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                                                                     EXHIBIT 4.6

        CERTIFICATE OF THE DESIGNATION OF THE POWERS, PREFERENCES AND
      RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF THE
       12% SERIES A SENIOR PAY-IN-KIND EXCHANGEABLE PREFERRED STOCK AND
       THE 12% SERIES B SENIOR PAY-IN-KIND EXCHANGEABLE PREFERRED STOCK
           AND QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF


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                        Pursuant to Section 151 of the
               General Corporation Law of the State of Delaware

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            American Restaurant Group, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware ("GCL"), does hereby certify that, pursuant to authority conferred upon
the Board of Directors of the Company by its Certificate of Incorporation, as
amended, (hereinafter referred to as the "Certificate of Incorporation") and
pursuant to the provisions of Section 151 of the GCL, said Board of Directors,
by written consent dated February 24, 1998, duly approved and adopted the
following resolution (the "Resolution"):

            RESOLVED, that pursuant to the authority vested in the Board of
Directors by its Certificate of Incorporation, the Board of Directors hereby
creates, authorizes and provides for the issuance of two series of Preferred
Stock of the Company, designated as 12% Series A Senior Pay-In-Kind Exchangeable
Preferred Stock of the Company, par value $0.01 per share, and 12% Series B
Senior Pay-In-Kind Exchangeable Preferred Stock of the Company, par value $0.01
per share, having the designations, preferences, relative, participating,
optional and other special rights of the shares of each such series, and the
qualifications, limitations and restrictions thereof that are set forth in this
Resolution, as follows:

            SECTION 1. Designation and Amount. The designations for the two
series of Preferred Stock authorized by this Resolution shall be the 12% Series
A Senior Pay-In-Kind Exchangeable Preferred Stock, par value $0.01 per share
(the "Series A Senior Preferred Stock") and the 12% Series B Senior Pay-In-Kind
Exchangeable Preferred Stock, par value $0.01 per share (the "Series B Senior
Preferred Stock" and, together with the Series A Senior Preferred Stock, the
"Senior Exchangeable Preferred Stock"). The liquidation preference of the Senior
Exchangeable Preferred Stock is $1,000.00 per share (the "Liquidation
Preference") and the original issue price for each such share is $1,000.00. The
Liquidation Preference or the issue price per share of the Senior Exchangeable
Preferred Stock shall not for any purpose be considered to be a determination by
the Board of Directors with respect to the capital and surplus of the Company.
The number of shares constituting such Series A Senior Preferred Stock shall be
80,000, consisting of an initial issuance of 35,000 shares of Series A Senior
Preferred Stock and
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45,000 shares of Series A Senior Preferred Stock, if the Company elects to pay
dividends in additional shares of Series A Senior Preferred Stock. The number of
shares constituting such Series B Senior Preferred Stock shall be 80,000, to be
registered under the Securities Act and exchanged for the outstanding Series A
Senior Preferred Stock and to be issued as dividends if the Company elects to
pay dividends in additional shares of Series B Senior Preferred Stock.

            SECTION 2. Dividends. (a) Beginning on the Issuance Date, Holders of
the outstanding shares of Senior Exchangeable Preferred Stock (the "Holders")
will be entitled to receive, when, as and if declared by the Board of Directors,
out of funds legally available therefor, dividends on the Senior Exchangeable
Preferred Stock at an annual rate of 12% of the Liquidation Preference per
share, subject to increase as provided below (the "Dividend Rate"). All
dividends will be cumulative and accrue daily, whether or not earned or
declared, and will be payable semi-annually in arrears on February 15 and August
15 of each year, commencing on August 15, 1998, to Holders of record on the
February 1 and August 1 immediately preceding the relevant Dividend Payment
Date. The Company may, at its option, pay dividends in cash or in additional
fully paid and non-assessable shares of Senior Exchangeable Preferred Stock
having an aggregate liquidation preference equal to the amount of such
dividends; provided, however, that if the Company pays dividends in additional
shares of Senior Exchangeable Preferred Stock, Holders of Series A Senior
Preferred Stock shall be paid in additional shares of Series A Senior Preferred
Stock and Holders of Series B Senior Preferred Stock shall be paid in additional
shares of Series B Senior Preferred Stock. Dividends on the Series B Senior
Preferred Stock will accrue from the last dividend payment date on which
dividends were paid on the Series A Senior Preferred Stock surrendered for
exchange therefor or, if no dividends had been paid on the Series A Senior
Preferred Stock, from the date of original issue of the Series A Senior
Preferred Stock. Dividends shall cease to accrue in respect of the shares of
Senior Exchangeable Preferred Stock on the Exchange Date or on the Redemption
Date unless the Company shall have failed, as applicable, to issue the
appropriate aggregate principal amount of Exchange Debentures in respect of the
Senior Exchangeable Preferred Stock on the Exchange Date or shall have failed to
pay the relevant redemption price on the Redemption Date. For all purposes
hereunder, the Dividend Rate shall be automatically increased in the following
events: (i) if at the end of any fiscal quarter of the Company, the Maintenance
Test Ratio exceeds the Maximum Test Ratio (each as defined in Section 8(e)
hereof) for that fiscal quarter, then for the period during the immediately
succeeding quarter, the Dividend Rate shall be 13.5% for the first two quarters
for which the Maximum Test Ratio is exceeded (whether or not such fiscal
quarters are consecutive) and 15% for any other quarter thereafter for which the
Maximum Test Ratio is exceeded or (ii) if a Voting Rights Triggering Event
(other than a Voting Rights Triggering Event occurring




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solely because of the breach of the Maintenance Test Ratio set forth in Section
8(e) hereof) occurs, then the Dividend Rate shall be 15% for the period during
which the voting rights relating to such Voting Rights Triggering Event continue
in accordance with the provisions of Section 5(b) hereof.

            (b) All dividends paid with respect to shares of the Senior
Exchangeable Preferred Stock pursuant to Section 2(a) of this Certificate of
Designation shall be paid pro rata to the
Holders entitled thereto.

            (c) Holders shall be entitled to receive the dividends provided for
in Section 2(a) of this Certificate of Designation (including any accrued and
unpaid cash dividends on the Senior Exchangeable Preferred Stock) in preference
to and in priority over any cash dividends (including accrued and unpaid
dividends) upon any of the Junior Securities.

            (d) Dividends on account of arrears for any past dividend period and
dividends in connection with any optional redemption may be declared and paid at
any time, without reference to any regular Dividend Payment Date, to Holders of
record of the Senior Exchangeable Preferred Stock on such date, not more than 30
days prior to the payment thereof, as may be fixed by the Board of Directors.

            (e) Each fractional share of Senior Exchangeable Preferred Stock
outstanding, if any, shall be entitled to a ratably proportionate amount of all
dividends accruing with respect to each outstanding share of Senior Exchangeable
Preferred Stock pursuant to Section 2(a), and all such dividends with respect to
such outstanding fractional shares shall accrue at the Dividend Rate and shall
be payable in the same manner and at such times as provided for in Section 2(a)
with respect to dividends on each outstanding share of Senior Exchangeable
Preferred Stock.

            (f) Dividends payable on the Senior Exchangeable Preferred Stock for
any period less than a year shall be computed on the basis of a 360-day year of
twelve 30-day months and the actual number of days elapsed in the period for
which dividends are payable.

            (g) In addition, in the event that the Company is required by the
terms of the Registration Rights Agreement to be entered into between the
Company, its Subsidiaries and Jefferies & Company, Inc. (the "Initial
Purchaser"), contemplated by the Purchase Agreement dated as of February 13,
1998 between the Company and the Initial Purchaser, and approved by the Board of
Directors of the Company, to pay liquidated damages, the Company may pay such
liquidated damages in the form of additional dividends on the Series A Senior
Exchangeable Preferred Stock in accordance with this Section 2.





