately once the ESOP becomes effective, and employee holdings should get bigger over time as the ESOP debt is paid down and Andy's grows.

Streett likes the idea of an internal sale, of turning over the 16-outlet chain to familiar faces who've helped build Andy's sales up to $10 million in 1989. But he's not in the running for Mr. Magnanimous or anything. Personal sentiments aside, the economic incentives for doing an ESOP are frankly just too rewarding for Streett to pass up.

The 58-year-old executive toyed with the idea of stepping down as the burgermeister of Andy's by initiating a conventional sale last year. He changed his mind after realizing the tax bite was more than he could stand and learning an ESOP arrangement could muzzle the Internal Revenue Service.

"I'm surprised that more people haven't taken advantage of it because the federal government has made ESOPs so tremendously attractive," Streett remarks.

Lucrative Tax Benefits

At least 50 percent of a company must be sold to its employees to qualify for an ESOP. The big carrot for everyone involved is tax benefits, which can easily run into millions of dollars.

The most eye-catching feature for Streett and other sellers in an ESOP is that they can defer taxes on proceeds from the sale as long as the money is invested in either stocks or bonds issued by U.S. corporations.

"And that's what my intentions are," Streett discloses. The money remains sheltered from the tax man until the stocks and bonds are converted into cash.

Streett will get his money up front from Union National Bank in Little Rock, which won out over several other bidders for the right to finance the Andy's ESOP. As its reward under federal guidelines, Union National doesn't have to pay taxes on 50 percent of the interest income generated from the ESOP loan.

The competition for the ESOP loan and its tax benefits results in an interest rate well below the prime, which helps make the transaction more financially feasible for the Andy's employees. Tax incentives again are the real kicker though. Among the biggies are:

* All of the interest paid to Union National Bank on the ESOP loan is tax deductible.

* Up to 25 percent of the salaries of employees participating in the ESOP is tax deductible.

* Dividends are allowed as long as 100 percent of the payments go toward retiring ESOP debt.

Lucrative though the ESOP tax breaks be, there is a cut-off date. The special

provisions for tax write-offs can last no longer than seven years after which the relationship between Andy's and the IRS returns to normal.

"If we can't pay it off in three to four years, I can tell you that everyone will be disappointed," Streett observes. "If it's half as successful as I think it can be it'll be tremendous for everyone."

Fiscal Philosophy

Streett is a bright, image-conscious salesman/promoter type - politeness and courtesy to a fault. Prior to his foray into the restaurant business, he worked in Little Rock at International Harvester and Frank Lyon Co.

The Camden native has owned Andy's since 1982 when he bought out his partner Dr. John W. Downs. The corporation was founded in 1977 by one-time bond daddy Dan Lassiter. Streett and Downs, who owned three Andy's outlets at the time, acquired the operation in 1980 from a 28-member group of stockholders led by Lassiter.

His buyout of Andy's entailed assuming $1.2 million in debt and a loss carryforward of $700,000 as well as paying $1 million for the investor's equity. The acquisition amounted to a corporate fix-it-up project, and Streett has worked through the debt to create a small but successful enterprise.

His fiscal conservatism, which is still apparent, has left a manageable corporate debt structure that should help speed up the ESOP process. "I am really hung up about not leasing anything," Streett admits. "We don't have any debt that's not tied to real estate. We don't borrow money."

Business appears to be going well what with a record sales period during April 4-11, so why is Streett looking to sell?

"I'm at an age where I'm looking to slow down," Streett responds.

Of the 16 Andy's outlets, only one is not located in Arkansas. This Topeka, Kan., restaurant and one in Monticello are owned by franchiseholders. The remaining operations are all owned by the corporation: three in Little Rock and one each in Arkadelphia, Camden, Crossett, El Dorado, Hope, Jacksonville, Magnolia, Malvern, Mountain Home, Pine Bluff and Stuttgart.

All employees at these 14 corporate outlets and the company headquarters in west Little Rock are eligible to participate in the ESOP. To qualify for an ownership position, Andy's employees must be 18 years old and have 1,000 hours of work under their belt. Once the deal closes, the ESOP is retroactive to Jan. 1, 1990.

Streett will retain a 30 percent stake in the company for the time-being and serve as board chairman and a member of the executive committee until the ownership transition is complete.

"I have agreed to sell the balance of my stock to the ESOP when they can afford it and when it's manageable," he reports.

Edsel Danner, EVP, and Shirley Sedder, secretary/treasurer, will also serve on the executive committee and board of directors. Six other Andy's employees, including two hourly wage earners, will be appointed to create a nine-member board of directors that will lead the company.

"It's something we'll have to work out," Shirley Sedder, an Andy's employee since 1984, points out in reference to the evolving leadership structure. "It's all new to us and exciting. There's a special feeling to not only work at a company but to own a part of it."

PHOTO : ESOP Players: Garland Streett will be selling 70 percent of Andy's Restaurants to company employees for more than $5 million. Pictured above (from left to right) are: Shirley Sedder, secretary/treasurer; Edsel Danner, EVP; Streett and Gail Shulte, financial officer.
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Title Annotation:Andy's Restaurants; Little Rock, Arkansas
Author:Waldon, George
Publication:Arkansas Business
Date:Apr 23, 1990
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