<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
REGISTRATION NO. 333-07601
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-1
AND FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FRD ACQUISITION CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5812 57-1040952
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
18831 VON KARMAN AVENUE
IRVINE, CA 92612
(714) 757-7900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
RHONDA J. PARISH
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
FRD ACQUISITION CO.
203 EAST MAIN STREET
SPARTANBURG, SOUTH CAROLINA 29319
(864) 597-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
RANDALL C. BASSETT, ESQ.
ANDREW D. HUTTON, ESQ.
LATHAM & WATKINS
633 W. FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
12 1/2% Senior Notes
due 2004. $150,000,000 100% $150,000,000 $51,725(2)
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 23, 1996
PROSPECTUS
OFFER TO EXCHANGE
12 1/2% SERIES B SENIOR NOTES DUE 2004
FOR ALL OUTSTANDING 12 1/2% SERIES A SENIOR NOTES DUE 2004
OF
FRD ACQUISITION CO.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , 1996
UNLESS EXTENDED.
-----------
FRD Acquisition Co. ("FRD" or the "Company") is hereby offering (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange $1,000 principal amount of its 12 1/2% Series B
Senior Notes due 2004 (the "Exchange Notes"), which exchange has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement of which this Prospectus is a part (the
"Registration Statement"), for each $1,000 principal amount of its outstanding
12 1/2% Series A Senior Notes due 2004 (the "Private Notes"), of which
$150,000,000 in aggregate principal amount was issued on May 23, 1996 and is
outstanding as of the date hereof. The form and terms of the Exchange Notes are
the same as the form and terms of the Private Notes except that (i) the
exchange will have been registered under the Securities Act, and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof and
(ii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Private Notes under the Registration Rights Agreement (as
defined), which rights will terminate upon the consummation of the Exchange
Offer. The Exchange Notes will evidence the same indebtedness as the Private
Notes (which they replace) and will be entitled to the benefits of an indenture
dated as of May 23, 1996 governing the Private Notes and the Exchange Notes.
The Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of
Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 12 1/2% per annum and the interest thereon will be payable semi-
annually in arrears on January 15 and July 15 of each year, commencing January
15, 1997. The Exchange Notes will bear interest from and including July 15,
1996. Holders whose Private Notes are accepted for exchange will be deemed to
have exchanged the right to receive any interest accrued on the Private Notes.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY
TENDERED PRIVATE NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON , 1996, UNLESS THE EXCHANGE
OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION
(THE "EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY
BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER
IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT
OF PRIVATE NOTES BEING TENDERED FOR EXCHANGE. PRIVATE
NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES OF
$1,000. IN THE EVENT THE COMPANY TERMINATES THE
EXCHANGE OFFER AND DOES NOT ACCEPT FOR EXCHANGE ANY
PRIVATE NOTES, THE COMPANY WILL PROMPTLY RETURN
ALL PREVIOUSLY TENDERED PRIVATE NOTES TO THE
HOLDERS THEREOF.
-----------
The date of this Prospectus is , 1996.
<PAGE>
The Company is a newly formed holding company whose sole asset is 100% of
the outstanding capital stock of FRI-M Corporation, a Delaware corporation
("FRI-M"). Pursuant to the terms of agreements governing its outstanding
indebtedness, FRI-M is subject to restrictions on its ability to make dividend
payments, loans or other transfers of cash to the Company unless certain
financial and other conditions are satisfied. Unless FRI-M is either (i) able
to satisfy such financial and other conditions at the time when the Company is
required to make cash payments of principal or interest on the Notes or (ii)
able to have such restrictions amended or waived, FRI-M may be precluded from
paying sufficient dividends to the Company to permit the Company to make such
payments of principal or interest on the Notes. See "Description of Credit
Agreement."
The Notes are limited in aggregate principal amount to $150 million plus
additional Securities (as defined), if any, issued pursuant to the purchase
price adjustment provisions set forth in the Stock Purchase Agreement (as
defined) and mature on July 15, 2004. Interest on the Notes accrues at the
rate of 12 1/2% per annum and is payable semi-annually in arrears on each
January 15 and July 15, commencing on January 15, 1997. The Company has the
option, in its sole discretion, upon the failure to achieve certain financial
performance levels and subject to certain conditions and restrictions, to
issue additional Securities at a rate of 14% per annum ("Secondary
Securities") in lieu of a cash payment of any or all of the interest due on
the Notes on up to four interest payment dates within the first 39-months
following issuance of the Notes. See "Description of Notes--Principal,
Maturity and Interest."
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after May 23, 2001 at the redemption prices set forth
herein, together with accrued and unpaid interest, if any, to the date of
redemption. Prior to May 23, 1999, the Company may, subject to certain
conditions described herein, use the proceeds from an Initial Public Equity
Offering (as defined) to redeem up to $50 million aggregate principal amount
of the Notes at the redemption price set forth herein. See "Description of
Notes--Optional Redemption." Upon a Change of Control (as defined), each
holder of Notes will have the right to require the Company to repurchase such
holder's Notes at a purchase price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase, subject to certain conditions described herein. See "Description
of Notes--Repurchase at the Option of Holders--Change of Control."
The Notes are unsecured obligations of the Company and rank senior in right
of payment to all future subordinated indebtedness of the Company and pari
passu in right of payment to all future senior indebtedness of the Company.
The Notes are structurally subordinated to all existing and future liabilities
and obligations (whether or not for borrowed money) of FRI-M and the Company's
other subsidiaries. The Company on a stand alone basis does not currently have
any outstanding senior indebtedness other than the Notes and its guarantee of
FRI-M's borrowings under the Credit Agreement (as defined). As of June 27,
1996, FRI-M and the Company's other subsidiaries had approximately $157.5
million of indebtedness and other liabilities (including trade payables,
capitalized lease obligations and additional Securities to be issued pursuant
to the purchase price adjustment provisions in the Stock Purchase Agreement).
The indenture pursuant to which the Notes were issued (the "Indenture") and
the Credit Agreement restrict, among other things, the ability of the Company,
FRI-M and the Company's other subsidiaries to incur additional indebtedness.
See "Description of Notes--Certain Covenants--Incurrence of Indebtedness and
Issuance of Capital Stock" and "Description of Credit Agreement."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the
2
<PAGE>
Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Company believes that none of the registered holders
of the Private Notes is an affiliate (as such term is defined in Rule 405
under the Securities Act) of the Company.
PRIOR TO THE EXCHANGE OFFER, THERE HAS BEEN NO PUBLIC MARKET FOR THE NOTES.
THE COMPANY DOES NOT INTEND TO LIST THE NOTES ON ANY SECURITIES EXCHANGE OR TO
SEEK APPROVAL FOR QUOTATION THROUGH ANY AUTOMATED QUOTATION SYSTEM. THERE CAN
BE NO ASSURANCE THAT AN ACTIVE MARKET FOR THE NOTES WILL DEVELOP. TO THE
EXTENT THAT A MARKET FOR THE NOTES DOES DEVELOP, SUCH MARKET IS LIKELY TO BE
ILLIQUID AND THE MARKET VALUE OF THE NOTES WILL DEPEND ON MARKET CONDITIONS
(SUCH AS YIELDS ON ALTERNATIVE INVESTMENTS), GENERAL ECONOMIC CONDITIONS, THE
COMPANY'S FINANCIAL CONDITION AND CERTAIN OTHER FACTORS. SUCH CONDITIONS MIGHT
CAUSE THE NOTES, TO THE EXTENT THAT THEY ARE TRADED, TO TRADE AT A SIGNIFICANT
DISCOUNT FROM FACE VALUE. SEE "RISK FACTORS--ABSENCE OF PUBLIC MARKET FOR THE
NOTES."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has indicated its
intention to make this Prospectus (as it may be amended or supplemented)
available to any broker-dealer for use in connection with any such resale for
a period of 180 days after the Expiration Date. See "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION
THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including notes thereto, located
elsewhere in this Prospectus. For purposes hereof and unless the context
requires otherwise, the "Company" refers to FRD, a newly-formed unrestricted
subsidiary of Flagstar Corporation ("Flagstar"), and the newly-acquired
operations of the Family Restaurant Division formerly owned by Family
Restaurants, Inc. ("FRI"), which include FRI-M and certain subsidiaries of FRI-
M, including those restaurants that make up the Family Restaurant Division and
including the FRD Commissary. Concurrently with the issuance of the Notes, FRD
acquired the operations of the Family Restaurant Division by acquiring the
outstanding stock of FRI-M (the "Acquisition"). Upon completion of the
Acquisition, FRI-M became a wholly-owned subsidiary of FRD.
THE COMPANY
The Company is one of the nation's leading operators of family restaurants.
As of June 27, 1996 the Company operated 346 restaurants owned or leased by the
Company principally under the Coco's and Carrows names. As of June 27, 1996,
the Company operated 167 Coco's, 159 Carrows, 17 jojos, 1 Jeremiah's and 2
Bob's restaurants. Approximately 74% of the Company's restaurants are located
in California, making the Company the second largest family restaurant operator
in California, both in terms of sales volume and number of restaurants. Coco's
and Carrows restaurants were founded more than 25 years ago and have developed
excellent name recognition and a loyal customer base, with customers on average
making return visits to the restaurants seven and six times per month,
respectively. In addition to its domestic operations, as of June 27, 1996 the
Company is the licensor of 261 Coco's restaurants in Japan and South Korea,
representing the most substantial penetration of any United States, non-fast
food restaurant chain overseas.
The Company's restaurants offer an extensive menu of moderately priced
breakfast, lunch and dinner items and are typically open either 18 or 24 hours
a day. Both Coco's and Carrows restaurants emphasize consistently high quality
food with an excellent price/value relationship and friendly, efficient
service. During the twelve months ended December 31, 1995, the average check
per person was approximately $6.73 for Coco's and $6.09 for Carrows,
representing increases of 3.2% and 5.0%, respectively, over the previous year.
The Company generates approximately 23%, 32%, 40% and 5% of its revenue from
breakfast, lunch, dinner and late night meals, respectively, which the Company
believes represents a higher dinner proportion than its major competitors. The
Company's average weekly restaurant customer count in 1995 was 4,244 for Coco's
and 4,443 for Carrows.
The Company's restaurants are generally located in densely populated suburban
areas with high commercial traffic and a strong residential base. The
commercial traffic typically provides a large portion of the Company's weekday
breakfast and lunch customers, while the residential traffic accounts for a
majority of the Company's dinner and weekend business. The Company's
restaurants average between 5,000 and 6,000 square feet of floor space,
allowing them to accommodate approximately 120 to 180 guests. The Company
believes that the location and concentration of its restaurants allows it to
realize economies of scale in advertising, distribution and field supervision.
In 1992, the Company significantly increased its revenue base and California
market share with the acquisition of 109 Bob's Big Boy and Allie's Restaurants
(collectively, "Bob's") from Marriott Corporation. The Company believes that
the acquisition of Bob's enabled the Company to establish attractive locations
in developed areas at a substantially lower cost than had the Company built the
locations itself. The Company completed its conversion of the Bob's restaurants
to the Company's Coco's and Carrows concepts in 1994 at an average cost of
approximately $230,000 per restaurant. In addition, the Company implemented a
remodeling program in 1994 to remodel its 208 Coco's and Carrows restaurants
that were not part of the Bob's conversion.
4
<PAGE>
From January 1, 1994 through June 27, 1996, the Company remodeled 64 Coco's and
50 Carrows restaurants, at an average cost of approximately $150,000 per
restaurant, with the majority of such remodels occurring in 1994 and early
1995. Since such time, remodeling activities have been curtailed due to the
limited availability of capital.
The Company's headquarters are located at 18831 Von Karman Avenue, Irvine,
California, 92612. The Company's telephone number is (714) 757-7900.
THE ACQUISITION
Flagstar, through the newly-formed FRD, acquired 100% of the capital stock of
FRI-M and its Family Restaurant Division operating subsidiaries on May 23, 1996
for a purchase price of approximately $306 million. FRD financed the
acquisition with $125 million in cash, $150 million in Notes and the assumption
of approximately $31 million in lease and other debt obligations of FRI-M. The
$125 million in cash paid to the seller was funded by a $75 million equity
investment from Flagstar and a $51.5 million intercompany loan from FRI-M ($1.5
million of which was used to fund transaction costs). In order to fund an
intercompany loan to FRD and provide a source of working capital, FRI-M
obtained at the May 23, 1996 closing of the Acquisition a new credit facility
consisting of a $56 million, 39-month term loan and a $35 million working
capital facility to support letters of credit and for general working capital
purposes (together, the "Credit Facility"). See "Description of Credit
Agreement." Hereinafter, these transactions are collectively referred to as the
"Acquisition." Flagstar is a wholly-owned subsidiary of Flagstar Companies,
Inc. ("FCI"). Reference to the "Predecessor Company" refers to the period of
ownership of the Company by FRI prior to May 23, 1996. Reference to the
"Successor Company" refers to the period of ownership of the Company by FRD
Acquisition Co., a wholly owned subsidiary of Flagstar, subsequent to May 23,
1996.
THE EXCHANGE OFFER
The Exchange Offer..... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are
properly tendered and accepted. The Company will
issue Exchange Notes on or promptly after the
Expiration Date. As of the date hereof, there is
$150,000,000 aggregate principal amount of Private
Notes outstanding. See "The Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of
Rule 405 under the Securities Act), without
compliance with the registration and prospectus
delivery provisions of the Securities Act;
provided that the holder is acquiring Exchange
Notes in the ordinary course of its business and
is not participating, and had no arrangement or
understanding with any person to participate, in
the distribution of the Exchange Notes. Each
broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes,
where such Private Notes were acquired by such
broker-dealer as a result of market-making
5
<PAGE>
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange
Notes. See "The Exchange Offer--Resale of the
Exchange Notes."
Registration Rights
Agreement.............. The Private Notes were issued by the Company on
May 23, 1996 to FRI pursuant to a Stock Purchase
Agreement, dated March 1, 1996, by and among the
Company, Flagstar, Flagstar Companies, Inc. and
FRI (the "Stock Purchase Agreement"). Pursuant to
the Stock Purchase Agreement, the Company and FRI
entered into a Registration Rights Agreement,
dated as of May 23, 1996 (the "Registration
Rights Agreement"), which grants the holders of
the Private Notes certain registration rights.
The Registration Rights Agreement was
subsequently amended on August , 1996 to grant
the holders of the Private Notes certain exchange
rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the
consummation of the Exchange Offer. The holders
of the Exchange Notes will not be entitled to any
exchange or registration rights with respect to
the Exchange Notes. See "The Exchange Offer--
Termination of Certain Rights."
Expiration Date........ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1996, unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration
Date" shall mean the latest date and time to
which the Exchange Offer is extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Accrued Interest on the
Exchange Notes and the
Private Notes.......... The Exchange Notes will bear interest from and
including July 15, 1996. Holders whose Private
Notes are accepted for exchange will be deemed to
have exchanged the right to receive any interest
accrued on the Private Notes. See "The Exchange
Offer--Interest on the Exchange Notes."
Conditions to the Exchange
Offer.................. The Exchange Offer is subject to certain
customary conditions that may be waived by the
Company. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Private Notes being tendered for exchange. See
"The Exchange Offer--Conditions."