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            SECTION 3. Liquidation Preference. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, Holders will be entitled
to be paid, out of the assets of the Company legally available for distribution
to stockholders, 110% of the then effective Liquidation Preference per share of
Senior Exchangeable Preferred Stock, plus, without duplication, an amount in
cash equal to all accrued and unpaid dividends, if any, thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the last Dividend Payment Date to the date
fixed for liquidation, dissolution or winding-up), before any distribution is
made on any Junior Securities. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Senior Exchangeable Preferred Stock are not paid in full, the
Holders of the Senior Exchangeable Preferred Stock will share equally and
ratably in any distribution of assets of the Company based on 110% of the
Liquidation Preference of the Senior Exchangeable Preferred Stock, together,
with all accrued and unpaid dividends. For the purposes of this Section 3,
neither the sale, conveyance, lease or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Company nor the consolidation or merger of the Company with one
or more entities shall be deemed to be a liquidation, dissolution or winding-up
of the Company. Any liquidation payment with respect to each outstanding
fractional share of Senior Exchangeable Preferred Stock, if any, shall be equal
to a ratably proportionate amount of the liquidation payments with respect to
each outstanding full share of Senior Exchangeable Preferred Stock.

            SECTION 4. Exchange. (a) The Company may, at its option, subject to
the conditions described below, on any scheduled Dividend Payment Date occurring
on or after February 15, 1999, exchange the Senior Exchangeable Preferred Stock,
in whole but not in part, for the Exchange Debentures. At least 30 and not more
than 60 days prior to the date fixed for exchange, the Company shall send a
written notice (the "Exchange Notice") of exchange by mail to each Holder, which
notice shall state:

          (i) that the Company has elected to exchange the Senior Exchangeable
      Preferred Stock into Exchange Debentures pursuant to this Certificate of
      Designation;

         (ii) the date of such exchange (the "Exchange Date");

        (iii) that the Holder is to surrender to the Company, at the place or
      places and in the manner designated in the Exchange Notice, its
      certificate or certificates representing the shares of Senior Exchangeable
      Preferred Stock;





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         (iv) that dividends on the shares of Senior Exchangeable Preferred
      Stock to be exchanged shall cease to accrue at the close of business on
      the day prior to the Exchange Date, whether or not certificates for shares
      of Senior Exchangeable Preferred Stock are surrendered for exchange on the
      Exchange Date, unless the Company shall default in the delivery of
      Exchange Debentures; and

          (v) that interest on the Exchange Debentures shall accrue from the
      Exchange Date whether or not certificates for shares of Senior
      Exchangeable Preferred Stock are surrendered for exchange on the Exchange
      Date.

            On the Exchange Date, if the conditions set forth in clauses (A)
through (F) below are satisfied and if the exchange is then permitted under the
Exchange Indenture, the Company shall issue Exchange Debentures in exchange for
the Senior Exchangeable Preferred Stock as provided in the next paragraph;
provided that: (A) on the Exchange Date there are no accrued and unpaid
dividends on the Senior Exchangeable Preferred Stock (including the dividend
payable on such date) or other contractual impediments to such exchange; (B)
there shall be legally available funds sufficient for the exchange to occur
(including, without limitation, legally available funds sufficient therefor
under Section 160 and 170 (or any successor provisions) of the GCL; (C) no
Voting Rights Triggering Event has occurred and is continuing at the time of
such exchange; (D) immediately after giving effect to such exchange, no Default
or Event of Default (each as defined in the Exchange Indenture) would exist
under the Exchange Indenture, and no Default or Event of Default would exist
under any material instrument governing Indebtedness outstanding of the Company
at the time of such exchange, including without limitation the Senior Secured
Notes and the New Credit Facility; (E) the Exchange Indenture shall have been
qualified under the Trust Indenture Act, if qualification is required; and (F)
the Company shall have delivered to the Debenture Trustee, an Officers'
Certificate, dated the Exchange Date, regarding the satisfaction of the
conditions set forth in clauses (A) through (E). In the event that any of the
conditions set forth in clauses (A) through (F) of the preceding sentence are
not satisfied on the Exchange Date, then no shares of Senior Exchangeable
Preferred Stock shall be exchanged, and in order to effect an exchange as
provided for in this Section 4, the Company shall be required to fix another
date for the exchange and issue a new Exchange Notice and the Company shall use
its best efforts to satisfy such conditions and effect such exchange as soon as
practicable.

            (b) Upon any exchange pursuant to this Section 4, Holders shall be
entitled to receive for each share of Senior Exchangeable Preferred Stock,
subject to the provisions hereof, a principal amount of Exchange Debentures
equal to 100% of the Liquidation Preference of such share, plus all accrued and
unpaid dividends thereon to the Exchange Date; provided that the Company




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shall pay cash to Holders in lieu of issuing an Exchange Debenture in a
principal amount of less than $1,000 (or, at the option of the Company, $100)
and provided further that the Exchange Debentures will be issuable only in
denominations of $1,000 (or, at the option of the Company, $100) and integral
multiples thereof.

            (c) On or before the Exchange Date, each Holder shall surrender the
certificate or certificates representing such shares of the Senior Exchangeable
Preferred Stock, in the manner and at the place designated in the Exchange
Notice. The Company shall cause the Exchange Debentures to be executed on the
Exchange Date and, upon surrender in accordance with the Exchange Notice of the
certificates for any shares of the Senior Exchangeable Preferred Stock so
exchanged (properly endorsed or assigned for transfer, if the Exchange Notice
shall so state), such shares shall be exchanged by the Company into Exchange
Debentures as aforesaid. The Company shall pay interest on the Exchange
Debentures at the rate and on the dates specified therein from the Exchange
Date.

            (d) If the Exchange Notice has been mailed as aforesaid, and if
before the Exchange Date all Exchange Debentures necessary for such exchange
shall have been duly executed by the Company and delivered to the Debenture
Trustee with irrevocable instructions to authenticate the Exchange Debentures
necessary for such exchange, then the rights of the Holders as stockholders of
the Company shall cease (except the right to receive the Exchange Debentures and
cash in lieu of any Exchange Debenture that is in a principal amount less than
$1,000 (or, if denominations of $100 are issued by the Company, $100), and the
person or persons entitled to receive the Exchange Debentures issuable upon
exchange shall be treated for all purposes as a registered holder or holders of
such Exchange Debentures as of the Exchange Date.

            SECTION 5. Voting Rights. (a) Holders, except as otherwise required
under the laws of the State of Delaware or as set forth below, shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.

            (b) If (i) dividends on the Senior Exchangeable Preferred Stock are
in arrears and unpaid for any quarterly period; (ii) the Company fails to
discharge its obligation to redeem the Senior Exchangeable Preferred Stock on
the Mandatory Redemption Date or fails to otherwise discharge any redemption
obligation with respect to the Senior Exchangeable Preferred Stock; (iii) the
Maintenance Test Ratio exceeds the applicable Maximum Test Ratio (each as
defined herein) for a period of eight (8) consecutive fiscal quarters; (iv) the
Company breaches any of the covenants in Section 8 concerning Restricted
Payments, sales of assets, affiliate transactions, mergers and sales of assets;
or (v) a breach or violation of any other provision contained in




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this Certificate of Designation occurs which materially affects the Holders and
such breach or violation continues for a period of 30 days or more after receipt
of notice from a majority of the Holders of the Senior Exchangeable Preferred
Stock, then (A) the number of members comprising the Company's Board of
Directors shall automatically increase by two and (B) the holders of the
majority of the then outstanding Senior Exchangeable Preferred Stock, voting or
consenting, as the case may be, as one class, will be entitled to elect two
directors to the Board of Directors to fill the vacancies created by such
increase. Such voting rights will continue until such time as, in the case of a
dividend default, all dividends in arrears on the Senior Exchangeable Preferred
Stock are paid in full and, in all other cases, any failure, breach or default
giving rise to such voting rights is remedied (which in the case of the
Maintenance Test Ratio exceeding the Maximum Test Ratio, shall be the first
quarter when the Maintenance Test Ratio does not exceed the Maximum Test Ratio)
or waived by the holders of at least a majority of the shares of Senior
Exchangeable Preferred Stock then outstanding, at which time the term of the
directors elected pursuant to the provisions of this paragraph shall terminate.
Each such event described in clauses (i) through (v) above is referred to herein
as a "Voting Rights Triggering Event."

            (c) Immediately after voting power to elect directors shall have
become vested and be continuing in the Holders pursuant to Section 5(b) or if
vacancies shall exist in the offices of directors elected by the Holders, a
proper officer of the Company shall call a special meeting of the Holders for
the purpose of electing the directors which such Holders are entitled to elect.
Any such meeting shall be held at the earliest practicable date, and the Company
shall provide Holders with access to the lists of Holders, pursuant to the
provisions of this Section 5(c). At any meeting held for the purpose of electing
directors at which the Holders shall have the right, voting separately as a
class, to elect directors, the presence in person or by proxy of the Holders of
at least a majority of the outstanding shares of Senior Exchangeable Preferred
Stock shall be required to constitute a quorum of such Holders.

            (d) Any vacancy occurring in the office of a director elected by the
Holders pursuant to Section 5(b) may be filled by the remaining director elected
by the Holders unless and until such vacancy shall be filled by the Holders.

            (e) The Company shall not modify, change, affect or amend the
Certificate of Incorporation or this Certificate of Designation to affect
materially and adversely the specified rights, preferences or privileges of the
Holders of the Senior Exchangeable Preferred Stock, or authorize the issuance of
any additional shares of Senior Exchangeable Preferred Stock, without the
affirmative vote or consent of Holders of at least a majority of the shares of
Senior Exchangeable Preferred Stock then




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outstanding, voting or consenting, as the case may be, as one class.

            (f) In any case in which the Holders shall be entitled to vote
pursuant to this Section 5 or pursuant to the laws of the State of Delaware,
each Holder shall be entitled to one vote for each share of Senior Exchangeable
Preferred Stock held.

            (g) In lieu of voting at a meeting, Holders may act by written
consent in accordance with Section 228 of the GCL.

            (h) Except as otherwise required by the GCL, Holders of at least a
majority of the then outstanding shares of Senior Exchangeable Preferred Stock,
voting or consenting, as the case may be, separately as a class, may waive
compliance with any provision of this Certificate of Designation.

            SECTION 6. Redemption.

            (a) Optional Redemption.

          (i) The Senior Exchangeable Preferred Stock will be redeemable
      (subject to restrictions with respect to the legal availability of funds
      therefor) at the election of the Company, as a whole or from time to time
      in part, at any time on not less than 30 nor more than 60 days' prior
      notice, at 110% of the then effective Liquidation Preference, plus,
      without duplication, all accrued and unpaid dividends, if any, to the date
      of redemption (the "Redemption Date").

         (ii) No optional redemption may be authorized or made unless on or
      prior to such redemption full unpaid cumulative dividends shall have been
      paid, or a sum set apart in cash or in shares of Senior Exchangeable
      Preferred Stock for such payment, on all shares of Senior Exchangeable
      Preferred Stock then outstanding. If less then all the Senior Exchangeable
      Preferred Stock is to be redeemed, the particular shares to be redeemed
      will be determined pro rata. If any Senior Exchangeable Preferred Stock is
      to be redeemed in part, the Redemption Notice that relates to such Senior
      Exchangeable Preferred Stock shall state the portion of the liquidation
      preference to be redeemed. New shares of the same Series of Senior
      Exchangeable Preferred Stock having an aggregate liquidation preference
      equal to the unredeemed portion will be issued in the name of the holder
      thereof upon cancellation of the original shares of Senior Exchangeable
      Preferred Stock and, unless the Company fails to pay the redemption price
      on the Redemption Date, after the Redemption Date dividends will cease to
      accrue on the Senior Exchangeable Preferred Stock called for redemption.

            (b) Mandatory Redemption. The Company shall redeem all outstanding
Senior Exchangeable Preferred Stock (subject to




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the legal availability of funds therefor) in whole on the redemption date of
August 15, 2003 (the "Mandatory Redemption Date"), at a redemption price equal
to 110% of the Liquidation Preference thereof, plus all accrued and unpaid
dividends, if any, to the date of redemption.

            (c) Procedure for Redemption. (i) Not more than 60 and not less then
30 days prior to any Redemption Date, written notice (the "Redemption Notice")
shall be given by first-class mail, postage prepaid, to each Holder of record of
shares to be redeemed on the record date fixed for such redemption of the Senior
Exchangeable Preferred Stock at such Holder's address as the same appears on the
stock register of the Company. The Redemption Notice shall state:

            (A) the Redemption Price;

            (B) whether all or less than all of the outstanding shares of the
      Senior Exchangeable Preferred Stock are to be redeemed and the total
      number of shares of such Senior Exchangeable Preferred Stock being
      redeemed;

            (C) the number of shares of Senior Exchangeable Preferred Stock held
      by the Holder that the Company intends to redeem;

            (D) the Redemption Date;

            (E) that the Holder is to surrender to the Company, at the place or
      places, which shall be designated in such Redemption Notice, its
      certificates representing the shares of Senior Exchangeable Preferred
      Stock to be redeemed;

            (F) that dividends on the shares of the Senior Exchangeable
      Preferred Stock to be redeemed shall cease to accrue on such Redemption
      Date unless the Company defaults in the payment of the redemption price;
      and

            (G) the name of any bank or trust company performing the duties
      referred to in subsection (c)(v) below.

         (ii) On or before the Redemption Date, each Holder of Senior
      Exchangeable Preferred Stock to be redeemed shall surrender the
      certificate or certificates representing such shares of Senior
      Exchangeable Preferred Stock to the Company, in the manner and at the
      place designated in the Redemption Notice, and on the Redemption Date the
      full redemption price for such shares shall be payable in cash to the
      person whose name appears on such certificate or certificates as the owner
      thereof, and each surrendered certificate shall be returned to authorized
      but unissued shares. In the event that less than all of the shares
      represented by any such certificate are redeemed, a new




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      certificate shall be issued representing the unredeemed shares.

        (iii) Unless the Company defaults in the payment in full of the
      redemption price, dividends on the Senior Exchangeable Preferred Stock
      called for redemption shall cease to accrue on the Redemption Date, and
      the Holders of such shares shall cease to have any further rights with
      respect thereto on the Redemption Date, other than the right to receive
      the redemption price, without interest.

         (iv) If a Redemption Notice shall have been duly given, and if, on or
      before the Redemption Date specified therein, all funds necessary for such
      redemption shall have been set aside by the Company, separate and apart
      from its other funds, in trust for the pro rata benefit of the Holders of
      the Senior Exchangeable Preferred Stock called for redemption so as to be
      and continue to be available therefor, then, notwithstanding that any
      certificate for shares so called for redemption shall not have been
      surrendered for cancellation, all shares so called for redemption shall no
      longer be deemed outstanding, and all rights with respect to such shares
      shall forthwith on such Redemption Date cease and terminate, except only
      the right of the Holders thereof to receive the amount payable on
      redemption thereof, without interest.