Procedures for Tendering
Private Notes......... Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to The Bank
of New York, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder
will represent to and agree with the Company
that, among other things, (i) the Exchange Notes
to be acquired by such holder of Private Notes in
connection with the Exchange Offer are being
acquired by
6
<PAGE>
such holder in the ordinary course of its
business, (ii) such holder has no arrangement or
understanding with any person to participate in a
distribution of the Exchange Notes, (iii) that if
such holder is a broker-dealer registered under
the Exchange Act or is participating in the
Exchange Offer for the purposes of distributing
the Exchange Notes, such holder will comply with
the registration and prospectus delivery
requirements of the Securities Act in connection
with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot
rely on the position of the staff of the
Commission set forth in no-action letters (see
"The Exchange Offer--Resale of the Exchange
Notes"), (iv) such holder understands that a
secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes
obtained by such holder in exchange for Private
Notes acquired by such holder directly from the
Company should be covered by an effective
registration statement containing the selling
securityholder information required by Item 507
or Item 508, as applicable, of Regulation S-K of
the Commission and (v) such holder is not an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the holder is
a broker-dealer that will receive Exchange Notes
for its own account in exchange for Private Notes
that were acquired as a result of market-making
activities or other trading activities, such
holder will be required to acknowledge in the
Letter of Transmittal that such holder will
deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--
Procedures for Tendering."
Special Procedures for
Beneficial Owners..... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures.................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
7
<PAGE>
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes........ Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, Holdings will
accept for exchange any and all Private Notes
that are properly tendered in the Exchange Offer
prior to the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights...... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations........ The exchange of Private Notes for Exchange Notes
will be treated as a "non-event" for federal
income tax purposes because the Exchange Notes
will not be considered to differ materially in
kind or extent from the Private Notes. As a
result, no material federal income tax
consequences will result to holders exchanging
Private Notes for Exchange Notes. See "Certain
Federal Income Tax Considerations--The Exchange
Offer."
Exchange Agent......... The Bank of New York is serving as the Exchange
Agent in connection with the Exchange Offer.
8
<PAGE>
THE EXCHANGE NOTES
The Exchange Offer applies to the entire aggregate principal amount of the
Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture. For further
information and for definitions of certain capitalized terms used below, see
"Description of Notes."
Securities.................. $150,000,000 aggregate principal amount of 12
1/2% Series B Senior Notes due 2004
Issuer...................... FRD Acquisition Co., a Delaware corporation
Maturity Date............... July 15, 2004
Interest Payments........... Interest on the Notes accrues at the rate of 12
1/2% per annum and is paid semi-annually on each
January 15 and July 15, commencing July 15, 1996.
The Company has the option, in its sole
discretion, upon the failure to achieve certain
financial performance levels and subject to
certain conditions and restrictions, to issue
Secondary Securities at a rate of 14% per annum
in lieu of a cash payment of any or all of the
interest due on the Notes on up to four interest
payment dates within the first 39-months
following issuance of the Notes. See "Description
of Notes--Principal, Maturity and Interest."
Ranking..................... The Notes are unsecured obligations of the
Company and rank senior in right of payment to
all future subordinated indebtedness of the
Company and pari passu in right of payment to all
future senior indebtedness of the Company. The
Notes are structurally subordinated to all
existing and future liabilities and obligations
(whether or not for borrowed money) of FRI-M and
the Company's other subsidiaries. The Company on
a stand alone basis does not currently have any
outstanding senior indebtedness other than the
Notes and its guarantee of FRI-M's borrowings
under the Credit Agreement. As of June 27, 1996,
FRI-M and the Company's other subsidiaries had
approximately $157.5 million of indebtedness and
other liabilities (including trade payables,
capitalized lease obligations and additional
Securities to be issued pursuant to the purchase
price adjustment provisions in the Stock Purchase
Agreement).
Optional Redemption......... The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after May 23, 2001 at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, prior to May 23, 1999, the Company may,
subject to certain conditions described herein,
use the proceeds from an Initial Public Equity
Offering to redeem up to $50 million aggregate
principal amount of the Notes at the redemption
price set forth herein. See "Description of
Notes--Optional Redemption."
9
<PAGE>
Change of Control........... Upon a Change of Control, each holder of Notes
will have the right to require the Company to
repurchase such holder's Notes at a purchase
price equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest,
if any, to the date of repurchase, subject to
certain conditions described herein. See
"Description of Notes--Repurchase at the Option
of Holders--Change of Control."
Certain Covenants........... The Indenture limits, among other things, (i) the
issuance of additional debt or disqualified stock
by the Company or any of its subsidiaries, (ii)
the payment of dividends on, and redemption of,
stock of the Company and certain other restricted
payments, (iii) creation of liens, (iv) asset
sales, (v) transactions with affiliates, (vi)
licensing of trade names or other intangible
assets, (vii) engaging in a business other than
the Company's current lines of business, (viii)
consolidations, mergers, or transfers of all or
substantially all of the Company's assets and
(ix) the payment of management fees, franchise
fees and tax payments by the Company to Flagstar
or its other subsidiaries.
Original Issue Discount..... The Notes were issued with original issue
discount for federal income tax purposes.
Original issue discount (that is, the difference
between the face amount and the issue price of
the Notes) will accrue from the date of issuance
of a Note to its maturity date and will be
includible as interest income for each day during
each taxable year in which the Note is held by a
holder in such holder's gross income for federal
income tax purposes possibly in advance of
receipt of the cash payments to which the income
is attributable. See "Certain Federal Income Tax
Considerations--The Notes."
Risk Factors................ An investment in the Notes involves a high degree
of risk. For a discussion of certain
considerations relevant to an investment in the
Notes, see "Risk Factors."
For a detailed discussion of the terms of the Notes, see "Description of
Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by holders of the Private Notes in evaluating the Exchange Offer.
10
<PAGE>
SUMMARY COMBINED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
The summary combined historical and unaudited combined pro forma financial
information presented below have been derived from the audited combined
financial statements, the Selected Combined Historical Financial Information,
unaudited combined condensed financial statements, and the Unaudited Pro Forma
Combined Financial Information included elsewhere herein. For additional
financial information about the Company, see "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited combined financial statements included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PRO FORMA(E)
---------------------------------------------------------------------------- ----------- ---------------------
SIX FIVE ONE SIX
FISCAL YEAR ENDED MONTHS MONTHS MONTH YEAR MONTHS
DECEMBER(A), ENDED ENDED ENDED ENDED ENDED
---------------------------------------------------- JUNE 25, MAY 23, JUNE 27, DECEMBER 31, JUNE 27,
1991 1992 1993 1994(B) 1995(C) 1995 1996 1996 1995 1996(D)
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
STATEMENT DATA:
Operating
revenues....... $339,894 $438,582 $487,433 $504,174 $501,248 $243,630 $194,464 $48,950 $501,248 $243,414
Operating
income......... 22,484 23,486 30,522 27,073 27,909 12,353 7,919 3,185 32,890 13,607
Interest and
debt expenses.. 4,601 4,852 4,594 6,934(f) 16,515(f) 5,925(f) 4,658(f) 2,496 29,756 12,479
Net income
(loss)......... 10,619 10,899 15,236 10,111 4,724 2,794 1,101 493 (330) (140)
Ratio of
earnings to
fixed charges
(g)............ 4.9x 4.8x 6.6x 3.9x 1.7x 2.1x 1.7x 1.3x 1.1x 1.1x
SELECTED
OPERATING DATA:
Depreciation and
amortization of
property....... $ 11,280 $ 8,416 $ 9,241 $ 18,438(h) $ 22,547 $ 9,871 $ 9,487 $ 1,884 $ 22,547 $ 11,379
Amortization of
goodwill and
other
intangibles.... 276 703 801 5,561(h) 5,900 2,968 2,399 624 6,145 3,117
Capital
expenditures... 6,394 85,231(i) 14,720 24,154 22,890 15,393 2,216 311 22,890 2,527
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 27,
1995 1996
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Net property................................... $146,042 $135,452(j)
Total assets................................... 332,847 382,954
Long-term debt, excluding current portion and
loans payable to bank......................... 27,502 223,238
Stockholder's equity........................... 152,601(k) 75,493
</TABLE>
- - - -------------------
(a) The Company's five most recently completed fiscal years ended on December
30, 1991, December 28, 1992, December 26, 1993, December 25, 1994 and
December 31, 1995.
(b) Data presented for 1994 includes one month of financial information for the
Company prior to FRI's reorganization under Chapter 11 of the Bankruptcy
Code and eleven months of financial information for the Company following
such reorganization. In January 1994, FRI's predecessor corporation, The
Restaurant Enterprises Group, Inc. ("REG"), completed a reorganization
under Chapter 11 of the Bankruptcy Code (the "Reorganization") and applied
the provisions of the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," ("SOP 90-7"). Pursuant to SOP
90-7, REG qualified for fresh start reporting as of January 27, 1994. Under
this concept, all assets and liabilities of FRI are restated to current
value at the date of reorganization. FRI obtained an appraisal of the
assets and liabilities of FRI and the Company which determined the
reorganization value (i.e., fair value) of the assets and liabilities. FRI
utilized the results of this appraisal to implement fresh start reporting,
which resulted in reorganization value in excess of amounts allocable to
identifiable assets of $155,540,000 to the Company at January 27, 1994. For
the one month ended January 26, 1994, the Company's selected operating
statement data consisted of operating revenues of $43,538,000, operating
income of $1,707,000, interest and debt expenses of $458,000, net income of
$717,000, ratio of earnings to fixed charges of 3.7 times, depreciation and
amortization of property of $697,000, amortization of goodwill and other
intangibles of $81,000 and capital expenditures of $412,000. For the eleven
months ended December 25, 1994, the Company's selected operating statement
data consisted of operating revenues of $460,636,000, operating income of
$25,366,000, interest and debt expenses of $6,476,000, net income of
$9,394,000, ratio of earnings to fixed charges of 3.9 times, depreciation
and amortization of property of $17,741,000, amortization of intangibles of
$5,480,000 and capital expenditures of $23,742,000.
11
<PAGE>
(c) Fiscal 1995 represents a 53 week period.
(d) The pro forma six months ended June 27, 1996 amounts represent a
combination of the Predecessor's activity for the five months ended May 23,
1996 and the Successor's activity for the one month ended June 27, 1996
(five weeks), after giving effect to the pro forma adjustments.
(e) Pro forma information gives effect to the Acquisition as if it had occurred
on December 26, 1994.
(f) Includes $3,033,000, $13,177,000, $4,232,000 and $4,260,000 for interest
related to the Company's outstanding balance under the working capital
portion of FRI's credit agreement used to fund operating cash flow needs
for all of FRI's subsidiaries during 1994, 1995, the six months ended June
25, 1995 and the five months ended May 23, 1996, respectively.
(g) For purposes of computing the ratio of earnings to fixed charges, "fixed
charges" consist of interest on debt, amortization of deferred financing
expense and the interest element in rental payments under operating and
capital leases. "Earnings" consist of income (loss) before income taxes,
plus fixed charges.
(h) In connection with the Reorganization in January 1994, the Company restated
all assets and liabilities, which resulted in reorganization value in
excess of amounts allocable to identifiable assets of $155,540,000 to the
Company at January 27, 1994.
(i) Includes $67,904,000 related to the acquisition of 109 Bob's restaurants in
February 1992.
(j) Certain assets and liabilities are subject to appraisals which have not yet
been completed.
(k) The predecessor financial information presented represents a combination of
certain subsidiaries and divisions of FRI and does not represent a legal
entity. Therefore, stockholder's equity as of December 31, 1995 represents
the balance of the net intercompany activity with FRI.
12
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers of the Notes should consider carefully the following
risk factors in evaluating an investment in the Notes. Certain statements in
this Prospectus that are not historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Discussions containing such forward-looking statements may be found
in the material set forth under "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as within the Prospectus generally. In addition, when used in the
Prospectus the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below and the matters set forth in
the Prospectus generally. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances. The Company
cautions the reader that this list of risk factors may not be exhaustive.
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or "float," of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of
a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
CORPORATE STRUCTURE AND EFFECTIVE SUBORDINATION TO SUBSIDIARY DEBT
The Company operates primarily through its subsidiaries. Accordingly, the
rights of the Company and its creditors, including holders of Notes, to
participate in the assets of any subsidiary of the Company upon such
subsidiary's liquidation or recapitalization will be subject to the prior
claims of the subsidiary's creditors, except to the extent that the Company
may be a creditor with recognized claims against the subsidiary. Dividends,
loans and advances from certain subsidiaries of the Company are contingent
upon the earnings of such subsidiaries and are subject to certain contractual
restrictions, including restrictions under the Credit Agreement. Borrowings
under the Credit Agreement will be made by FRI-M, a subsidiary of the Company,
will be guaranteed by the Company and the Company's other subsidiaries and
generally will be secured by substantially all of the assets of the Company
and the Company's subsidiaries and by a pledge of the stock of FRI-M and the
Company's other subsidiaries. As a result, the Notes will be effectively
subordinated to borrowings under the Credit Agreement and structurally
subordinated to all existing and future liabilities and obligations of FRI-M
and the Company's other subsidiaries. As of June 27, 1996, FRI-M and the
Company's other subsidiaries had
13
<PAGE>
approximately $157.5 million of indebtedness and other liabilities (including
trade payables, capitalized lease obligations and additional Securities to be
issued pursuant to the purchase price adjustment provisions in the Stock
Purchase Agreement). Moreover, payment of the Company's other ongoing
obligations will be dependent upon the ability of the Company's subsidiaries
to advance money or pay dividends to the Company. The Credit Agreement
prohibits the payment of dividends or other funds to the Company if, after
giving effect to such payment, there would exist a continuing event of default
under the Credit Agreement, including an event of default arising as a result
of the Company's failure to maintain certain specified financial ratios. See
"--Restrictive Covenants" and "Description of Credit Agreement."
LEVERAGE
As a result of the Acquisition, the Company is highly leveraged.
Concurrently with the Acquisition, the Company entered into the Credit
Agreement which provides for a $56 million term loan and working capital
facility in the aggregate principal amount of $35 million. As of June 27,
1996, the Company had $23.1 million of letters of credit and $1.4 million of
borrowings outstanding under the working capital portion of the Credit
Facility.
The indebtedness incurred in connection with the Acquisition has resulted in
significant annual fixed charge obligations. The Company's ability to make
scheduled payments, to refinance its obligations with respect to its
indebtedness or to obtain additional financing in the future will depend on
its financial and operating performance, which in turn is subject to
prevailing economic conditions and to financial, business and other factors
beyond its control. The Company believes it will have sufficient cash flow
from operations to service its indebtedness. However, a significant downturn
in the restaurant industry, the California economy or other developments
adversely affecting the Company's cash flow could materially impair the
Company's ability to service its indebtedness. If the Company's cash flow and
capital resources are insufficient to fund its debt service obligations, the
Company may be forced to refinance all or a portion of its debt or sell
assets. There can be no assurance that the Company will be able to meet its
debt service requirements or to repay the Notes at maturity or that the
Company will be able to refinance the Notes or sell assets upon commercially
reasonable terms.