          (v) If a Redemption Notice shall have been duly given or if the
      Company shall have given to the bank or trust company hereinafter referred
      to irrevocable authorization promptly to give such notice, and if on or
      before the Redemption Date specified therein the funds necessary for such
      redemption shall have been deposited by the Company with such bank or
      trust company in trust for the pro rata benefit of the Holders of the
      Senior Exchangeable Preferred Stock called for redemption, then,
      notwithstanding that any certificate for shares so called for redemption
      shall not have been surrendered for cancellation, from and after the time
      of such deposit, all shares so called, or to be so called pursuant to such
      irrevocable authorization, for redemption shall no longer be deemed to be
      outstanding and all rights with respect of such shares shall forthwith
      cease and terminate, except only the right of the Holders thereof to
      receive from such bank or trust company at any time after the time of such
      deposit the funds so deposited, without interest. The aforesaid bank or
      trust company shall be organized and in good standing under the laws of
      the United States of America or of the State of New York, shall be doing
      business in the Borough of Manhattan, The City of New York, shall have
      capital, surplus and undivided profits aggregating at least $100,000,000
      according to its last published statement of condition, and shall be
      identified in the Redemption Notice. Any interest accrued on such funds
      shall be paid to the Company from time to time. Any funds




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      so set aside or deposited, as the case may be, and unclaimed at the end of
      three years from such Redemption Date shall, to the extent permitted by
      law, be released or repaid to the Company, after which repayment the
      Holders of the shares so called for redemption shall look only to the
      Company for payment thereof.

            SECTION 7. Ranking. The Senior Exchangeable Preferred Stock shall,
with respect to dividends and distributions upon liquidation, winding-up and
dissolution of the Company, rank senior to all classes of Common Stock and to
each other class of Capital Stock or series of preferred stock of the Company
existing on, or established after, the Issuance Date by the Board of Directors
(collectively referred to, together with all classes of Common Stock of the
Company, as "Junior Securities").

            SECTION 8. Covenants and Certain Additional Provisions.

            (a) Limitations on Restricted Payments. The Company shall not, and,
with respect to clause (ii) below, shall not permit any Subsidiary to, directly
or indirectly, take any of the following actions:

          (i) declare, set aside for payment or pay any dividend on, or make any
      distribution to the holders of any Junior Securities (other than dividends
      or distributions payable solely in shares of a class or series upon which
      such dividends are declared or paid, or payable in shares of Common Stock
      with respect to Junior Securities other than Common Stock, together with
      cash in lieu of fractional shares); or

         (ii) purchase, redeem or otherwise acquire or retire for value,
      directly or indirectly, any Junior Securities

(such payments or other actions described in (but not excluded from) clauses (i)
and (ii) are collectively referred to as "Restricted Payments"), unless at the
time of, and immediately after giving effect to, the proposed Restricted Payment
(1) no Voting Rights Triggering Event shall have occurred and be continuing, and
(2) all accrued dividends on the Senior Exchangeable Preferred Stock shall have
been paid in full, or funds (or shares of Senior Exchangeable Preferred Stock)
sufficient for payment thereof have been set apart for payment.

            (b) Limitation on Asset Sales. The Company will not, and will not
permit any Subsidiary to, make any Asset Sale unless (i) the Company or such
Subsidiary receives consideration at the time of such Asset Sale at least equal
to the fair market value (as determined in good faith by the Board of Directors
as evidenced by a Board Resolution) of the assets subject to such Asset Sale;
(ii) at least 75% of the consideration for such Asset




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Sale is in the form of cash, Cash Equivalents or liabilities of the Company or
any Subsidiary that are assumed by the transferee of such assets (provided, that
following such Asset Sale there is no further recourse to the Company and its
Subsidiaries with respect to such liabilities); and (iii) within 12 months of
such Asset Sale, the Net Proceeds thereof, at the Company's election, are (A)
invested in assets related to the business of the Company or its Subsidiaries,
or (B) used to repay, purchase or otherwise acquire any Indebtedness of the
Company or its Subsidiaries, including Indebtedness under the New Credit
Facility or the Senior Secured Notes, or (C) used during such 12 months, or
within 60 days after such 12 month period, to purchase or otherwise acquire
shares of Senior Exchangeable Preferred Stock or (D) to the extent not used as
provided in clauses (A) through (C), applied to make an offer to purchase the
Senior Exchangeable Preferred Stock (an "Excess Proceeds Payment") pursuant to
the offer described below (the "Excess Proceeds Offer") and the other procedures
set forth herein; provided, that if the amount of the Net Proceeds from any
Asset Sale not invested or used pursuant to clauses (A), (B) or (C) above is
less than $5.0 million, the Company will not be required to make an offer
pursuant to clause (D) until the aggregate amount of Excess Proceeds from all
Asset Sales exceeds $5.0 million. Pending final application of any such Net
Proceeds, the Company or any Subsidiary may temporarily reduce Indebtedness
under the New Credit Facility or temporarily invest such Net Proceeds in Cash
Equivalents.

            For the purpose of this Section 8(b), the following are deemed to be
cash: (y) securities received by the Company or any Subsidiary from the
transferee that are promptly converted by the Company or such Subsidiary into
cash and (z) assets related to the business of the Company or its Subsidiaries
received in an exchange of assets transaction; provided that (i) in the event
such exchange of assets transaction or series of related exchange of assets
transactions (each an "Exchange Transaction") involves an aggregate value in
excess of $2.5 million, the terms of such Exchange Transaction shall have been
approved by a majority of the disinterested members of the Board of Directors of
the Company as evidenced by a Board Resolution, (ii) in the event such Exchange
Transaction involves an aggregate value in excess of $5.0 million, the Company
shall have received a written opinion from a nationally recognized independent
investment banking firm that the Company has received consideration equal to the
fair market value of the assets disposed of and (iii) any assets to be received
shall be comparable to those being exchanged as determined in good faith by the
Board of Directors of the Company as evidenced by a Board Resolution.

            The amount of Net Proceeds not invested, used or applied as set
forth in the preceding clauses (A) through (C) constitutes "Excess Proceeds." If
the Company elects, or becomes obligated to make an Excess Proceeds Offer, the
Company will offer to purchase, with such Excess Proceeds, shares of Senior
Exchangeable Preferred Stock at a purchase price equal to 110% of




                                     -12-
<PAGE>   13

the Liquidation Preference thereof, plus accrued and unpaid dividends, if any,
to the purchase date (the "Purchase Amount"). The Company must commence such
Excess Proceeds Offer not later than 90 days after the expiration of the
12-month period following the Asset Sale that produced Excess Proceeds. If the
aggregate purchase price for the shares of Senior Exchangeable Preferred Stock
tendered pursuant to the Excess Proceeds Offer is less than the Excess Proceeds,
the Company and its Subsidiaries may use the portion of the Excess Proceeds
remaining after payment of such purchase price for general corporate purposes.

            Each Excess Proceeds Offer will remain open for a period of 20
Business Days and no longer, unless a longer period is required by law (the
"Excess Proceeds Offer Period"). Promptly after the termination of the Excess
Proceeds Offer Period (the "Excess Proceeds Payment Date"), the Company will
purchase and mail or deliver payment for the Purchase Amount for the shares of
Senior Exchangeable Preferred Stock tendered, pro rata or by such other method
as may be required by law, or, if less shares than the Purchase Amount has been
tendered, all shares tendered pursuant to the Excess Proceeds Offer. The shares
to be purchased pursuant to an Excess Proceeds Offer may be reduced by the
Liquidation Preference of shares acquired by the Company through purchase or
redemption subsequent to the date of the Asset Sale and surrendered to the
transfer agent for cancellation.

            Each Excess Proceeds Offer will be conducted in compliance with
applicable regulations under the federal securities laws, including Exchange Act
Rule 14e-1. To the extent that the provisions of any securities laws or
regulations conflict with this Section 8(b), the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section 8(b) by virtue thereof.

            (c) Limitation on Transactions with Affiliates. the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), except
for (i) Affiliate Transactions, which together with all Affiliate Transactions
that are part of a common plan, have an aggregate value of not more than $1.0
million; provided, that such transactions are conducted in good faith and on
terms that are no less favorable to the Company or the relevant Subsidiary than
those that would have bene obtained in a comparable transaction at such time on
a arms-length basis from a Person that is not an Affiliate of the Company or
such Subsidiary; (ii) Affiliate Transactions, which together with all Affiliate
Transactions that are part of a common plan, have an aggregate value of not more
than




                                     -13-
<PAGE>   14

$2.5 million; provided, that a majority of the disinterested members of the
Board of Directors of the Company, as evidenced by a Board Resolution, determine
that such transactions are conducted in good faith and on terms that are no less
favorable to the Company or the relevant Subsidiary than those that would have
been obtained in a comparable transaction at such time on an arms-length basis
from a Person that is not an Affiliate of the Company or such Subsidiary; (iii)
Affiliate Transactions for which the Company delivers to the Holders an opinion
as to the fairness to the Company or such Subsidiary from a financial point of
view, issued by an investment banking firm of national standing; and (iv)
Permitted Affiliate Transactions and other "Restricted Payments" (as defined in
the Senior Secured Notes) permitted by the provisions on the "Limitations on
Restricted Payments" covenant contained in the Senior Secured Notes.

            (d) Consolidation, Merger and Sale of Assets. The Company shall not,
in a single transaction or through a series of transactions, consolidate with or
merge with or into any other Person (whether or not the Company is the surviving
corporation) or sell, assign, convey, transfer, lease or otherwise dispose of
all or substantially all of its properties and assets (determined on a
consolidated basis for the Company and its Subsidiaries) to any other Person or
Persons, unless at the time and immediately after giving effect thereto:

          (i) either (a) the Company shall be the continuing corporation or (b)
      the Person (if other than the Company) formed by such consolidation or
      into which the Company is merged or the Person that acquires by sale,
      assignment, conveyance, transfer, lease or disposition all or
      substantially all the properties and assets of the Company and its
      Subsidiaries on a consolidated basis (the "Surviving Entity") shall be a
      corporation duly organized and validly existing under the laws of the
      United States of America, any state thereof or the District of Columbia;

         (ii) the Senior Exchangeable Preferred Stock shall be converted into or
      exchanged for and shall become shares of the Surviving Entity having in
      respect of the Surviving Entity the same rights and privileges that the
      Senior Exchangeable Preferred Stock had immediately prior to such
      transaction with respect to the Company;

        (iii) immediately after giving effect to such transaction or series of
      transactions on a pro forma basis, no Voting Rights Triggering Event, and
      no event that after the giving of notice or lapse of time or both would
      become a Voting Rights Triggering Event, shall have occurred and be
      continuing;

         (iv) the Company (or the Surviving Entity as the case may be) has (A) a
      Consolidated Net Worth (immediately after giving effect to such
      transaction, but prior to any purchase




                                     -14-
<PAGE>   15

      accounting adjustments from such transaction) not less than 100% of the
      Consolidated Net Worth of the Company immediately before such transaction
      and (B) immediately before and immediately after giving effect to such
      transaction or series of transactions on a pro forma basis (on the
      assumption that the transaction or series of transactions occurred on the
      first day of the four-quarter period immediately prior to the consummation
      of such transaction or series of transactions with the appropriate
      adjustments with respect to the transaction or series of transactions
      being included in such pro forma calculation), could incur at least $1.00
      of additional Indebtedness pursuant to the "Interest Coverage Ratio" test
      set forth in the Senior Secured Notes; and

          (v) the Company or the Surviving Entity shall have delivered to the
      Holders an Officers' Certificate, each stating that such consolidation,
      merger, sale, assignment conveyance, transfer, lease or other disposition
      comply with this Certificate of Designation.

            The Surviving Entity shall file an appropriate certificate of
designation with respect to the preferred stock referred to in clause (ii) above
with the secretary of state (or similar public official) of the jurisdiction
under whose laws it is organized. In such event, the Company shall be released
from its obligations under this Certificate of Designation.

            (e) Maintenance Test Ratio. The Company will calculate whether the
Maintenance Test Ratio exceeds any of the following respective amounts at the
end of the fiscal quarter (the "Maximum Test Ratio") set forth opposite such
Maximum Test Ratio:

<TABLE>
<CAPTION>
         Fiscal Quarter Ended                      Maximum Test Ratio
         --------------------                      ------------------

     <S>                                                  <C>
     March, June, September, 1998                         6.75

             December 1998                                6.50

        March, June, September,
             December 1999                                6.00

        March, June, September,
             December 2000                                5.50

        March, June, September,
             December 2001                                5.25

        March, June, September,
    December 2002 and each quarter
              thereafter                                  5.00
</TABLE>

            (f) Reports and Other Information. The Company shall file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission and whether or not the




                                     -15-
<PAGE>   16

Company has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Company would be
required to file if it were subject to Section 13 or 15 of the Exchange Act. The
Company shall also (i) file with the transfer agent, and provide to each Holder
of Senior Exchangeable Preferred Stock, without cost to such holder, copies of
such reports and documents within fifteen days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required, and (ii) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at the Company's cost copies of such reports and documents to any
prospective holder of Senior Exchangeable Preferred Stock promptly upon written
request together with an Officers' Certificate.

            SECTION 9. No Reissuance of Senior Exchangeable Preferred Stock.
None of the shares of Senior Exchangeable Preferred Stock acquired by the
Company by reason of redemption, purchase, or otherwise shall be reissued,
except shares of Series A Senior Exchangeable Preferred Stock acquired by the
Company in exchange for Series B Senior Exchangeable Preferred Stock which are
reissued in payment of dividends on the Series B Senior Exchangeable Preferred
Stock.

            SECTION 10. Business Day. If any payment or redemption shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment or redemption shall be made on the immediately succeeding Business
Day and dividends shall accrue on any such payment or redemption so deferred
from the payment date or redemption date to the next succeeding Business Day and
be paid on such payment date or redemption date.

            SECTION 11. Transfer Restrictions. (a) The Series A Senior Preferred
Stock will bear a legend to the following effect (as applicable) unless
otherwise agreed by the Company and the Holder thereof:

            THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
            1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
            LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
            MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
            OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
            UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
            REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
            AGREES THAT IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER SUCH
            SECURITY, PRIOR TO THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER
            PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(k) AS
            PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED SECURITIES
            WITHOUT RESTRICTION) AFTER THE LATER OF THE ORIGINAL ISSUE DATE
            HEREOF AND THE LAST




                                     -16-
<PAGE>   17

            DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE
            OWNER OF SUCH SECURITY, EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A
            REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
            SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR
            RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON
            IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
            DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
            ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN
            THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D)
            PURSUANT TO OFFERS AND SALES TO FOREIGN PERSONS THAT OCCUR IN
            OFFSHORE TRANSACTIONS AND WITHOUT DIRECTED SELLING EFFORTS WITHIN
            THE MEANINGS OF SUCH TERMS AS DEFINED IN REGULATION S UNDER THE
            SECURITIES ACT, (E) AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
            THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES
            ACT THAT IS PURCHASING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
            ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR
            INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
            CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES
            ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
            REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, THE COMPANY'S AND
            THE TRANSFER AGENT'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
            PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN
            OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
            SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO
            REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON
            THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE
            TRANSFER AGENT.

            (b) Except as provided in this Section 11, the transfer agent shall
refuse to register any transfer of Series A Senior Preferred Stock in violation
of the restrictions contained in the legend provided for in Section 11(a).