RESTRICTIVE COVENANTS
The Credit Agreement and the Indenture contain a number of restrictive
covenants, including those restricting (i) the issuance of additional debt or
disqualified stock by the Company or any of its subsidiaries, (ii) the payment
of dividends on, and redemption of, stock of the Company and certain other
restricted payments, (iii) creation of liens, (iv) asset sales, (v)
transactions with affiliates, (vi) licensing of trade names or other
intangible assets, (vii) engaging in a business other than the Company's
current lines of business, (viii) consolidations, mergers, or transfers of all
or substantially all of the Company's assets and (ix) the payment of
management fees, franchise fees and tax payments by the Company to Flagstar or
its other subsidiaries. See "Description of Notes" and "Description of Credit
Agreement." A failure by the Company to comply with the restrictions contained
in the Credit Agreement, the Indenture or other agreements relating to the
Company's indebtedness could result in a default thereunder, which in turn
could cause such indebtedness (and, by reason of cross-default provisions,
other indebtedness) to become immediately due and payable. There can be no
assurance that such restrictions will not adversely affect the Company's
ability to conduct its operations or finance its capital needs or impair the
Company's ability to pursue attractive business and investment opportunities
if such opportunities arise. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Notes." While the restrictions described above,
in combination with the leveraged nature of the Company, could limit the
Company's ability to obtain financing in the future or may otherwise restrict
corporate activities, the Company does not believe that its debt structure
will have a material adverse effect on its ability to compete in the various
restaurant markets in which it operates.
14
<PAGE>
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence by the Company of the indebtedness represented by the Notes
as part of the Acquisition, may be subject to review under relevant federal
and state fraudulent transfer laws in a bankruptcy case or a lawsuit commenced
by or on behalf of unpaid creditors of the Company (including a lawsuit
brought under circumstances not including bankruptcy) or a representative of
such creditors, such as a trustee or the Company as debtor-in-possession.
Under these laws, if a court were to find that, at the time the Notes were
issued, (a) the Company either incurred indebtedness represented by the Notes
with the intent of hindering, delaying or defrauding creditors or received
less than reasonably equivalent value or fair consideration for incurring such
indebtedness and (b) the Company (i) was insolvent or was rendered insolvent
by reason of incurring such indebtedness and effecting the Acquisition, (ii)
was engaged in a business or transaction for which the assets remaining with
it constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as
they matured, such court may void the Company's obligations under the Notes
and direct the repayment of any amounts paid thereunder to the Company or to a
fund for the benefit of the Company's creditors or take other action
detrimental to the holders of the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction which is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness constituting the Notes, either
(a) the fair market value (or the fair saleable value) of its assets on a
going concern basis is less than the amount required to pay the probable
liability on its total existing debts and liabilities (including contingent
liabilities) as they become absolute and matured or (b) it is incurring debt
beyond its ability to pay or refinance as such debt matures.
The Company believes it received fair value at the time the indebtedness
represented by the Notes was incurred. In addition, the Company does not
believe that it, as a result of the issuance of the Notes, and the
consummation of the Acquisition (i) is insolvent or rendered insolvent under
the foregoing standards, (ii) is engaged in a business or transaction for
which its remaining assets constitute unreasonably small capital or
(iii) incurred debts beyond its ability to pay such debts as they mature.
These beliefs are based on the Company's operating history, the Company's net
worth and management's analysis of internal cash flow projections and
estimated values of Company assets and liabilities at the time of consummation
of the Acquisition. There can be no assurance, however, that a court passing
on these issues would make the same determination.
LIMITED OPERATING HISTORY SINCE THE ACQUISITION
Prior to the Acquisition, FRI-M and its subsidiaries operated as wholly-
owned subsidiaries of FRI. FRI-M and its subsidiaries have a limited operating
history under the current ownership structure and investors have a very
limited history to evaluate the Company's performance.
FACTORS AFFECTING THE RESTAURANT INDUSTRY
The Company's future performance will be subject to a number of factors that
affect the restaurant industry generally, including (i) competition, (ii) food
service, and (iii) government regulation.
Competition. The restaurant business is highly competitive and the
competition can be expected to increase. Price, restaurant location, food
quality, service and attractiveness of facilities are important aspects of
competition, and the competitive environment is often affected by factors
beyond the Company's or a particular restaurant's control. The Company's
restaurants compete with a wide variety of restaurants ranging from national
and regional restaurant chains (some of which have substantially greater
financial resources than the Company) to locally-owned restaurants. There is
also active competition for liquor licenses in certain markets and for
advantageous commercial real estate sites suitable for restaurants.
Food Service. Food service businesses are often affected by changes in
consumer tastes, national, regional and local economic conditions and
demographic trends. The performance of individual restaurants may be
15
<PAGE>
adversely affected by factors such as traffic patterns, demographic
considerations and the type, number and location of competing restaurants.
Multi-unit food service chains such as the Company's can also be materially
and adversely affected by publicity resulting from food quality, illness,
injury or other health concerns or operating issues stemming from one
restaurant or a limited number of restaurants. Dependence on frequent
deliveries of fresh produce and groceries subjects food service businesses
such as the Company to the risk that shortages or interruptions in supply,
caused by adverse weather or other conditions, could adversely affect the
availability, quality and cost of ingredients. In addition, unfavorable trends
or developments concerning factors such as inflation, increased food, labor
and employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), regional weather conditions and the availability of
experienced management and hourly employees may also adversely affect the food
service industry in general and the Company's results of operations and
financial condition in particular. Changes in economic conditions affecting
the Company's guests could reduce traffic in some or all of the Company's
restaurants or impose practical limits on pricing, either of which could have
a material adverse effect on the results of operations of the Company. The
continued success of the Company will depend on the ability of the Company's
management to anticipate, identify and respond to changing conditions.
Government Regulation. The Company's restaurants are subject to federal,
state and local laws and regulations governing health, sanitation,
environmental matters, safety, the sale of alcoholic beverages and regulations
regarding hiring and employment practices. The Company believes it has all
licenses and approvals material to the operation of its businesses, and that
its operations are in material compliance with applicable laws and
regulations.
The Company is subject to federal and state laws and regulations governing
matters such as minimum wages, overtime and other working conditions.
Approximately 56% of the Company's employees are paid at rates related to the
minimum wage. Accordingly, increases in the minimum wage or decreases in the
allowable tip credit (which reduce the minimum wage that must be paid to
tipped employees in certain states) increase the Company's labor costs. This
is especially true in California, where there is no tip credit. There is
currently an initiative to raise the minimum wage in California to $5.00 per
hour effective March 1, 1997, and to $5.75 per hour effective March 1, 1998.
The initiative will be voted upon in November 1996. Also, the Federal minimum
wage will increase from $4.25 per hour to $4.75 per hour on October 1, 1996
and again to $5.15 per hour on September 1, 1997. Employers must pay the
higher of the Federal or State minimum wage. The Company will attempt to
offset increases in the minimum wage through pricing and other cost control
efforts; however, there can be no assurance that the Company or its
franchisees will be able to pass such additional costs on to its customers.
The Company is also subject to both federal and state regulations governing
disabled persons' access to its restaurant facilities. The selection of new
restaurant sites is affected by federal, state and local laws and regulations
regarding environmental matters, zoning and land use. In the past, none of
these laws and regulations has had a significant negative effect on
operations, nor has the Company experienced any significant difficulties in
obtaining necessary licenses and approvals. More stringent and varied
requirements (particularly at the local level), however, may result in
increases in the cost and time required for opening new restaurants, as well
as increases in the cost of operating restaurants, and difficulties in
obtaining necessary licenses or permits could cause delays in or cancellations
of new restaurant openings.
ORIGINAL ISSUE DISCOUNT
The Notes were issued with original issue discount (the difference between
the face amount and the issue price of the Notes) for federal income tax
purposes. Original issue discount must be included in income for each day of
the taxable year during which a Note is held. While the cash interest payments
due under the Notes will, in most cases, equal the original issue discount
which must be included in taxable income, it is possible that under certain
circumstances a Note holder would be required to include original issue
discount in income in advance of receipt of the cash interest payments to
which the income is attributable. See "Certain Federal
16
<PAGE>
Income Tax Considerations--The Notes." With the exception of certain matters
with respect to the AHYDO (as defined) rules, such discussion of material
federal tax consequences is based on the opinion of Latham & Watkins. No
Treasury Regulations have been proposed or issued under the AHYDO provision,
and therefore Latham & Watkins is unable to opine on matters with respect
thereto.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase such holder's Notes in whole or
in part at a purchase price in cash in an amount equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any,
to the date of repurchase. The Company's ability to redeem Notes may be
limited by the availability of sufficient funds, restrictions imposed by any
other debt obligations (including the Credit Agreement) that may then be in
effect and compliance with applicable securities laws. After giving effect to
the Acquisition, the Company is not expected to, and no assurance can be given
that the Company will have, sufficient funds available to purchase all of the
outstanding Notes were they to be tendered in response to an offer made as a
result of a Change of Control.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
There is no public market for the trading of the Notes. No assurance can be
given that any trading market for the Notes will develop, or if developed, as
to the liquidity of any trading market for the Notes or that any such trading
market will continue. In addition, the liquidity of and the market prices for
the Notes can be expected to vary with changes in market and economic
conditions, the financial condition and prospects of the Company and other
factors that generally influence the market prices of securities, including,
in particular, further fluctuations in the market for high-yield securities.
Such fluctuations in the high-yield market may significantly affect liquidity
and market prices independent of the financial performance of and prospects
for the Company.
17
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were issued by the Company on May 23, 1996 (the "Closing
Date") to FRI pursuant to the Stock Purchase Agreement. As a condition to the
sale of the Private Notes, the Company and FRI entered into the Registration
Rights Agreement on May 23, 1996, as subsequently amended. Pursuant to the
Registration Rights Agreement, as amended, the Company agreed that, unless the
Exchange Offer is not permitted by applicable law or Commission policy, it
would file with the Commission a registration statement under the Securities
Act (a "Registration Statement") with respect to the Exchange Notes within 45
days after the Closing Date and use its best efforts to cause such
Registration Statement to become effective under the Securities Act on or
before September 26, 1996. A copy of the Registration Rights Agreement, as
amended, has been filed as an exhibit to the Registration Statement. The
Registration Statement is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement and the Stock Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in a distribution of the Exchange Notes, will be allowed to
resell Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to broker-dealers for use in connection with any resale for a period
of 180 days after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
not be entitled to any of the
18
<PAGE>
rights of holders of Private Notes under the Registration Rights Agreement,
which rights will terminate upon the consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of,
the Indenture, which also authorized the issuance of the Private Notes, such
that both series of Notes will be treated as a single class of debt securities
under the Indenture.
As of the date of this Prospectus, $150,000,000 in aggregate principal
amount of the Private Notes are outstanding. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on ,
1996, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
19
<PAGE>
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 12 1/2% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
January 15 and July 15 of each year, commencing January 15, 1997. Holders of
Exchange Notes will receive interest from the date of initial issuance of the
Exchange Notes, plus an amount equal to the accrued interest on the Private
Notes from the date of initial delivery to the date of exchange for Exchange
Notes. Holders of Private Notes that are accepted for exchange will be deemed
to have exchanged the right to receive any interest accrued on the Private
Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
20
<PAGE>
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), compliance with conditions, acceptance and withdrawal of tendered
Private Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Private Notes not properly tendered or any Private
Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Private
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Private Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of
Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405 under the Securities Act, of the
Company. If the holder is a broker-dealer that will receive Exchange Notes for
such holder's own account in exchange for Private Notes that were acquired as
a result of market-making activities or other trading activities, such holder
will be required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
21
<PAGE>
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company
setting forth the name and address of the holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or a facsimile thereof), together with the
certificate(s) representing the Private Notes in proper form for transfer
or a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date.
22
<PAGE>
Any such notice of withdrawal must (i) specify the name of the person having
deposited the Private Notes to be withdrawn (the "Depositor"), (ii) identify
the Private Notes to be withdrawn (including the certificate number or numbers
and principal amount of such Private Notes) and (iii) be signed by the holder
in the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders,
(ii) extend the Exchange Offer and retain all Private Notes tendered prior to
the expiration of the Exchange Offer, subject, however, to the rights of
holders to withdraw such Private Notes (see "--Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Private Notes that have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that
will be distributed to the registered holders of the Private Notes, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
LIQUIDATED DAMAGES
If (a) the Company fails to file the Registration Statement or a shelf
registration statement covering resale of the Private Notes (a "Shelf
Registration Statement") on or before the date specified for such filing, (b)
neither of such registration statements is declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Registration Statement becomes
effective, and the Company fails to consummate the Exchange Offer within 30
business days following the Effectiveness Target Date, or (d) the Shelf
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Private Notes during the
period specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above, a "Registration Default"), the
Company is required to pay as liquidated damages ("Liquidated Damages"), to
each holder of Private Notes, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount of Private Notes held by
such holder. Upon a Registration Default, Liquidated Damages will accrue at
the rate specified above until such Registration Default is cured, and the
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Private Notes for each subsequent 90-day period
until all Registration Defaults have been cured. All accrued Liquidated
Damages will be paid by the Company on January 15 and July 15 of each year and
on each other payment date provided in the Indenture including, without
limitation, whether upon redemption, maturity (by acceleration or otherwise),
purchase upon a change of control or purchase upon a sale of assets to the
holders of Private Notes by wire transfer of immediately available funds or by
mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the payment of
Liquidated
23
<PAGE>
Damages will cease. The filing and effectiveness of the Registration Statement
of which this Prospectus is a part and the consummation of the Exchange Offer
within the time periods specified above will eliminate all rights of the
holders of Private Notes eligible to participate in the Exchange Offer to
receive the Liquidated Damages described in this section.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
holders (including any broker-dealers) and certain parties related to such
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Private Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Private Notes
pursuant to Rule 144A and (iii) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for a period of up to 180 days
after the Expiration Date.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
HAND DELIVERY: MAIL/OVERNIGHT COURIER:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, NY 10286 7th East Side
Attn: Arwen Gibbons New York, NY 10286
Tel. #(212) 815-6333
BY FACSIMILE:
Fax #(212) 571-3080
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
24
<PAGE>
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a "qualified institutional buyer" as defined in Rule 144A under
the Securities Act ("QIB") in a transaction meeting the requirements of Rule
144A, (ii) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (iii) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act,
(iv) in accordance with another exemption from the registration requirements
of the Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
25
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive in exchange Private Notes in like
principal amount, the terms of which are identical to the Exchange Notes except
that (i) the exchange will have been registered under the Securities Act, and
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (ii) holders of the Exchange Notes will not be entitled to certain
rights of holders of the Private Notes under the Registration Rights Agreement,
which rights will terminate upon the consummation of the Exchange Offer. The
Private Notes surrendered in exchange for Exchange Notes will be retained by
the Company and the Exchange Offer will not result in any increase in the
indebtedness of the Company.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
27, 1996. This table should be read in conjunction with the unaudited pro forma
financial statements and the notes thereto, as well as the other financial
information and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 27, 1996
(IN THOUSANDS)
<S> <C>
Long-term debt (including current portion):
Working capital revolver.................................. $ 1,400
Term loan................................................. 56,000
Notes..................................................... 150,000
Other long-term debt...................................... 30,027
--------
Total long-term debt........................................ 237,427
Stockholder's equity........................................ 75,493
--------
Total capitalization........................................ $312,920
========
</TABLE>
26
<PAGE>
SELECTED COMBINED HISTORICAL FINANCIAL INFORMATION
The combined historical results of operations data and balance sheet of the
Company's predecessor corporation are presented below for or at the end of each
of the fiscal years 1991, 1992, 1993, 1994 and 1995 and the six-month period
ended June 25, 1995 and the five-month period ended May 23, 1996. The selected
combined historical financial information for the years ended 1991 and 1992 and
for the six-month period ended June 25, 1995, the five-month period ended May
23, 1996 and the one-month period ended June 27, 1996 (five weeks) were derived
from unaudited financial statements which, in the opinion of management,
reflect all adjustments (consisting only of normal recurring items) necessary
to present fairly, in accordance with generally accepted accounting principles,
the information contained therein. Such information should be read in
conjunction with the combined financial statements and related notes thereto
included elsewhere in this Prospectus, as well as in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Because FRD is a wholly owned subsidiary of Flagstar, per share
data is not meaningful and has been omitted for the periods presented below.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------------------------------------------- -----------
SIX FIVE
FISCAL YEAR ENDED MONTHS MONTHS
DECEMBER(A), ENDED ENDED ONE MONTH
---------------------------------------------------- JUNE 25, MAY 23, ENDED JUNE
1991 1992 1993 1994(B) 1995(C) 1995 1996 27, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA:
Operating revenues..... $339,894 $438,582 $487,433 $504,174 $501,248 $243,630 $194,464 $48,950
Operating income....... 22,484 23,486 30,522 27,073 27,909 12,353 7,919 3,185
Interest and debt
expenses.............. 4,601 4,852 4,594 6,934(d) 16,515(d) 5,925(d) 4,658(d) 2,496
Net income (loss)...... 10,619 10,899 15,236 10,111 4,724 2,794 1,101 493
Ratio of earnings to
fixed charges (e)..... 4.9x 4.8x 6.6x 3.9x 1.7x 2.1x 1.7x 1.3x
SELECTED OPERATING DATA:
Depreciation and
amortization of
property.............. $ 11,280 $ 8,416 $ 9,241 $ 18,438(f) $ 22,547 $ 9,871 $ 9,487 $ 1,884
Amortization of
goodwill and other
intangibles........... 276 703 801 5,561(f) 5,900 2,968 2,399 624
Capital expenditures... 6,394 85,231(g) 14,720 24,154 22,890 15,393 2,216 311
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------- JUNE 27,
1991 1992 1993 1994 1995 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency) (h)...... $(28,096) $(47,397) $(46,293) $(106,223) $(121,032) $(54,354)
Net property........... 58,731 73,369 78,471 165,285 146,042 135,452
Total assets........... 86,432 130,394 135,843 350,993 332,847 382,954
Long-term debt,
excluding current
portion and loans
payable to bank....... 34,031 36,116 34,605 32,499 27,502 223,238
Stockholder's equity
(i)................... 2,768 23,823 31,852 192,354 152,601 75,493
</TABLE>
- - - --------------------
(a) The Company's five most recently completed fiscal years ended on December
30, 1991, December 28, 1992, December 26, 1993, December 25, 1994 and
December 31, 1995.
(b) Data presented for 1994 includes one month of financial information for the
Company prior to FRI's reorganization under Chapter 11 of the Bankruptcy
Code and eleven months of financial information for the Company following
such reorganization. In January 1994, FRI's predecessor corporation, REG,
completed the Reorganization and applied the provisions of SOP 90-7.
Pursuant to SOP 90-7, REG qualified for fresh start reporting as of January
27, 1994. Under this concept, all assets and liabilities of FRI are
restated to current value at the date of reorganization. FRI obtained an
appraisal of the assets and liabilities of FRI and the Company which
determined the reorganization value (i.e., fair value) of the assets and
liabilities. FRI utilized the results of this appraisal to implement fresh
start reporting, which resulted in reorganization value in excess of
amounts allocable to identifiable assets of $155,540,000 to the Company at
January 27, 1994. For the one month ended January 26, 1994, the Company's
operating statement data consisted of operating revenues of $43,538,000,
operating income of $1,707,000, interest and debt expenses of $458,000, net
income of $717,000, ratio of earnings to fixed charges of 3.7 times,
depreciation and amortization of property of $697,000, amortization of
goodwill and other intangibles of $81,000 and capital expenditures of
$412,000. For the eleven months ended December 25, 1994, the Company's
selected operating statement data consisted of operating revenues of
$460,636,000, operating income of $25,366,000, interest and debt expenses
of $6,476,000, net income of $9,394,000 ratio of earnings to fixed charges
of 3.9 times, depreciation and amortization of property of $17,741,000,
amortization of intangibles of $5,480,000 and capital expenditures of
$23,742,000.
27
<PAGE>
(c) Fiscal 1995 represents a 53 week period.
(d) Includes $3,033,000, $13,117,000, $4,232,000 and $4,260,000 for interest
related to the Company's outstanding balance under the working capital
portion of FRI's credit agreement used to fund operating cash flow needs
for all of FRI's subsidiaries for 1994, 1995, the six months ended June
25, 1995 and the five months ended May 23, 1996, respectively.
(e) For purposes of computing the ratio of earnings to fixed charges, "fixed
charges" consist of interest on debt, amortization of deferred financing
expense and the interest element in rental payments under operating and
capital leases. "Earnings" consist of income (loss) from continuing
operations before income taxes, plus fixed charges.
(f) In connection with the Reorganization in January 1994, the Company
restated all assets and liabilities, which resulted in reorganization
value in excess of amounts allocable to identifiable assets of
$155,540,000 to the Company at January 27, 1994.
(g) Includes $67,904,000 related to the acquisition of 109 Bob's restaurants
in February 1992.
(h) The Company historically operates with a working capital deficiency
because (i) restaurant operations are conducted primarily on a cash (and
cash equivalent) basis with a low level of accounts receivable, (ii) rapid
turnover allows a limited investment in inventories and (iii) cash from
sales is usually received before related accounts payable for food,
beverage and supplies become due.
(i) The predecessor financial information presented represents a combination
of certain subsidiaries and divisions of FRI and does not represent a
legal entity. Therefore, stockholder's equity represents the net activity
with FRI.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1995 and the six-month period ended June 27, 1996, combines
the results of operations of FRD and FRI-M assuming that the Acquisition had
been consummated on December 26, 1994 (the beginning of the Company's 1995
fiscal year). An unaudited pro forma combined balance sheet is not presented,
as the Acquisition is already reflected in the historical balance sheet
included in this Prospectus. FRD was incorporated on February 14, 1996 for the
purpose of acquiring FRI-M. Its capitalization upon incorporation was $100,
representing 1,000 shares of common stock with a par value of $0.10 per share.
Accordingly, no amounts are presented for FRD in the historical statement of
operations data. Because FRD is a wholly owned subsidiary of Flagstar, per
share data is not meaningful and has been omitted for the periods presented.
The unaudited pro forma combined financial information has been provided for
comparative purposes only and does not purport to be indicative of results
which would actually have been obtained had the Acquisition been effected on
the date or dates indicated or which may be obtained in the future. These
unaudited pro forma combined financial statements should be read in
conjunction with the combined audited financial statements and unaudited
interim combined financial statements, including the notes thereto, which
appear elsewhere in this Prospectus.
The unaudited pro forma adjustments are based upon information set forth in
this Prospectus and certain assumptions included in the notes to the unaudited
pro forma combined financial statements. The Company is performing an ongoing
evaluation regarding the nature and scope of its restaurant operations and
various short-and long-term strategic considerations in the process of
assessing whether, and to what extent, integration, consolidation or other
modification of its restaurant operations is appropriate following the
Acquisition. These strategic considerations include, among other things, the
elimination of certain duplicative administrative functions, which are
reflected in the unaudited pro forma adjustments. The Company believes the pro
forma assumptions are reasonable under the circumstances.
The Acquisition will be accounted for by the purchase method of accounting.
Accordingly, FRD's cost to acquire FRI-M and certain of its subsidiaries (the
"Purchase Consideration"), calculated to be $286,000,000, will be allocated to
the assets acquired and liabilities assumed according to their respective fair
values. The final allocation of the Purchase Consideration, including the fair
value of the Notes, is dependent upon certain valuations and other studies
that have not progressed to a stage where there is sufficient information to
make such an allocation in the accompanying unaudited pro forma combined
financial statements. Accordingly, the purchase allocation adjustments made in
connection with the preparation of the unaudited pro forma combined financial
statements are preliminary and have been made solely for the purpose of
preparing such unaudited pro forma combined financial statements. The Company
anticipates finalizing the preliminary allocation by the end of 1996, and does
not anticipate the impact of the reallocation to be significant to the
financial statements.
29
<PAGE>
UNAUDITED PRO FORMA COMBINED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------------------------------------ --------------
PRO FORMA
COMBINED
FOR THE
SIX MONTHS
ONE MONTH ENDED
YEAR ENDED FIVE MONTHS ENDED ENDED JUNE 27, JUNE 27,
DECEMBER 31, 1995 MAY 23, 1996 1996 1996
-------------------------------- -------------------------------- -------------- ----------
PRO FORMA AS PRO FORMA AS
ACTUAL ADJUSTMENTS ADJUSTED ACTUAL ADJUSTMENTS ADJUSTED ACTUAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $501,248 $501,248 $194,464 $194,464 $48,950 $243,414
-------- ------- -------- -------- ------- -------- ------- --------
Operating expenses:
Product cost............ 143,206 143,206 54,370 54,370 14,126 68,496
Payroll and related
costs.................. 180,922 180,922 74,642 74,642 17,481 92,123
Occupancy and other
operating expenses..... 79,331 79,331 32,772 32,772 7,718 40,490
Depreciation and
amortization........... 22,547 22,547 9,487 9,487 1,884 11,379
Amortization of
intangibles............ 5,900 $ 245 (a) 6,145 2,399 $ 102 (a) 2,501 624 3,117
General, administrative
and selling expenses... 43,535 (5,226)(b) 38,309 20,092 (2,605)(b) 17,487 4,246 21,733
Franchise fees.......... (4,371) (4,371) (1,479) (1,479) (326) (1,805)
Loss (gain) on
disposition of
properties............. 2,269 2,269 (5,738) (5,738) 12 (5,726)
-------- ------- -------- -------- ------- -------- ------- --------
473,339 (4,981) 468,358 186,545 (2,503) 184,042 45,765 229,807
-------- ------- -------- -------- ------- -------- ------- --------
Operating income........ 27,909 4,981 32,890 7,919 2,503 10,422 3,185 13,607
Interest expense........ 16,515 13,241 (c) 29,756 4,658 5,325 (c) 9,983 2,496 12,479
-------- ------- -------- -------- ------- -------- ------- --------
Income before income
taxes.................. 11,394 (8,260) 3,134 3,261 (2,822) 439 689 1,128
Income taxes............ 6,670 (3,206)(d) 3,464 2,160 (1,088)(d) 1,072 196 1,268
-------- ------- -------- -------- ------- -------- ------- --------
Net income (loss)....... $ 4,724 $(5,054) $ (330) $ 1,101 $(1,734) $ (633) $ 493 (140)
======== ======= ======== ======== ======= ======== ======= ========
Ratio of earnings to
fixed charges.......... 1.7x 1.1x 1.7x 1.0x 1.3x 1.1x
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
A summary of the Acquisition is as follows:
<TABLE>
<S> <C>
Cost of acquisition:
Flagstar cash investment...................................... $ 75,000,000
Long-term note payable to FRI................................. 150,000,000
Proceeds of term loan and working capital borrowings.......... 57,400,000
-------------
$ 282,400,000
=============
Net assets acquired:
Stockholder's equity of FRI-M immediately prior to the
Acquisition.................................................. $ 132,199,000
Assets and liabilities retained by FRI:
Excess cash................................................. (4,695,000)
Royalties receivable........................................ (3,485,000)
Utility deposit............................................. (127,700)
Note receivable............................................. (394,300)
Administrative bonus accrual................................ 389,000
Sale/leaseback of restaurants in accordance with the
Acquisition terms............................................ (2,338,000)
Credit facility repaid on the date of the Acquisition......... 82,493,000
Direct costs of the Acquisition............................... 4,500,000
Fair value adjustments to reflect increases (decreases) in the
book value of FRI-M purchased assets:
Liabilities for integration and other costs associated with
the Acquisition............................................ (3,100,000)
Write-off of net reorganization costs....................... (144,056,000)
Excess of the purchase price over the fair value of the
assets acquired based on information currently available... 221,015,000
-------------
$ 282,400,000
=============
</TABLE>
The fair value adjustments noted above are preliminary in nature. The final
allocation of the purchase price is dependent upon certain valuations and other
studies that are not complete at this time.
Based on the preliminary assessment of net assets acquired, the following pro
forma adjustments to the unaudited pro forma combined statement of operations
have been made:
(a) The adjustment for amortization of intangibles reflects the removal of FRI-
M net reorganization costs amortized over 30 years of $144,056,000 and the
net effect of pro forma adjustments that impact the excess purchase price
and other direct expenses of the Acquisition over the fair value of the net
assets acquired $221,015,000 amortized over 40 years. Other intangible
assets of the Company includes amounts allocated to franchise operating
rights of $7,953,000, to be amortized over 15 years.
(b) The adjustment for general and administrative expenses at December 31, 1995
and June 27, 1996 represents reductions in corporate overhead charges
previously incurred by the Company of $10,111,000 and $3,892,000,
respectively, and elimination of the management fee charged by FRI to the
Company of $2,633,000 and $1,630,000, respectively, offset by management
fees of 1.0% of sales to be charged by Flagstar and an estimated 0.5% of
sales, estimated to be the Company's allocated cost of shared
administrative services provided by Flagstar or its subsidiaries.
(c) The adjustment for interest expense represents the elimination of interest
of $13,117,000 and $5,658,000 at December 31, 1995 and June 27, 1996,
respectively, on the Company's loan payable to banks, including
amortization of deferred financing costs, and includes interest on (i) the
$155,687,000 of Notes ($5,687,000 of which resulted from the liability for
additional Notes to be issued pursuant to the purchase price adjustment
provisions in the Stock Purchase Agreement) at an annual interest rate of
12 1/2%, (ii) the $56,000,000 term loan (including the current portion of
$8,000,000) at an annualized interest rate of 8.5%,
31
<PAGE>
(iii) assumed borrowings of $1,400,000 on the revolving portion of the
Credit Facility at an assumed annual interest rate of 8.5% and (iv) use of
$23,100,000 of the revolving portion of the Credit Facility to support
letters of credit at an annual interest rate of 3% and a commitment fee of
0.5% annually on the unused portion of the revolving portion of the Credit
Facility ($10,500,000). The adjustment also includes amortization of the
deferred financing costs incurred in connection with the financing of the
Acquisition. These deferred financing costs of $3,900,000 in connection
with the Credit Facility and $600,000 on the Notes are amortized over 39
months and eight years, respectively. See "Description of Credit
Agreement."
(d) The provision for income taxes has been adjusted assuming an effective
federal and state income tax rate of 40% on the combined earnings of the
Company, excluding amortization of goodwill of $5,280,000 and $2,139,000
for 1995 and the five-month period ended May 23, 1996, respectively, after
giving effect to the adjustments set forth in (a) through (c), above.
(e) The provision for income taxes for the one month ended June 27, 1996 was
based on the projected tax rate for the seven months ended December 28,
1996.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
FRD Acquisition Co. completed the acquisition of the Coco's and Carrows
restaurant chains from Family Restaurants, Inc. on May 23, 1996. FRD
Acquisition Co. was formed as a wholly owned subsidiary of Flagstar Corporation
for the purpose of effecting this acquisition. Prior to May 23, 1996, FRD
Acquisition Co. had no assets or business. See "Summary--The Acquisition."