            (c) The legend provided for in Section 11(a) may be removed if the
Series A Senior Preferred Stock has been registered pursuant to a Preferred
Stock Shelf Registration Statement under the Securities Act. Unlegended Series B
Senior Preferred Stock may be issued in exchange for Series A Senior Preferred
Stock pursuant to a Preferred Stock Exchange Offer.

            (d) In connection with proposed transfers of Series A Senior
Preferred Stock described in Exhibit A, the transfer agent or the Company may
require the transferor or transferee, as the case may be, to deliver the letter
attached hereto as Exhibit A. Each Holder of Series A Senior Preferred Stock
shall notify the Company or the transfer agent in the event of any transfer by
such Holder of any shares of Series A Senior Preferred Stock to a foreign
transferee.




                                     -17-
<PAGE>   18

            SECTION 12. Definitions. As used in this Certificate of Designation,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:

            "Affiliate" means, any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, will mean (i) the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; (ii) in the case of a
corporation, beneficial ownership of 10% or more of any class of Capital Stock
of such Person; and (iii) in the case of an individual (A) members of such
Person's immediate family (as defined in Instruction 2 of Item 404(a) of
Regulation S-K under the Securities Act) and (B) trusts, any trustee or
beneficiaries of which are such Person or members of such Person's immediate
family. Notwithstanding the foregoing, neither Jefferies & Company, Inc. nor any
of its Affiliates will be deemed to be Affiliates of the Company.

            "Affiliate Transaction" has the meaning set forth in Section 8(c)
hereof.

            "Asset Sale" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) of shares of
Capital Stock or a Subsidiary (other than directors' qualifying shares),
property or other assets, including by way of a sale/leaseback transaction (each
referred to for the purposes of this definition as a "disposition"), by the
Company or any of its Subsidiaries (including any disposition by means of a
merger, consolidation or similar transaction) other than (i) a disposition by a
Subsidiary to the Company or by the Company or a Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, (iii) dispositions of inventory in the ordinary course of business,
(iv) for purposes of Section 8(b) hereof only, a disposition that constitutes a
"Restricted Payment" (as defined in the Senior Secured Notes) permitted by the
provisions of the "Limitation on Restricted Payments" covenant contained in the
Senior Secured Notes, (v) the sale, lease, transfer or other disposition of all
or substantially all the assets of the Company as permitted under Section 8(d)
hereof, (vi) the grant of Liens permitted by the covenant "Limitation on Liens"
contained in the Senior Secured Notes and (vii) sales of obsolete or worn-out
equipment.





                                     -18-
<PAGE>   19

            "Board of Directors" means, with respect to any Person, the board of
directors of such Person or any duly authorized committee of such board.

            "Board Resolution" means a resolution of the Company's Board of
Directors and, if requested by a majority of the Holders, certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors of the Company and to be in full force and effect on the
date of such certification and delivered to the Holders.

            "Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York City are
authorized or obligated by law, regulation or executive order to close.

            "Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participation, rights or other
equivalents (however designated) of corporate stock of such Person; and (ii)
with respect to any other Person, any and all partnership or other equity
interests of such Person.

            "Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be classified and
accounted for as capital lease obligations under GAAP, and the amount of such
obligations at any date shall be the capitalized amount of such obligations at
such date, determined in accordance with GAAP.

            "Cash Equivalents" means: (i) securities issued by the United States
of America or any agency or instrumentality thereof; (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation of
any domestic commercial bank of recognized standing having capital and surplus
in excess of $250,000,000 and commercial paper issued by others rated at least
A-1 or the equivalent thereof by Standard & Poor's Corporation or at least P-1
or the equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition; and (iii) investments in
money market funds substantially all of whose assets comprise securities of the
types described in clauses (i) and (ii) above.

            "Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act.

            "Common Stock" means any and all shares, interests or other
participations in, and other equivalents (however designated, whether voting or
non-voting) of the Company's common stock, whether outstanding on the Issuance
Date or issued after the Issuance Date, and includes, without limitation, all
series and classes of such common stock.





                                     -19-
<PAGE>   20

            "Company" means the Person named as the "Company" in the first
paragraph of this Certificate of Designation until a successor Person shall have
become such pursuant to the applicable provisions of this Certificate of
Designation, and thereafter "Company" shall mean such successor Person.

            "Consolidated EBITDA" means, with respect to any Person (the
referent Person) for any period, consolidated operating profit of such Person
and its subsidiaries for such period, determined in accordance with GAAP, plus
(to the extent such amounts are deducted in calculating such operating profit
(loss) of such Person for such period, and without duplication) amortization,
depreciation and other non-cash charges (including, without limitation, non-cash
impairment charges, amortization of goodwill, deferred financing fees and other
intangibles but excluding non-cash charges incurred after the date of the
Indenture that require an accrual of or a reserve for cash charges for any
future period); provided, that the operating profit (loss) of any Person that is
not a Subsidiary or that is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or distributions
paid during such period to the referent Person or a Wholly Owned Subsidiary of
the referent Person.

            "Consolidated Net Worth" means, with respect to any Person, the
total stockholders' equity of such Person determined on a consolidated basis in
accordance with GAAP adjusted to exclude (to the extent included in calculating
such equity) (i) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock of such Person and its consolidated subsidiaries;
(ii) all upward revaluations and other write-ups in the book value of any asset
of such person or a consolidated subsidiary of such person subsequent to the
Issuance Date; and (iii) all Investments in persons that are not consolidated
Subsidiaries.

            "Debenture Trustee" means the trustee under the Exchange Debenture,
which is a bank or trust company organized and in good standing under the laws
of the United States of America or of the State of New York, doing business in
the Borough of Manhattan, The City of New York, and having capital, surplus and
undivided profits aggregating at least $100,000,000 according to its last
published statement of condition.

            "Disqualified Capital Stock" means any Equity Interest that either
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable) is or upon the happening of an event would be
required to be redeemed or repurchased prior to the final stated maturity of the
Senior Secured Notes or is redeemable at the option of the holder thereof at any
time prior to such final stated maturity.

            "Dividend Payment Date" means each February 15 and August 15 of each
year on which dividends shall be paid or are




                                     -20-
<PAGE>   21

payable, any Redemption Date and any other date on which dividends in arrears
may be paid.

            "Dividend Rate" has the meaning specified in Section 2(a) hereof.

            "Equity Interests" means Capital Stock or warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

            "Excess Proceeds," "Excess Proceeds Offer," "Excess Proceeds Offer
Period," "Excess Proceeds Payment," and "Excess Proceeds Payment Date" have the
respective meanings specified in Section 8(b) hereof.

            "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.

            "Exchange Date" has the meaning specified in Section 4(a) hereof.

            "Exchange Debentures" means the 12% Subordinated Exchange Debentures
due 2003 of the Company issuable in exchange for the Senior Exchangeable
Preferred Stock, at the option of the Company, plus any additional Exchange
Debentures issued in lieu of cash interest, pursuant to the Exchange Indenture.

            "Exchange Indenture" means the Indenture among the Company and the
Debenture Trustee thereunder, relating to the Exchange Debentures in the form
filed with the Secretary of the Company.

            "Exchange Notice" has the meaning specified in Section 4(a) hereof.

            "Exchange Transaction" has the meaning specified in Section 8(b)
hereof.

            "GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, and in the rules and regulations of the Commission, that
are in effect on the Issuance Date.

            "Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and




                                     -21-
<PAGE>   22

reimbursement agreement in respect thereof), of all or any part
of any Indebtedness.

            "Holder" has the meaning specified in Section 2(a) hereof.