FRD Acquisition Co. is a holding company, all of whose operations are
conducted by wholly owned subsidiaries. The Company is entirely dependent upon
the cash flow of its subsidiaries to meet its obligations under the Notes. The
Credit Agreement imposes significant limitations upon the payment of dividends
by the subsidiaries to FRD Acquisition Co. See "Risk Factors--Corporate
Structure and Effective Subordination to Subsidiary Debt," "--Restrictive
Covenants" and "Description of Credit Agreement."
PREDECESSOR OPERATIONS
Over the past three years, the results of the Company's predecessor have been
impacted by (i) capital constraints that limited the Company's ability to
remodel its restaurants; (ii) a weak California economy; and (iii) increased
competitive pressure within the entire restaurant industry.
RESULTS OF OPERATIONS
Six Months Ended June 27, 1996 to Six Months Ended June 25, 1995
Operating results for the six months ended June 27, 1996 include the five
months ended May 23, 1996 (predecessor) and the one month ended June 27, 1996
(successor).
Operating revenues for the first six months of 1996 decreased by
approximately $0.2 million (0.1%) as compared with the first six months of
1995. This decrease is the result of a reduction of one restaurant. The Carrows
restaurants experienced a 2.3% increase in comparable store sales in the first
six months of 1996 compared to the first six months of 1995 while the Coco's
restaurants experienced a decrease of 2.5% in comparable store sales during the
period. The Company's average check increased during the period while average
weekly customer count decreased during the same period.
The Company's general administrative and selling expenses increased by $2.6
million (12.4%). This increase is primarily due to a litigation reserve
established ($1.1 million) as well as an increase in advertising spending ($0.7
million).
Revenues from franchised restaurants were mainly comprised of annual
franchise royalties from the Company's franchisees. Franchise fees for the
first six months of 1996 decreased by approximately $0.9 million, as compared
to the first six months of 1995. This decrease was the result of the change in
the applicable exchange rates from a 79 yen/dollar rate for the first six
months in 1995 compared to a 105 yen/dollar rate for the first six months in
1996, resulting in a decrease in fees of approximately $0.7 million.
Additionally a change in the franchisee contract royalty rate resulted in an
average royalty rate of 1.2% in the first six months of 1995 being reduced to
0.9% in the first six months of 1996, creating a reduction in fees of
approximately $0.5 million. These decreases were partially offset by an
increase in the number of units from 216 in the first six months of 1995
compared to 265 in the first six months of 1996.
The Company's overall operating income decreased by $1.2 million (10.1%) in
the first six months of 1996 as compared to the first six months of 1995. This
decrease was partially attributable to the above mentioned operating revenue
decrease, general, administrative and selling expenses increases and franchise
fee revenue decreases. In addition, included in payroll and benefits is an
increase for increased workers' compensation self insurance reserves ($2.0
million) based on revised claim loss estimates and an increase in certain
employee benefit accruals ($0.8 million). Partially offsetting these decreases
to operating income was a gain on the sale of one Carrows restaurant in Las
Vegas, Nevada of $5.9 million.
33
<PAGE>
Interest and debt expense increased by $1.2 million (20.7%) in the first six
months of 1996 as compared to the same period in 1995. This increase was due
to an increase in working capital borrowings under the Company's prior credit
facility which was used to fund operating cash flow needs of all FRI
subsidiaries.
The change in net income is a combination of the above described items.
Fiscal 1995 to Fiscal 1994
Operating revenues for 1995 decreased by approximately $2.9 million (0.6%)
as compared with the twelve months ended December 25, 1994. This decrease is
attributed to a reduction in the number of the Company's restaurants (349
restaurants in 1995 as compared to 350 restaurants in 1994), as well as a
decrease in comparable store sales of approximately $12.8 million. The Carrows
restaurants experienced a slight decrease of approximately $0.3 million (0.2%)
in comparable store sales in 1995 compared to 1994, while the Coco's
restaurants experienced a decrease in comparable store sales of approximately
$12.5 million (5.0%) in 1995 compared to 1994. Carrows average weekly customer
count per restaurant decreased by 30 guests (0.7%) in 1995 as compared to
1994, while Coco's average weekly customer count decreased by 335 guests
(7.0%) in 1995 compared to 1994. These decreases in customer count were
partially offset by increases in average guest check for Carrows and Coco's of
5.0% and 3.2%, respectively, in 1995 as compared to 1994. The decrease in
traffic during 1995 resulted from intense competition and discounting in the
family restaurant segment. In addition, the California economy continued to
generally experience weakness in 1995. In January 1995, California required
all restaurants to be "non-smoking" and the Company believes this legislation
had a substantial negative impact on traffic in the Company's restaurants due
to the fact that 75% of the Company's restaurants are located in California.
Advertising expense increased by $1.9 million in 1995 as compared to 1994.
This increase is attributable to an additional television campaign for Carrows
as well as the hiring of an outside advertising agency for the first time
during 1995.
Revenues from franchised restaurants were mainly comprised of annual
franchise royalties from the Company's franchisees. Franchise fees decreased
by $1.6 million in 1995 as compared to 1994. This decrease is due to the
decrease in royalty rate paid by the franchisees of 1.6% in 1994 to 1.0% in
1995, which is partially offset by an increase in fees due to the increase in
number of units during the year, which created a reduction in fees of
approximately $2.3 million. This decrease was partially offset by an increase
in fees due to the increase in the number of units from 219 units in 1994 to
251 units in 1995.
The Company's overall operating income increased by $0.8 million (3.1%) in
1995 as compared to 1994. This increase was primarily attributable to improved
efficiencies in labor and related fringe benefits of $6.6 million. However,
these efficiencies were partially offset by the decrease in operating revenues
of approximately $2.9 million in 1995 as compared to 1994 and increased
depreciation and amortization expense of approximately $4.2 million as a
result of the asset revaluation made upon the Reorganization and the Company's
1994 remodeling activities.
Interest and debt expense increased by $9.6 million (138%) in 1995 as
compared to 1994. This increase was due to an increase in working capital
borrowings under the Company's prior credit facility which was used to fund
operating cash flow needs of all FRI subsidiaries.
The change in net income is a combination of the above described items.
Fiscal 1994 to Fiscal 1993
Operating revenues for 1994 increased by approximately $16.7 million (3.4%)
as compared with the twelve months ended December 26, 1993. This increase was
the result of the continuing effect of the acquisition of 109 Bob's
restaurants in 1992 and their subsequent conversion to Carrows and Coco's
concepts. Following the
34
<PAGE>
conversion of Bob's to Carrows and Coco's, the average restaurant traffic
increased by approximately 80% from pre-conversion levels. In addition, Carrows
restaurants experienced an increase of approximately $1.6 million (1.0%) in
comparable store sales in 1994 compared to 1993, while the Coco's restaurants
experienced an increase in comparable store sales of approximately $3.2 million
(1.5%) in 1994 compared to 1993. Carrows average weekly customer count per
restaurant increased by less than 1.0% in 1994 as compared to 1993, while
Coco's average weekly customer count remained virtually even in 1994 as
compared to 1993. Average guest check for Carrows and Coco's increased by 4.9%
and 2.2%, respectively, in 1994 as compared to 1993.
Advertising expense increased by $1.5 million in 1994 as compared to 1993.
This increase is attributable to increased media (radio, television, and
newspaper) advertising.
Revenues from franchised restaurants were mainly comprised of annual
franchise royalties from the Company's franchisees. Franchise fees increased by
$1.1 million in 1994 as compared to 1993. This increase is attributable to the
change in the combined exchange rates from applicable hedge contracts from an
average 123 yen/dollar rate in 1993 compared to an average 101 yen/dollar rate
in 1994. As the franchise fees are in yen, the conversion to dollars causes a
change in the dollar amount of franchise fees from period to period.
The Company's overall operating income decreased by $3.4 million (11.3%) in
1994 as compared to 1993. This decrease was primarily attributable to an
increase in depreciation and amortization as a result of the Reorganization in
January 1994. Depreciation and amortization in 1994 (one month pre-
Reorganization and 11 months post-Reorganization) compared to 1993 depreciation
and amortization increased by $14.0 million. Other operating expenses were
substantially consistent with increased operating revenues.
Interest and debt expense increased by $2.3 million (51%) in 1994 as compared
to 1993. This increase was due to an increase in working capital borrowings
under the Company's prior credit facility which was used to fund operating cash
flow needs of all FRI subsidiaries. Prior to January 1994, FRI-M did not have a
working capital facility.
The change in net income is a combination of the above described items.
PRO FORMA RESULTS
The Unaudited Pro Forma Combined Statements of Operations reflect the
estimated results of operations, assuming the acquisition had been consummated
on the first day of the Company's 1995 fiscal year. On a pro forma basis,
operating income would have been $32.9 million for 1995, rather than the
historical amount of $27.9 million, reflecting assumed lower general and
administrative expenses for the Company subsequent to the acquisition. The
reduction in general and administrative expenses is primarily the result of the
elimination of corporate overhead and management fees previously charged to the
Company by its predecessor parent, offset by management fees to be charged the
company by its new parent, Flagstar. Interest expense on a pro forma basis
would have been $29.8 million, compared to the historical amount of $16.5
million in 1995. This increase is due to the debt incurred by the Company in
making the acquisition. Pro forma income tax expense for 1995 would have been
$3.5 million, as compared to $6.7 million. This decrease is due primarily to
the tax impact of the amounts discussed above. On a pro forma basis, the net
loss for 1995 would have been $330,000 compared to the historical net income
amount of $4.7 million, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's predecessor was a wholly owned subsidiary of FRI which operated
other restaurant concepts. Certain of these concepts operated at a significant
cash flow deficit and borrowings against FRI-M's Credit Facility were necessary
to fund the Company's predecessor's operations during 1995 and through May 23,
1996 (the date of the Acquisition). These borrowings were not used by the
Company.
The Company historically operates with a working capital deficiency because
(i) restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable, (ii) rapid turnover
allows a limited investment in inventories and (iii) cash from sales is usually
received before related accounts payable for food, beverages and supplies
become due.
35
<PAGE>
The Company intends to continue to operate with working capital deficiencies
and to rely upon internally generated funds and borrowings under the Credit
Agreement to finance its daily restaurant operations. The Company is
performing an ongoing evaluation regarding the nature and scope of its
restaurant operations and various short-term and long-term strategic
considerations in the process of assessing whether, and to what extent,
integration, consolidation or other modification of its restaurant operations
is appropriate following the Acquisition. The Company believes that funds to
be generated internally from operations and the funds available to the Company
under the Credit Agreement will be adequate to meet the Company's debt service
and capital expenditure requirements for the foreseeable future. See "Risk
Factors--Leverage" and "Description of Credit Agreement."
IMPACT OF INFLATION
Management recognizes that inflation has an impact on food, construction,
labor, and benefit costs, all of which can significantly affect the Company's
operations. High interest rates can negatively affect lease payments for new
restaurants as well. Historically, the Company has been able to pass any
associated higher costs due to these inflationary factors along to its
customers because those factors have impacted nearly all restaurant companies.
36
<PAGE>
BUSINESS
OVERVIEW
The Company is one of the nation's leading operators of family restaurants.
As of June 27, 1996, the Company operated 346 restaurants owned or leased by
the Company, principally under the Coco's and Carrows names. As of June 27,
1996, the Company operated 167 Coco's, 159 Carrows, 17 jojos, 1 Jeremiah's and
2 Bob's restaurants. Approximately 74% of the Company's restaurants are
located in California, making the Company the second largest family restaurant
operator in California, both in terms of sales volume and number of
restaurants. Coco's and Carrows restaurants were founded more than 25 years
ago and have developed excellent name recognition and a loyal customer base,
with customers on average making return visits to the restaurants seven and
six times per month, respectively. In addition to its domestic operations, as
of June 27, 1996 the Company is the licensor of 261 Coco's restaurants in
Japan and South Korea, representing the most substantial penetration of any
United States, non-fast food restaurant chain overseas.
The Company's restaurants offer an extensive menu of moderately priced
breakfast, lunch and dinner items and are typically open either 18 or 24 hours
a day. Both Coco's and Carrows restaurants emphasize consistently high quality
food with an excellent price/value relationship and friendly, efficient
service. During 1995, the average check per person was approximately $6.73 for
Coco's and $6.09 for Carrows, representing increases of 3.2% and 5.0%,
respectively, over the previous year. The Company generates approximately 23%,
32%, 40% and 5% of its revenue from breakfast, lunch, dinner and late night
meals, respectively, which the Company believes represents a higher dinner
proportion than its major competitors. The Company's average weekly restaurant
customer count in 1995 was 4,244 for Coco's and 4,443 for Carrows.
The Company's restaurants are generally located in densely populated
suburban areas with high commercial traffic and a strong residential base. The
commercial traffic typically provides a large portion of the Company's weekday
breakfast and lunch customers, while the residential traffic accounts for a
majority of the Company's dinner and weekend business. The Company's
restaurants average between 5,000 and 6,000 square feet of floor space,
allowing them to accommodate approximately 120 to 180 guests. The Company
believes that the location and concentration of its restaurants allows it to
realize economies of scale in advertising, distribution and field supervision.
In 1992, the Company significantly increased its revenue base and California
market share with the acquisition of 109 Bob's restaurants from Marriott
Corporation. The Company believes that the acquisition of Bob's enabled the
Company to establish attractive locations in developed areas at a
substantially lower cost than had the Company built the locations itself. The
Company completed its conversion of the Bob's restaurants to the Company's
Coco's and Carrows concepts in 1994 at an average cost of approximately
$230,000 per restaurant. In addition, the Company implemented a remodeling
program in 1994 to remodel its 208 Coco's and Carrows restaurants that were
not part of the Bob's conversion. From January 1, 1994 through June 27, 1996,
the Company remodeled 64 Coco's and 50 Carrows restaurants, at an average cost
of approximately $150,000 per restaurant, with the majority of such remodels
occurring in 1994 and early 1995. Since such time, remodeling activities have
been curtailed due to the limited availability of capital.
The Company has been built through a series of acquisitions, the first of
which was the purchase of Coco's restaurants (originally known as Snack Shop)
in 1970 from its founder, John McIntosh; in January 1980, the Company
purchased 120 jojos restaurants from its founder, Harold Butler; in May 1984,
the Company purchased 21 Sambo's restaurants out of bankruptcy; in January
1985, the Company purchased 91 Carrows restaurants from Carrows founder, David
Nancarrow; and in February 1992, the Company purchased 109 Bob's restaurants
from Marriott Corporation.
37
<PAGE>
RESTAURANTS
While the Coco's and Carrows concepts appeal to many of the same broad-based
customers, they are positioned to target two distinct groups within the family
restaurant segment. Through this dual positioning, the Company capitalizes on
various demographic and industry trends while achieving substantial economies
of scale (i.e., advertising, distribution and supervision) through operating a
large chain of restaurants.
The Coco's Concept. Coco's is positioned to appeal to a younger, more
contemporary customer who is more quality oriented than cost conscious and who
seeks a wide variety of unique menu items that are not typically offered at
family restaurants. Coco's customers are more often white-collar professionals
who are 25-54 years of age and have annual incomes in excess of $50,000.
Coco's has developed a strong following among this customer base through its
creative menu, new product development and execution capabilities, quality of
food and consistent, traditional "dinnerhouse style" service. Coco's service
is evolving in order to better compete with the casual dining restaurants by
focusing more on a "fun" dining experience. In addition, Coco's has
successfully implemented an in-restaurant and takeout bakery business which
reinforces the concept's quality food image and offers high margin products.
The average Coco's check during fiscal 1995 was $6.73, and the average
weekly customer count per store was 4,244. Positioned in the upper end of the
family restaurant segment, Coco's competes most directly with Marie
Callender's, Baker's Square, Sizzler and Mimi's Cafe. Coco's has been
increasing its market share since 1992 primarily through conversions of
acquired restaurants. See "Business--Restaurant Competition." The chart below
sets forth certain data with respect to the Company's Coco's restaurants:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER, ENDED
-------------------------------------------------- JUNE 27,
1991 1992(1) 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Number of Restaurants
(end of period)
Owned................. 144 185 189 187 188 184(2)
Franchised............ 0 2 4 5 6 6
International
Licensed............. 183 202 206 214 251 261
Sales (Owned) (in
thousands)............. $199,886 $244,617 $285,022 $288,494 $282,251 $135,245
Comparable Restaurant
Sales
Growth................. 6.8% (0.6)% (1.2)% 1.5% (5.0)% (2.5)%
Average Weekly Customer
Count Per Restaurant... 4,643 4,622 4,578 4,579 4,244 4,137
Average Check........... $ 6.07 $ 6.13 $ 6.38 $ 6.52 $ 6.73 $ 6.84
</TABLE>
- - - ---------------------
(1) Includes the effect of the acquisition of Bob's restaurants in February
1992.
(2) Includes the Company's jojos restaurants (17 as of June 27, 1996).
38
<PAGE>
The Carrows Concept. In contrast to Coco's, Carrows caters to a slightly
older clientele with more conservative tastes in food. Carrows' customers
typically have traditional values and tastes and seek dependable food and
service at reasonable prices. Carrows' primary target market is blue-collar
customers who are 35-64 years of age, while its secondary target market is
senior citizens. Carrows has developed a strong reputation as a restaurant
serving quality, traditional food at affordable prices in a familiar setting
while providing especially friendly service. This service, along with Carrows'
emphasis on larger portioned, traditional American entrees, enable Carrows to
appeal to its targeted customers. The average Carrows check during Fiscal 1995
was $6.09, and the average weekly customer count per store was 4,443. Carrows
is in the upper-middle price range of the family restaurant segment and
competes most directly with Denny's, IHOP, Baker's Square and Lyons. Similar
to Coco's, Carrows has been increasing its market share since 1992. See
"Business--Restaurant Competition." The chart below sets forth certain data
with respect to the Company's Carrows restaurants:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER, ENDED
------------------------------------------------ JUNE 27,
1991 1992(1) 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Number of Restaurants
Owned
(end of period)........ 108 167 167 163 161 162(2)
Sales (in thousands).... $140,008 $195,196 $203,790 $217,351 $220,234 $108,169
Comparable Restaurant
Sales
Growth................. 3.0% 3.3% 1.2% 1.0% (0.2)% 2.3%
Average Weekly Customer
Count Per Restaurant... 4,891 4,524 4,456 4,473 4,443 4,341
Average Check........... $ 5.15 $ 5.30 $ 5.53 $ 5.80 $ 6.09 $ 6.20
</TABLE>
- - - ---------------------
(1) Includes the effect of the acquisition of Bob's restaurants in February
1992.
(2) Includes the Company's Bob's and Jeremiahs restaurants (two and one,
respectively, as of June 27, 1996). Also includes the effect of one
Carrows restaurant located in Las Vegas, Nevada which was retained by FRI
and not acquired by the Company in the Acquisition.
OPERATING STRATEGY
The Company's operating strategy focuses on three primary areas: (i)
maintaining its momentum in its major West Coast markets through innovative
product development, creative marketing and superior execution and
repositioning the Coco's concept toward a more select targeted market; (ii)
selectively expanding its domestic presence in existing and contiguous markets
through new franchising agreements and conversion opportunities; and (iii)
expanding its international presence through additional licensing
arrangements.
RESTAURANT LICENSING AND FRANCHISING
The Company has successfully established the largest foreign presence of any
United States-based, non-fast food restaurant chain. As of June 27, 1996 the
Company licensed 261 Coco's restaurants abroad. This presence was established
primarily through a 1979 licensing agreement with Kasumi Stores K.K. and
Coco's Japan, Ltd. (collectively, "Kasumi"). Under the terms of this licensing
agreement, Kasumi has the exclusive right through February 1, 2010, to use the
Coco's restaurant concept in Japan, and a non-exclusive right to do so in
certain other Asian countries. This agreement also gives Kasumi access to
certain training procedures and technical information concerning the operation
of such family restaurants. At June 27, 1996, 226 Coco's were in operation in
Japan under the agreement with Kasumi. In addition, a sublicensee of Kasumi
operated 35 restaurants under the Coco's name in South Korea. During the
twelve months ended December 31, 1995, operating profit from these license
arrangements was $3.5 million. The Company's license agreement with Kasumi was
renegotiated effective February/March 1995. Prior to such renegotiation,
Kasumi paid the Company a weighted average royalty of 1.67% of net sales
attributable to the Company's Coco's restaurants located in Japan and Korea.
Effective February/March 1995, under the renegotiated agreement Kasumi pays
the Company a weighted average
39
<PAGE>
royalty of 0.92% of net sales attributable to such restaurants. The Company
incurs minimal expenses relating to the licensing arrangements as the Company
has no assets located overseas. The Company intends to leverage its
international brand recognition by entering into additional licensing
agreements in existing and new markets abroad. The Company is in preliminary
discussions with prospective licensees and initial market research has
indicated that attractive opportunities may exist in Indonesia, Western Europe
and Southeast Asia.
In 1990, the Company established a wholly owned subsidiary, CFC Franchising
Company ("CFC"), to franchise Coco's restaurants in the United States. Six such
Coco's franchised restaurants have been opened. In 1996, CFC obtained certain
license rights in Asia. Franchising represents an opportunity to achieve
additional growth with low investment risk for both the Coco's and Carrows
concepts.
As a subsidiary of Flagstar Corporation (the parent of the company which
operates and franchises Denny's and El Pollo Loco restaurants), the Company may
have the ability to convert Coco's and Carrows restaurants into Denny's or El
Pollo Loco restaurants or to operate El Pollo Loco restaurants in conjunction
with a Coco's or Carrows by becoming a Denny's or El Pollo Loco franchisee, and
the Company may have the opportunity to license Denny's Restaurants, Inc. to
convert Denny's Restaurants to Coco's or Carrows. The Indenture permits the
Company to become a Denny's or El Pollo Loco franchisee so long as the terms
are no less favorable to the Company than those available to unaffiliated
persons. See "Description of Notes--Certain Definitions--Permitted Franchise
Agreement." Neither Flagstar Corporation nor the Company has any such
conversion plans at this time.
RESTAURANT SITES
At June 27, 1996, the Company operated 346 restaurants owned or leased by the
Company in ten states. Approximately 74% of the Company's 346 restaurants are
located in California, making the Company the second largest family restaurant
chain in California in terms of number of restaurants. Set forth below is a
breakout of the Company's restaurant concepts by state:
<TABLE>
<CAPTION>
NUMBER OF RESTAURANTS
-------------------------------------------------
STATE COCO'S CARROWS JOJOS JEREMIAH'S BOB'S TOTAL %
<S> <C> <C> <C> <C> <C> <C> <C>
California................... 135 120 -- -- 2 257 74.3%
Arizona...................... 17 9 -- -- -- 26 7.5
Texas........................ 1 10 14 -- -- 25 7.2
Oregon....................... -- 9 -- -- -- 9 2.6
Nevada....................... -- 6 -- 1 -- 7 2.0
Washington................... 6 1 -- -- -- 7 2.0
Colorado..................... 6 -- -- -- -- 6 1.7
New Mexico................... -- 4 -- -- -- 4 1.2
Indiana...................... -- -- 3 -- -- 3 0.9
Missouri..................... 2 -- -- -- -- 2 0.6
--- --- --- --- --- --- -----
Total...................... 167 159 17 1 2 346 100.0%
=== === === === === === =====
</TABLE>
The Company completed the sale/leaseback of most of its owned restaurants
during the beginning of 1996. The Company has relatively low occupancy costs
since most of its restaurants operate under leases that have been in place for
many years. Minimum occupancy costs for the Company's existing restaurants
average $65,000 compared to $165,000 for the Company's new restaurants.
Franchise Site Selection. The Company has a Franchise Development Group which
is responsible for identifying and securing new franchise locations. The
Franchise Development Group works closely with real estate brokers in the
Company's existing markets who are familiar with the Company's needs and
selection criteria. In general, the Company's restaurants are located in high-
traffic commercial areas with a substantial surrounding residential base within
a three mile radius. The commercial traffic typically provides the Company's
weekday breakfast and lunch clientele while the residential traffic accounts
for a majority of the Company's dinner and weekend business. Sites are
evaluated on the basis of a variety of factors, including demographic
40
<PAGE>
data, land use and environmental restrictions, competition in the area, ease
of access, visibility, availability of parking and proximity to a major
traffic generator such as a shopping mall, office complex, stadium or
university. Under the Company's franchise program, the franchisee becomes the
tenant for the restaurant and incurs the cost of any leasehold tenant
improvements and all operating costs.
RESTAURANT LAYOUT
The Company's restaurants average in size between 5,000 and 6,000 square
feet of floor space, allowing them to accommodate approximately 120 to 180
guests. Approximately 60% of each restaurant's space is dedicated to dining
room and customer areas, while 40% is dedicated to back room, kitchen and
storage areas. The Company's Coco's restaurants all have in-house bakeries
that reinforce the concept's high-quality image. Most of the Company's
restaurants do not have full bars but serve beer and wine at the tables.
Seating is a combination of tables and booths. Every restaurant has a waiting
area where customers may be seated while waiting for tables or booths to open.
Since most restaurants are located in power centers or strip center shopping
malls, the Company's restaurants have ample parking spaces to support their
respective guest counts.
RESTAURANT OPERATIONS AND MANAGEMENT
The Company's restaurants offer an extensive menu of moderately priced
breakfast, lunch and dinner items and are typically open approximately 18 to
24 hours a day. Both Coco's and Carrows restaurants emphasize consistently
high quality food designed to enhance the price/value relationship of
friendly, efficient service. Approximately 80% of the Company's customers pay
in cash and most of the credit card payments are made during dinner meals. The
average weekly guest count per restaurant at Coco's was 4,244 and at Carrows
was 4,443 during fiscal 1995.
The Company generates approximately 23%, 32%, 40% and 5% of its revenue from
breakfast, lunch, dinner and late night meals, respectively. The Company
believes that the higher dinner proportion primarily at Coco's increases its
average check and asset utilization relative to competitors. The Company
employs a different strategy during each meal time, offering lower prices at
breakfast (which is primarily commodity-oriented) during the weekdays, faster
service at lunch time during the weekdays, and a better quality, more
differentiated product at dinnertime.
The Dining Experience. Both Coco's and Carrows provide casual, sit-down
dining experiences. Guests are greeted by hosts or hostesses at the door who
direct guests to available tables or booths. A sit down waiting area is
provided for when the restaurants are at capacity. Once seated, guests are
given menus, which outline specials, and servers approach the table to
describe specials further and take beverage orders. Orders are taken, the food
is prepared and delivered, plates are cleared and coffee and dessert are then
offered. Checks are paid for at the cash register on the customer's way out of
the restaurant. A typical lunch meal takes 20 to 45 minutes to complete while
typical dinner meal takes approximately one hour to complete (meals can be
completed more quickly depending upon customer preferences).
Food Preparation and Delivery. To maintain its reputation of offering high
quality food and service, the Company has standardized, documented
specifications for the preparation and efficient service of quality food.
Major emphasis is placed on the proper preparation and delivery of the product
to the consumer, portion control, prompt and courteous service, cleanliness
and the cost-effective procurement and distribution of quality products. Food
items are prepared fresh daily on a made-to-order basis at the restaurants.
The Company's commissary manufactures the soups, salad dressings and sauces
and these items are delivered to the restaurants by the Company's distributors
approximately two to three times per week.
Restaurant Management and Employee Structure. The Company's restaurant
management field structure is comprised of six Divisional Vice Presidents
(three for each concept), who each oversee approximately six to eleven
District Managers. Each District Manager in turn oversees five to nine
restaurants. A General Manager, Associate Manager and Assistant Manager are
employed at each restaurant to manage day-to-day operations,
41
<PAGE>
including customer relations, food service, cost control, restaurant
maintenance, hiring and training of restaurant employees, and the
implementation of all Company policies. Coco's and Carrows restaurants
typically operate with a staff of 40 employees for low volume restaurants to
70 employees for high volume restaurants. The average restaurant employs
approximately 45 to 55 employees, and a majority of the restaurant level
employees work part time.
The Company recognizes the importance of its personnel in providing
customers with a quality dining experience. As a result, the Company offers
its employees extensive training (described below), opportunities for
promotion, and incentive-based compensation that meets, and frequently
exceeds, industry standards. The success of these endeavors allows the Company
to enjoy employee turnover rates that the Company believes are below industry
averages and to benefit from a staff of highly experienced employees. The
Company's restaurant General Managers average approximately 8.5 years of
experience with the Company.
Training. Both Coco's and Carrows provide formal training programs for new
managers and employees of the Company's restaurants. Exceptional General
Managers are identified as "Executive Training Managers." Management training
includes one week at the Company's corporate headquarters and eight weeks with
Executive Training Managers for Coco's (because of the bakery concept) and
seven weeks with Executive Training Managers for Carrows. Hourly employees are
trained by the respective restaurants managers and each shift has an hourly
employee who has been certified to help train other employees.
Quality Control. Coco's and Carrows have developed programs and systems that
ensure the safety, quality, and consistency of key ingredients, menu items and
operations. The major components of these programs include a
Supplier/Distributor QA program that audits ingredients and suppliers to
ensure compliance to specifications, and a Restaurant Food Safety program
which is responsible for maintaining communications with regulatory agencies
and proactively managing risk situations.
Facility Maintenance. The Company has five Facility Maintenance Managers who
each report to the Director of Facilities. Each of the Facility Maintenance
Managers established preferred vendor relationships and is actively involved
in evaluating bids for major repairs. Janitorial services for each restaurant
are performed nightly by the restaurant employees.
RESTAURANT MENUS
Carrows Menu Strategy. The Company's menu strategy for Carrows is to (i)
serve a consistent quality and variety of traditional American cuisine, with
an emphasis on traditional home style fare, taking the extra steps to prepare
these meals better than any other chain; (ii) provide an excellent value
relationship through the amount of food offered for the money; (iii) leverage
the high quality of its food products to achieve increased margins from its
menu items; and (iv) generate sales and profits in the breakfast and dinner
day parts through the strong marketing of breakfast specials and high quality
dinner items, such as prime rib and seafood, which are not generally available
in family restaurants. To reinforce its traditional positioning, Carrows has
recently introduced such items as Smoky Mountain BBQ Ribs and Grilled Pork
Chops, as well as a home style side dish program at dinner called "Fixin's"
that allows guests to customize their entrees with fresh, made from scratch
side orders such as mashed potatoes, stuffing and a vegetable casserole.