            "Indebtedness" of any Person means (without duplication) (1) all
liabilities and obligations, contingent or otherwise, of such Person (a) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof), (b) evidenced
by bonds, debentures, notes or other similar instruments, (c) representing the
deferred purchase price of property or services (other than trade payables and
other liabilities incurred in the ordinary course of business which are not more
than 90 days past due), (d) created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (e) as lessee under Capitalized Lease Obligations, (f) under bankers'
acceptance and letter of credit facilities, (g) to purchase, redeem, retire,
defease or otherwise acquire for value any Disqualified Capital Stock, or (h) in
respect of hedging obligations, (2) all liabilities and obligations of others of
the type described in clause (1), above, that are Guaranteed by such Person, and
(3) all liabilities and obligations of others of the type described in clause
(1), above, that are secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property (including, without limitation, accounts and contract rights) owned by
such Person; provided, that the amount of such Indebtedness shall (to the extent
such Person has not assumed or become liable for the payment of such
Indebtedness in full) be the lesser of (x) the fair market value of such
property at the time of determination and (y) the amount of such Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.

            "Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of loans,
Guarantees, advances or capital contributions (excluding (i) commission, travel
and similar advances to officers and employees of such Person made in the
ordinary course of business; and (ii) bona fide accounts receivable arising from
the sale of goods or services in the ordinary course of business consistent with
past practice), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, and any other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP.




                                     -22-
<PAGE>   23

            "Issuance Date" means the date on which the Series A Senior
Exchangeable Preferred Stock is originally issued under this Certificate of
Designation.

            "Junior Securities" has the meaning specified in Section 7 hereof.

            "Lien" means any mortgage, lien, pledge, charge, security interest
or encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction).

            "Maintenance Test Ratio" means, at any time, the ratio of (i) the
result of (x) the aggregate amount of Indebtedness of the Company and its
Subsidiaries (on a consolidated basis) as of the time of determination plus (y)
110% of the then applicable Liquidation Preference of the Senior Exchangeable
Preferred Stock, and the liquidation preference of any other shares of preferred
stock of the Company or any Subsidiary of the Company (other than preferred
stock owned by the Company or a Wholly Owned Subsidiary), plus, in each case,
accrued and unpaid dividends as of the time of determination, to (ii) the result
of (a) the Consolidated EBITDA of the Company for the last four fiscal quarters
from the time of determination less (b) the aggregate amount of the cash charges
in such four quarter period against the reserve established by the Company and
its Subsidiaries on a consolidated basis relating to the elimination of costs
associated with restaurants closed in 1997 and prior years as set forth in
"Unaudited Selected Consolidated Pro Forma Condensed Financial Data" contained
in the Offering Circular plus (c) $3.3 million for the four quarter period ended
March 1998, $2.2 million for the four quarter period ended June 1998 and $1.6
million for the four quarter period ended September 1998.

            "Mandatory Redemption Date" has the meaning specified in Section
6(b) hereof.

            "Maximum Test Ratio" has the meaning specified in Section 8(e)
hereof.

            "Net Proceeds" means the aggregate proceeds received in the form of
cash or Cash Equivalents in respect of any Asset Sale (including payments in
respect of deferred payment obligations when received), net of (a) the
reasonable and customary direct out-of-pocket costs relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sale commissions), other than any such costs payable to an Affiliate of the
Company, (b) taxes actually payable directly as a result of such Asset Sale
(after taking into account any available net operating loss carryovers, tax
credits or




                                     -23-
<PAGE>   24

deductions and any tax sharing arrangements), (c) amounts required to be applied
to the permanent repayment of Indebtedness in connection with such Asset Sale,
and (d) appropriate amounts provided as a reserve by the Company or any
Subsidiary, in accordance with GAAP, against any liabilities associated with
such Asset Sale and retained by the Company or such Subsidiary, as the case may
be, after such Asset Sale, including without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations arising from such
Asset Sale.

            "New Credit Facility" means the New Credit Facility, entered into on
the Issuance Date between the Company, certain of its subsidiaries and the
agents for the lenders named therein as the same may be amended, modified,
renewed, refunded, replaced or refinanced from time to time, including (i) any
related notes, letters of credit, guarantees, collateral documents, instruments
and agreements executed in connection therewith, and in each case as amended,
modified, renewed, refunded, replaced or refinanced from time to time; and (ii)
any notes, guarantees, collateral documents, instruments and agreements executed
in connection with such amendment, modification, renewal, refunding, replacement
or refinancing.

            "Offering Circular" means the Final Offering Circular, dated
February 17, 1998, prepared by the Company relating to, among other offerings,
the original offering of the Series A Senior Exchangeable Preferred Stock.

            "Officers' Certificate" means a certificate signed by the Chairman
of the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial officer or a Vice President, and by the Treasurer,
an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company,
and delivered to the Holders.

            "Opinion of Counsel" means a written opinion of legal counsel, which
and who may be counsel for the Company, including an employee of the Company,
and who shall be reasonably acceptable to the Holders and their counsel.

            "Permitted Affiliate Transactions" means (i) employment agreements,
stockholder agreements, stock options or other incentive plans existing on the
Issuance Date or thereafter entered into by the Company or any Subsidiary in the
ordinary course of business with the approval of a majority of the disinterested
members of the Company's Board of Directors as evidenced by a Board Resolution;
(ii) transactions between, among or for the benefit of the Company and/or its
Subsidiaries; (iii) reasonable and customary fees and compensation paid to and
indemnity, loans or advances provided on behalf of, officers, directors,
employees or consultants of the Company or any Subsidiary as determined in good
faith by a majority of the




                                     -24-
<PAGE>   25

disinterested members of the Company's Board of Directors as evidenced by a
Board Resolution and (iv) payments made to affiliates of the TCW Shared
Opportunities Fund or the TCW Leverage Income Trust in connection with any tax
liability for withholding, which payments shall not exceed $125,000 per year.

            "Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity.

            "Preferred Stock Exchange Offer" means an offer by the Company to
exchange the Series A Senior Preferred Stock for the Series B Senior Preferred
Stock pursuant to an effective registration statement.

            "Preferred Stock Shelf Registration Statement" means a shelf
registration statement which becomes effective and covers resales of the Series
A Senior Preferred Stock.

            "Redemption Date" has the meaning specified in Section 6(a)(i)
hereof.

            "Redemption Notice" has the meaning specified in Section 6(c)(i)
hereof.

            "Redemption Price" means the price at which the Senior Exchangeable
Preferred Stock may be redeemed.

            "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.

            "Senior Exchangeable Preferred Stock" has the meaning set forth in
Section 1 hereof.

            "Senior Secured Notes" means the Company's 11 1/2% Senior Secured
Notes in the aggregate principal amount of $155 million together with the
related Indenture under which such 11 1/2% Senior Secured Notes were issued, as
the same exist on February 25, 1998 without regard to any subsequent amendment,
modification, supplement or waiver.

            "Series A Senior Preferred Stock" has the meaning set forth in
Section 1 hereof.

            "Series B Senior Preferred Stock" has the meaning set forth in
Section 1 hereof.

            "Subsidiary" means any Person a majority of the equity ownership or
Voting Stock of which is at the time owned or controlled, directly or
indirectly, by the Company or by one or




                                     -25-
<PAGE>   26

more other Subsidiaries or by the Company and one or more other
Subsidiaries.

            "Surviving Entity" has the meaning set forth in Section 8(d) hereof.

            "Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force on the date on which this Certificate of Designation was filed.

            "Voting Rights Triggering Event" has the meaning set forth above in
Section 5(b) hereof.

            "Voting Stock" means, with respect to any Person (i) one or more
classes of the Capital Stock of such Person having general voting power to elect
at least a majority of the board of directors, managers or trustees of such
Person (irrespective of whether or not at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of
any contingency); and (ii) any Capital Stock of such Person convertible or
exchangeable without restriction at the option of the holder thereof into
Capital Stock of such Person described in clause (i) above.