Carrows recently received an award from the National Restaurant Association
for Best Menu in its price category. In addition, the California Restaurant
Association annually conducts a menu contest for its family restaurant
segment. In 1995, Carrows entered their menus in this contest and won second
place in the Regular Menu category, second place in the Children's Menu
category and second and third place in the Dessert Menu category. The awards
are based on diversity and creativity in menu design in the $8 and under price
range.
Coco's Menu Strategy. The Company's menu strategy for Coco's is to (i) serve
a high quality and variety of traditional American cuisine with emphasis on
new or trend-establishing fare with special attention given to plate
presentation in order to communicate price/value relationship; (ii) utilize
high quality food products including fresh fish, fresh baked muffins, rolls,
etc., to communicate the increasing strength of those product lines
42
<PAGE>
in the market place; and (iii) improve sales and profits by strategic menu
offerings to appeal to a target market of families and adult males, a group
with respect to which Coco's has experienced substantial reductions since
early 1994. The Company intends to slightly reposition its Coco's restaurants
during the upcoming 12 months to appeal to a more "upscale" customer base.
This repositioning will be accomplished without substantial capital investment
by utilizing in-restaurant changes to products, flatware, dishware, table
settings, etc. The Company believes that by redesigning Coco's current menu,
Coco's will be in a better strategic position in its primary markets.
Enhancement and increased visibility of Coco's bakery capabilities will also
add to its strategic positioning.
New Product Development. The Company believes that its extensive product
development process, as well as the training received by district managers,
general managers and employees regarding new products, allows the Company to
execute new product development better than its competitors, providing the
Company with a significant competitive advantage. The Company develops
approximately 25 to 35 new products each year to maintain its reputation and
position as the family restaurant segment's menu innovator. The Company
reviews its menus two times each year to determine if slow-moving items should
be replaced with new products.
To develop new products, the Company's market research, food and beverage
and marketing departments for each chain conceive new ideas from trade
magazines, other restaurant formats and market research. Selected ideas are
initially exposed to consumers as written "concepts" in consumer research.
Those ideas with the greatest consumer appeal are then developed into
products, and are placed into a limited number of restaurants for testing to
determine consumer acceptance of the product as well as operational
feasibility. Products which are successful are then introduced into all
restaurants (with a menu insert at Carrows, or a flyer handout at Coco's) as a
"special" or promotion. These items will remain on promotion for 8-12 weeks,
at which point the most successful items are added to the menu.
RESTAURANT MARKETING
Media advertising is a large part of the integrated process that the Company
uses to market its concepts. The Company also uses its menu strategy,
interior/exterior building design, employee uniforms, style of service, and
specialized promotions to help differentiate itself. Media advertising for
both Carrows and Coco's is primarily product oriented, featuring high margin,
special entrees presented and priced to convey high value. Examples include
Carrows' Prime Rib Special at $7.99 and Coco's Shrimp and Garlic Pasta at
$8.99. Coco's advertising typically features dinner entrees while mentioning
their pies, and Carrows focuses on breakfast and dinner. Both concepts
reinforce that they are the restaurant of choice for all dining occasions
(i.e. breakfast, lunch, dinner, families, seniors, healthy options).
FOOD PRODUCT PURCHASING
The Company uses Flagstar's purchasing department in order to obtain high
quality ingredients at the most favorable prices and to make centralized
purchasing arrangements for the main ingredients, supplies and equipment needs
of all Coco's and Carrows restaurants. Flagstar's size provides the Company
with significant purchasing power which often enables it to obtain products at
favorable prices from several nationally recognized distributors to service
the restaurants. Orders are placed to distributors by the restaurant managers
and deliveries are typically made two to three times a week. This strategy
allows the Company to minimize warehousing and transportation expenses and to
greatly reduce spoilage expenses.
All Coco's and Carrows in California and Arizona utilize Marriott
Distribution Services as their principal distributor. Restaurants located in
other states use either Kraft, White Swan or Food Services of America as their
principal distributor. In an effort to maintain the Company's stringent
quality standards, food products are inspected both before and after they are
delivered by the distributor. The Company is not dependent upon any of its
distributors for operation of its business and believes that satisfactory
arrangements could be made to replace any of its current distributors, if
necessary, on a timely basis.
43
<PAGE>
In order to minimize the impact of fluctuations in price and availability,
the Company monitors the current and future prices and availability of the
primary commodities it purchases and, when such commitments are considered to
be advantageous, the Company makes advanced contract commitments for essential
commodities such as eggs, coffee, produce and meats.
In addition, the Company operates a commissary which produces proprietary
items such as soups, salad dressings, pie shells and fillings. Restaurant
purchases from the commissary totaled approximately $13.5 million in 1995.
RESTAURANT COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, and local and national economic conditions affecting consumer
spending habits. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service, advertising,
name identification, attractiveness of facilities and restaurant location. The
Company's restaurants compete with a variety of restaurants ranging from
national and regional restaurant chains to locally owned restaurants.
Management believes the Company's principal competitive strengths include
the Company's brand name recognition; the value, variety and quality of food
products served; the quality and training of its employees; and the Company's
market penetration, which has resulted in economies of scale in a variety of
areas, including advertising, distribution and supervision.
In fiscal 1995, the Company generated approximately 75% of its total revenue
from its California restaurants. With 257 restaurants in California, the
Company is the second largest family restaurant chain in California in terms
of sales volume and number of restaurants. Both Coco's and Carrows have
increased their market share since 1992. The Company was able to increase its
market share during a difficult competitive environment when most of its
competitors either lost or maintained their market shares. Listed below are
the market shares in California for the Company and its major competitors in
the family restaurant segment for 1992 to June 1995.
FAMILY RESTAURANT SEGMENT MARKET SHARE CALIFORNIA MARKET SHARE DATA
<TABLE>
<CAPTION>
CONCEPT 1992 1993 1994 JUNE 30, 1995
<S> <C> <C> <C> <C>
Denny's(1).................................... 27.0% 26.0% 25.6% 25.9%
- - - --------------------------------------------------------------------------------
THE COMPANY(2)................................ 19.5 21.7 23.8 24.3
- - - --------------------------------------------------------------------------------
COCO'S........................................ 12.1 13.5 14.1 14.1
Marie Callender's............................. 13.0 13.1 13.1 13.1
CARROWS....................................... 7.4 8.2 9.7 10.2
IHOP.......................................... 6.7 7.2 7.7 8.0
Lyon's Restaurant............................. 8.1 7.9 7.6 7.6
Baker's Square................................ 7.7 7.2 7.0 6.9
Mimi's Cafe................................... 2.2 2.2 2.5 2.9
Bob's Big Boy................................. 6.0 4.9 3.4 1.8
</TABLE>
- - - -------------------------------------------------------------------------------
(1) Denny's restaurants are currently owned, operated and/or franchised by
Flagstar.
(2) Includes Coco's and Carrows and excludes all Bob's restaurants, when
owned by the Company.
Source: Restaurant Trends June 1995 MarketSHARE Report for California
44
<PAGE>
TRADEMARKS AND SERVICE MARKS
The Company regards its trademarks and service marks as important to the
identification of its restaurants and believes that they have significant
value in the conduct of its business. The Company has registered various
trademarks and service marks with the United States Patent and Trademark
Office. In general, subject to their continuous use and priority of use, these
registrations may be renewed indefinitely. In addition to its federal
registrations, certain trademarks and service marks have been registered in
various states in which the Company operates restaurants. Also, many of the
Company's menus, training manuals and other printed manuals utilized in
conjunction with its business are copyrighted.
EMPLOYEES
The Company believes that its relationship with its employees is excellent.
At June 27, 1996, the Company had a total of approximately 16,500 employees,
none of which were covered by union contracts.
PROPERTIES
Of the 346 restaurants operated and owned or leased by the Company as of
June 27, 1996, the Company owned the land and building for 6, owned the
building and leased the land for 49, and leased both land and building for the
remaining 291 restaurants. Most of the restaurants are free standing units
ranging from approximately 5,000 to 6,000 square feet. Most of the leases
provide for the payment of a base rent or approximately 5% to 6% of gross
sales.
The leases (assuming exercise of no renewal options) have terms expiring as
follows:
<TABLE>
<CAPTION>
LEASE
EXPIRATION NUMBER OF RESTAURANTS
<S> <C>
1996-1999 67
2000-2004 188
</TABLE>
Assuming exercise of all options to renew leases, only 17 leases will expire
prior to December 31, 2000.
In addition to the restaurant locations set forth above under "--Restaurant
Sites," the Company's properties include (i) two office buildings located in
Irvine, California and (ii) various other regional offices and warehouses
which are leased. The Company shares a 53,916 square foot office building with
FRI located at 18831 Von Karman Avenue, Irvine, California, pursuant to a
lease that expires in April 1997, with annual rent of $806,376. Rent and
occupancy expenses are split evenly between the Company and FRI. The Company
owns a 106,864 square foot building located at 2450 White Road, Irvine,
California. The White Road building is used for a commissary (49,920 sq. ft.),
warehouse (24,840 sq. ft.) and office space currently occupied by a third
party (32,104 sq. ft.).
Substantially all of the Company's properties and assets are pledged to
secure indebtedness under the Credit Agreement.
GOVERNMENT REGULATION
The Company is subject to federal, state and local laws and regulations
governing health, sanitation, environmental matters, safety, the sale of
alcoholic beverages and regulations regarding hiring and employment practices.
The Company believes it has all licenses and approval material for the
operation of its business, and that its operations are in material compliance
with applicable laws and regulations.
The Company is subject to federal and state laws governing matters such as
minimum wages, overtime and other working conditions. At December 25, 1995,
approximately 56% of the Company's employees were paid at rates related to the
minimum wage. Accordingly, increases in the minimum wage or decreases in the
allowable tip credit (which reduces the minimum wage that must be paid to
tipped employees in certain states) increase the Company's labor costs. This
is especially true in California, where there is no tip credit. There is
currently an
45
<PAGE>
initiative on the ballot in California to raise the minimum wage in California
from $4.25 to $5.00 per hour, effective March 1, 1997, and to $5.75 per hour
effective March 1, 1998. The initiative will be voted upon in November 1996.
Also, the Federal minimum wage will increase from $4.25 per hour to $4.75 per
hour on October 1, 1996 and again to $5.15 per hour on September 1, 1997.
Employers must pay the higher of the Federal or State minimum wage.
The Company will attempt to offset increases in the minimum wage through
pricing and other cost control efforts; however, there can be no assurance
that the Company or its franchisees will be able to pass such additional costs
on to its customers.
The Company is also subject to both federal and state regulations governing
disabled persons' access to its restaurant facilities, including the Americans
with Disabilities Act ("ADA"), which became effective in January 1992. If the
ADA were interpreted to require a higher degree of accessibility for disabled
persons, the Company, and the restaurant industry as a whole, could be
required to make substantial modifications to its restaurant facilities which
have not been subject to recent remodels or conversions.
LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
liquidity, financial position or results of operations.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of June 30, 1996, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<C> <C> <S>
Mark L. Shipman 47 Director and President
C. Robert Campbell 51 Executive Vice President
Rhonda J. Parish 40 Senior Vice President, General
Counsel and Secretary
Paul R. Wexler 52 Senior Vice President, Procurement
and Distribution
Ronald B. Hutchison 46 Vice President and Treasurer
Beth L. Libhart 43 Vice President, Human Resources
Ross B. Nell 38 Vice President, Tax
Carolyn Toth 36 Vice President, Research and
Development
Ann A. Wride 34 Vice President, Finance and Chief
Financial Officer
William J. Boger 54 Vice President, Franchise Development
of CFC
William A. Coston 51 Vice President, International of CFC
James B. Adamson 48 Director
Ellen Downey 43 Director
Paul E. Raether 49 Director
H. Jay Sarles 51 Director
Michael T. Tokarz 46 Director
</TABLE>
MARK L. SHIPMAN became President and a Director of the Company in May 1996.
From December 1995 to May 1996, Mr. Shipman was Vice President of Acquisitions
and Development of Flagstar. Prior thereto, from 1993 to December 1995, he was
Vice President of Administration of Denny's and from 1991 to 1993 he was Vice
President of Operations (West) of Denny's.
C. ROBERT CAMPBELL became Executive Vice President of the Company in June
1996. From May 1995 to the present, Mr. Campbell has served as Vice President
and Chief Financial Officer of FCI and Executive Vice President and Chief
Financial Officer of Flagstar. Prior thereto, from 1991 to May 1995 he was
Executive Vice President of Human Resources and Administration for Ryder
System, Inc. and from 1981 to 1991 he was Executive Vice President--Finance of
Vehicle Leasing Division of Ryder System, Inc.
RHONDA J. PARISH became Senior Vice President, General Counsel and Secretary
of the Company in May 1996. From January 1995 to the present, Ms. Parish has
served as Senior Vice President and General Counsel of Flagstar and as Vice
President and General Counsel of FCI. In addition, from February 1995 to the
present, Ms. Parish has served as Secretary of Flagstar and FCI. From 1990 to
1994, she was Assistant General Counsel of Wal-Mart Stores, Inc.
PAUL R. WEXLER became Senior Vice President, Procurement and Distribution of
the Company in July 1996. From October 1995 to the present Mr. Wexler has
served as Senior Vice President, Procurement and Distribution of Flagstar.
Prior thereto, he was Vice President, Procurement and Quality Assurance for
Marriott International from 1991 to October 1995.
47
<PAGE>
RONALD B. HUTCHISON became Vice President and Treasurer of the Company in
May 1996. From August 1995 to the present, Mr. Hutchison has served as Vice
President and Treasurer of Flagstar. From 1988 to August 1995, he was Vice
President and Treasurer of Leaseway Transportation Corp.
BETH L. LIBHART became Vice President, Human Resources of the Company in May
1996. From 1988 to May 1996, Ms. Libhart was Director of Employee Relations of
FRI and its predecessor company, REG.
ROSS B. NELL became Vice President, Tax of the Company in July 1996. From
July 1996 to present, Mr. Nell has served as Vice President, Tax of Flagstar.
Prior thereto, from January 1996 to July 1996 he was Director of Taxes of
Flagstar and from April 1991 to January 1996 he was the Federal Tax Director
of Flagstar.
CAROLYN TOTH became Vice President, Research and Development of the Company
in May 1996. From December 1993 to May 1996, Ms. Toth was Vice President, Food
and Beverage of Coco's. Prior thereto, from 1991 to December 1993, she was
Director of Food and Beverage of Coco's and the predecessor company of FRI,
REG.
ANN A. WRIDE became Vice President and Chief Financial Officer of the
Company in May 1996. From March 1994 to May 1996, Ms. Wride was Vice President
of Finance of FRI. Prior thereto, from March 1989 to March 1994, she was
Controller of El Torito, FRI and its predecessor company, REG.
WILLIAM J. BOGER became Vice President, Development of CFC, a wholly-owned
subsidiary of the Company, in May 1996. From 1986 to May 1996, Mr. Boger was
Vice President, Development of FRI and its predecessor company, REG.
WILLIAM A. COSTON became Vice President, International of CFC, a wholly-
owned subsidiary of the Company, in May 1996. From 1986 to May 1996, Mr.