            "Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock
of which (other than directors' qualifying shares) is owned by the Company or
one or more Wholly Owned Subsidiaries.






                                     -26-
<PAGE>   27

            IN WITNESS WHEREOF, the Company has caused the Certificate of
Designation to be duly executed in its corporate name on this __th day of
February, 1998.

                              AMERICAN RESTAURANT GROUP, INC.


                              By:  /s/ WILLIAM J. McCAFFREY, JR.
                                 -----------------------------------------------
                                 Name:  William J. McCaffrey, Jr.
                                 Title: Vice President and
                                        Chief Financial Officer


                              By:  /s/ PATRICK J. KELVIE
                                 -----------------------------------------------
                                 Name:  Patrick J. Kelvie
                                 Title: Secretary


            This instrument was acknowledged before me on February __, 1998 by
Patrick J. Kelvie as Secretary of American Restaurant Group, Inc.

                                  /s/ JANE KROPP
                                  ----------------------------------------------
                                  Notary Public

(Seal, if any)
<PAGE>   28

                                  EXHIBIT A

                            Form of Certificate to be
                          Delivered in Connection with
                    Transfers to Non-QIB Accredited Investors
                      or Transfers Pursuant to Regulation S


                                                                          [Date]

Jefferies & Company, Inc.
11100 Santa Monica Boulevard
Suite 1100
Los Angeles, California 90025

American Restaurant Group, Inc.
450 Newport Center Dr.
Newport Beach, California 92660

Ladies and Gentlemen:

      In connection with our proposed purchase of
Senior Pay-in-kind Exchangeable Preferred Stock
(the "Preferred Stock") of American Restaurant Group, Inc.
(the "Company"), the undersigned confirms that:

            1. We understand and acknowledge that the Preferred Stock has not
      been registered under the Securities Act of 1933, as amended (the
      "Securities Act"), or any other applicable securities law, is being sold
      to us in a transaction not requiring registration under the Securities Act
      or any other securities law, and may not be offered, sold or otherwise
      transferred except in compliance with the registration requirements of the
      Securities Act or any other applicable securities law, pursuant to an
      exemption therefrom and in each case in compliance with the conditions for
      transfer set forth below.

            2. We have received a copy of the Offering Circular relating to the
      offering of the Preferred Stock, dated February 17, 1998 (the "Offering
      Circular"), upon which we are relying in making our investment decision
      with respect to the Preferred Stock. In addition, we have had access to
      such financial and other information concerning the Company and the
      Preferred Stock as we have deemed necessary in connection with our
      decision to purchase any of the Preferred Stock, including an opportunity
      to ask questions of and request information from Jefferies & Company, Inc.
      (the "Initial Purchaser") and the Company. We acknowledge that neither the
      Company nor the Initial Purchaser, nor any person representing the Company
      or the Initial Purchaser has made any representation to us with respect to
      the Company or the offering or sale of any Preferred Stock.
<PAGE>   29

            3. We are a corporation, partnership or other entity that invests in
      or purchases securities similar to the Preferred Stock during the normal
      course of our business and having such knowledge and experience in
      financial and business matters as to be capable of evaluating the merits
      and risks of purchasing any of the Preferred Stock; and we are (or any
      account for which we are purchasing under paragraph 4 below is) an
      institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3)
      or (7) under the Securities Act, able to bear the economic risk of an
      investment in the Preferred Stock for an indefinite period of time.

            4. We are acquiring the Preferred Stock for our own account (or for
      accounts as to which we exercise sole investment discretion and have full
      power to make, and do make, the statements contained in this letter on
      behalf of each such account) for investment purposes and not with a view
      to, or for offer or sale in connection with, any distribution of the
      Preferred Stock in violation of the Securities Act, subject, nevertheless,
      to the understanding that the disposition of our property or the property
      of such investor account or accounts shall at all times be and remain
      within our control.

            5. We confirm that neither the Company nor any person acting on its
      behalf has offered to sell the Preferred Stock, and that we have not been
      made aware of the offering of the Preferred Stock by, any form of general
      solicitation or general advertising, including, but not limited to, any
      advertisement, article, notice or other communication published in any
      newspaper, magazine or similar media or broadcast over television or
      radio.

            6. We understand that (a) the Preferred Stock will be delivered to
      us in registered form only and that the certificates delivered to us in
      respect of the Preferred Stock will bear a legend substantially to the
      following effect:

            THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
            1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
            LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
            MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
            OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
            UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,
            REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
            AGREES THAT IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER SUCH
            SECURITY, PRIOR TO THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER
            PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(k) AS
            PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED SECURITIES
            WITHOUT RESTRICTION) AFTER THE




                                     A-2
<PAGE>   30

            LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DAY ON WHICH
            THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF SUCH
            SECURITY, EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
            STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
            ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
            PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT
            REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
            IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
            OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
            TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO
            OFFERS AND SALES TO FOREIGN PERSONS THAT OCCUR IN OFFSHORE
            TRANSACTIONS AND WITHOUT DIRECTED SELLING EFFORTS WITHIN THE
            MEANINGS OF SUCH TERMS AS DEFINED IN REGULATION S UNDER THE
            SECURITIES ACT, (E) AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN
            THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES
            ACT THAT IS PURCHASING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
            ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR
            INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
            CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES
            ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
            REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, THE COMPANY'S AND
            THE TRANSFER AGENT'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
            PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN
            OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
            SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, TO
            REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON
            THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE
            TRANSFER AGENT.

      and (b) such certificate will be reissued without the foregoing legend
      only in the event of a disposition of the Preferred Stock in accordance
      with the provisions of paragraph 7(e) or (f) below, or at our request at
      such time as we would be permitted to dispose of the Preferred Stock in
      accordance with paragraph 7(e) below.

            7. We agree that in the event that at some future time we wish to
      dispose of any of the Preferred Stock, we will not do so unless:

                  (a) the Preferred Stock is sold to the issuer thereof;

                  (b) the Preferred Stock is sold to a qualified institutional
            buyer in compliance with Rule 144A under the Securities Act that
            purchases for its own account or for the account of a qualified
            institutional buyer




                                     A-3
<PAGE>   31

            and to whom notice is given that the transfer is being made in
            reliance of Rule 144A;

                  (c) the Preferred Stock is sold to an institutional accredited
            investor, as defined in Rule 501(a)(1), (2), (3) or (7) under the
            Securities Act, that prior to such transfer furnishes to the
            transfer agent, a signed letter containing certain representations
            and agreements relating to the restrictions on transfer of the
            Preferred Stock (the form of which letter can be obtained from the
            transfer agent);

                  (d) the Preferred Stock is sold to non-U.S. persons in
            offshore transactions in compliance with Rule 903 or rule 904 of
            Regulation S under the Securities Act;

                  (e) the Preferred Stock is sold pursuant to Rule 144 under the
            Securities Act; or

                  (f) the Preferred Stock is sold pursuant to an effective
            registration statement under the Securities Act.

            8. Upon purchase, the Preferred Stock would be registered in the
      name of the undersigned:

                  Name:
                  Address:
                  Taxpayer ID Number:


      We acknowledge that the Initial Purchaser and the Company and others will
rely upon the truth and accuracy of the foregoing acknowledgements,
representations and agreements and agree that, if any of the acknowledgements,
representations and agreements made by us are no longer accurate, we shall
promptly notify the Initial Purchaser.

      THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CHOICE OF LAW.

                              Very truly yours,

                              [PURCHASER]



                              By:_____________________________
                                 (Authorized Officer)





                                     A-4