Coston was Vice President, International of FRI and its predecessor company,
REG.
JAMES B. ADAMSON became a Director of the Company in May 1996. From February
1995 to the present, Mr. Adamson has served as President, Chief Executive
Officer and a Director of Flagstar and FCI. Prior thereto, from 1993 to
January 1995 he was Chief Executive Officer of Burger King Corporation, from
1991 to 1993 he was Chief Operating Officer of Burger King Corporation and in
1991 he was President of Burger King U.S.A. Retail Division. He is also a
director of Kmart Corporation and Oxford Health Plans.
ELLEN DOWNEY became a Director of the Company in May 1996. From 1993 to the
present, Ms. Downey has been a private investor in Miami, Florida. Prior
thereto, from 1991 to 1993, she was Vice President and Treasurer of Ryder
System and from 1988 to 1991 she was Vice President and Group Controller of
Ryder Dedicated Logistics.
PAUL E. RAETHER became a Director of the Company in May 1996. Mr. Raether is
a member of the limited liability company that serves as the General Partner
of Kohlberg Kravis Roberts & Co., L.P. ("KKR") and is a General Partner of KKR
Associates and prior to January 1996 he served as a General Partner of KKR. He
is also a director of Flagstar, FCI, Bruno's, Inc., Duracell International,
Inc., Fred Meyer, Inc., IDEX Corporation and The Stop & Shop Companies, Inc.
H. JAY SARLES became a Director of the Company in June 1996. From March 1993
to the present, Mr. Sarles has been Vice Chairman of Fleet Financial Group and
Chairman of Fleet Bank, N.A. Prior thereto, from April 1991 to March 1993, he
was President and Chief Executive Officer of Fleet Banking Group. He is also a
director of the Consumers Bankers Association and ABA Securities Association.
MICHAEL T. TOKARZ became a Director of the Company in May 1996. Mr. Tokarz
is a member of the limited liability company that serves as the General
Partner of KKR and is a General Partner of KKR Associates and prior to January
1996 he served as a General Partner of KKR. He is also a director of Flagstar,
FCI, IDEX Corporation, K-III Communications Corporation, Safeway, Inc. and
Walter Industries, Inc.
48
<PAGE>
DIRECTOR COMPENSATION
The Company pays those directors who are not affiliated with the Company,
Flagstar or FCI $10,000 per year for service on its board of directors. The
Company does not pay any fees or remuneration to its other directors for
service on its board of directors or any board committee, but the Company
reimburses all directors for their out-of-pocket expenses incurred in
connection with attending meetings of the board.
EXECUTIVE COMPENSATION
Summary Compensation Table. The Company was incorporated as a Delaware
corporation in February 1996. Accordingly, the Company did not pay any cash
compensation to its executive officers for the year ended December 31, 1995.
The following table sets forth the annual base salary and other annual
compensation for services rendered to the Company and its subsidiaries which
the Company expects to pay in 1996 to the Company's Chief Executive Officer
and each of the other four most highly compensated executive officers of the
Company whose cash compensation on an annualized basis is expected to exceed
$100,000 (salary and bonus) (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ---------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR(1) SALARY BONUS COMPENSATION(2) OPTIONS/SARS(3)
<S> <C> <C> <C> <C> <C>
Mark L. Shipman......... 1996 $250,000 $162,500 $2,000 50,000
(President)
Ann A. Wride............ 1996 130,000 17,750(4) 5,800 25,000
(Vice President,
Finance and Chief
Financial Officer) 34,125(5)
William J. Boger........ 1996 124,656 25,970(4) 1,400 25,000
(Vice President,
Franchise Development
of CFC) 32,722(5)
William A. Coston....... 1996 119,350 24,865(4) 1,450 25,000
(Vice President, Inter-
national of CFC) 31,329(5)
Carolyn Toth............ 1996 97,000 13,334(4) 5,800 0
(Vice President,
Research 25,463(5)
and Development)
</TABLE>
- - - ---------------------
(1) Amounts given are annualized projections for the year ending December 31,
1996.
(2) Represents imputed value of life insurance provided by the Company and car
allowances.
(3) Represents options to purchase shares of FCI common stock granted in 1996.
See "--Option Grants in 1996" and "--1989 Option Plan".
(4) Represents bonus compensation earned prior to the Acquisition and payable
by the Company.
(5) Represents estimated bonus compensation for post-Acquisition services to
the Company.
Employment Arrangements. Pursuant to the Company's employment arrangement
with Mr. Shipman, the Company has agreed to provide Mr. Shipman a performance
bonus targeted to equal 65% of his 1996 annual base salary (determined on a
pro-rata basis from June through December 1996) if Flagstar and/or the Company
achieve budgeted financial and other performance targets. Twenty-five percent
of Mr. Shipman's targeted bonus will be paid only in the event Flagstar's cash
flow (calculated as cash generated in Flagstar's restaurant operations, after
restaurant and corporate-level expenses and capital expenditures) meets or
exceeds $229 million and Flagstar's comparable store sales (calculated to
include all of Flagstar's restaurants) for 1996 exceeds such sales for 1995 by
three percent or greater. An additional twenty-five percent of Mr. Shipman's
targeted bonus will be paid only in the event the Company meets or exceeds its
budgeted sales target for June 1996 through December 1996. A further twenty-
five percent of Mr. Shipman's targeted bonus will be paid only in the event
the Company meets or exceeds its budgeted pro-forma EBITDA target for June
1996 through December 1996.
49
<PAGE>
The final twenty-five percent of Mr. Shipman's targeted bonus will be paid at
the discretion of the Chief Executive Officer of Flagstar, based on both
financial and non-financial measures. In the event the Company terminates Mr.
Shipman's employment for a reason other than fraud, dishonesty or as a result
of the commission of illegal acts, the Company has agreed to provide Mr.
Shipman, upon the satisfaction by Mr. Shipman of certain conditions, with
twenty-four months of severance benefits at his then-existing base salary. All
other employees of the Company (including its other executive officers) are
eligible to receive incentive bonus payments and/or severance benefits under
the terms of incentive and severance programs administered by the Company or
Flagstar, as the case may be.
Option Grants in 1996. The following table contains information concerning
the grant of stock options to those Named Executive Officers who have been
granted options under FCI's 1989 Option Plan made or expected to be made for
the year ended December 31, 1996. The table also lists potential realizable
values of such options on the basis of assumed annual compounded stock
appreciation rates of 5% and 10% over the life of the options.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF SHARE
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(4)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME (#)(1) FISCAL YEAR ($/SH)(2) DATE(3) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Mark L. Shipman......... 50,000 5.7% $ 6 May 2006 $ 20,729 $ 210,708
Ann A. Wride............ 25,000 2.9% $ 6 May 2006 $ 10,365 $ 105,354
William J. Boger........ 25,000 2.9% $ 6 May 2006 $ 10,365 $ 105,354
William A. Coston....... 25,000 2.9% $ 6 May 2006 $ 10,365 $ 105,354
</TABLE>
- - - ---------------------
(1) Such options were granted under FCI's 1989 Option Plan in connection with
the initial employment of the Named Executive Officers by the Company.
These options become exercisable in five equal installments on the first,
second, third, fourth and fifth anniversaries of their May 23, 1996 date
of grant.
(2) Under the 1989 Option Plan, the exercise price upon the exercise of an
option may be paid in cash or by surrender of other shares of common stock
of FCI having a fair market value on the date of exercise equal to such
exercise price, or in a combination of cash and such shares.
(3) The expiration date of the options is ten years after the date of grant.
In addition, upon termination of employment of a holder, all of such
holder's options not then exercisable expire and terminate. If such
termination is by reason of death, retirement or disability, such holder's
exercisable options remain exercisable for one year following termination.
If such termination is voluntary or without cause, such holder's
exercisable options generally remain exercisable for sixty days following
termination. If such termination is for cause, such holder's exercisable
options expire and terminate as of the date of termination.
(4) The potential realizable value is reported net of the option price, but
before income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% only from
the date of grant to the expiration date of the option.
1989 OPTION PLAN
Under the 1989 Option Plan, the Compensation and Benefits Committee of the
Board of Directors of FCI has authority to grant options to key employees of
the Company (including officers) and otherwise administer the 1989 Option
Plan. Such committee consists of five members of the Board of Directors of FCI
who are "disinterested persons" within the meaning of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Any employee of the Company is eligible to receive options under the 1989
Option Plan, at the discretion of the Committee. In the event that an
outstanding option terminates for any
50
<PAGE>
reason, the shares of common stock of FCI subject to the unexercised portion
of such option shall again be available for grants under the 1989 Option Plan.
An option granted under the 1989 Option Plan entitles the participant to
purchase shares of common stock of FCI at an option exercise price determined
by the committee. Option agreements may provide for the exercise of options,
in whole or in part, from time to time during the term of the option or in
such installments as the committee shall determine, subject to earlier
termination upon certain events as provided in the 1989 Option Plan. The
committee may, in its discretion, accelerate the date on which an option
becomes exercisable. The options are not "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended. The maximum term
of each option is ten years. The exercise price of all options granted
pursuant to the 1989 Option Plan is determined by the Committee at the time of
grant, but cannot be less than the minimum price required by law. The exercise
price of shares of common stock of FCI purchased upon exercise of an option
may be paid in cash, by surrender of other shares of common stock of FCI
having a fair market value on the date of exercise equal to such exercise
price, or subject to the approval of the committee, in a combination of cash
and such shares.
Upon termination of the services of a participant, all options granted to
such participant that are not then exercisable shall expire and terminate. If
such termination is by reason of death, retirement or disability, such
holder's exercisable options shall remain exercisable for one year following
termination. If such termination is due to voluntary termination or
termination without cause, such holder's exercisable options shall generally
remain exercisable for sixty days following termination. If such termination
is for cause, all of such holder's options shall expire and terminate as of
the date of termination.
Options granted under the 1989 Option Plan are nontransferable and
nonassignable by the optionee, other than by will or the laws of descent and
distribution, and are exercisable during his or her lifetime only by the
optionee. No option may be exercised after the expiration of its term. Neither
the Company, Flagstar nor FCI receives any proceeds upon the grant of options.
Any proceeds received by FCI from the sale of its common stock on the exercise
of options shall be used for general corporate purposes. No partial exercise
of an option shall be for an aggregate exercise price of less than $1,000 or
in respect of less than 100 shares of common stock of FCI. The partial
exercise of an option shall not cause termination of the remaining portion
thereof.
Upon the occurrence of certain events involving a recapitalization or
reorganization of FCI, the committee will make appropriate adjustments to the
number of shares covered by each outstanding option and the per share exercise
price thereof, redeem such options (whether or not then exercisable), or make
other appropriate adjustments, in its discretion, to prevent dilution or
enlargement of rights.
The Board of Directors of FCI may at any time suspend or discontinue the
1989 Option Plan or revise or amend it any respect whatsoever; provided,
however, that without approval of the stockholders of FCI, no revision or
amendment shall increase the number of shares of common stock of FCI that may
be issued under the 1989 Option Plan, materially increase the benefits
accruing to individuals holding options pursuant to the 1989 Option Plan or
materially modify the requirements as to eligibility for participation in the
1989 Option Plan. As of July 1, 1996, options with respect to approximately
3,825,290 shares of common stock of FCI had been granted and were outstanding
under the 1989 Option Plan.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date hereof with
respect to the beneficial ownership of shares of common stock of the Company
(the "Common Stock"):
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF
OF SHARES OUTSTANDING
BENEFICIAL OWNER(1) OWNED SHARES
<S> <C> <C>
Flagstar Corporation...................................... 1,000 100%
203 East Main Street
Spartanburg, South Carolina 29319
</TABLE>
- - - ---------------------
(1) The beneficial owner has the sole power to vote and to dispose of all
shares of Common Stock.
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consisted of 1,000 shares of Common Stock, of which 1,000 shares were
outstanding. There is no public trading market for the Common Stock. Holders
of Common Stock are entitled to one vote per share on any matter coming before
the stockholders for a vote. The Company does not expect in the foreseeable
future to pay dividends on the Common Stock.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
Pursuant to a Management Services Agreement, dated as of May 24, 1996,
between Flagstar and the Company (the "Management Agreement"), Flagstar has
agreed to provide those management and support services that are requested
from time to time by the Company and its subsidiaries and that are of a nature
and extent generally performed by Flagstar. The term of the Management
Agreement continues through July 31, 2004, with automatic renewal for
successive one year terms unless otherwise terminated pursuant to its terms.
Pursuant to the Management Agreement, the Company shall pay Flagstar a
quarterly management fee equal to one percent of the Company's consolidated
net revenues during the preceding fiscal quarter. In addition, the Company
shall reimburse Flagstar on a quarterly basis for the Company's and its
subsidiaries' portion of shared administrative services provided by Flagstar
or any other subsidiary of Flagstar during the preceding fiscal quarter (such
reimbursement, together with the management fee described in the preceding
sentence, the "Management Charge"). However, in the event that the Company's
Consolidated EBITDA for the Reference Period (each as defined in "Description
of Notes") (calculated to exclude all expenses related to the Permitted
Royalties (as defined in "Description of Notes") and the Management Charge)
exceeds (the "Surplus") two times the Company's Consolidated Fixed Charges (as
defined in "Description of Notes") for such period, then the Company shall pay
Flagstar the lesser of the Management Charge and the Surplus for such period.
The Indenture and the Credit Agreement each impose limits on the amount of
payments from the Company to Flagstar and its affiliates under the Management
Agreement. To the extent the applicable management fee is not permitted to be
paid by the Company to Flagstar as a result of such restrictions contained in
the Indenture and Credit Agreement, such management fee shall be deferred and
Flagstar's claim therefor shall rank junior in right of payment to the Notes.
See "Description of Notes" and "Description of Credit Agreement."
TAX SHARING AND ALLOCATION AGREEMENT
Pursuant to a Tax Sharing and Allocation Agreement, dated as of May 23,
1996, by and among FCI, the Company, FRI-M and the direct and indirect
subsidiaries of FRI-M (the "Tax Allocation Agreement"), FCI has agreed to file
a consolidated federal income tax return, under which the federal income tax
liability of FCI and its subsidiaries is determined on a consolidated basis.
The Tax Sharing Agreement provides that in any year in which the Company, FRI-
M and its subsidiaries are included in any consolidated federal income tax
return of FCI and have taxable income, the Company will pay to FCI the amount
of the tax liability the Company, FRI-M and its subsidiaries would have had on
such due date if the Company, FRI-M and its subsidiaries had been filing a
separate consolidated return. Conversely, if the Company, FRI-M and its
subsidiaries generates losses or credits which actually reduce the
consolidated tax liability of FCI and its other subsidiaries, FCI will credit
to the Company the amount of such reduction in the consolidated tax liability
to the extent of tax payments previously made by the Company. These credits
are passed between FCI and the Company in the form of cash payments. In the
event any state and local income taxes are determinable on a combined or
consolidated basis, the Tax Allocation Agreement provides for a similar
allocation between FCI and the Company of such state and local taxes. The Tax
Allocation Agreement also provides that no payment shall be made by the
Company, FRI-M or any of its subsidiaries to FCI thereunder if it would
violate the provisions of the Indenture. The Indenture permits payments
required to be made pursuant to the Tax Allocation Agreement in accordance
with the terms thereof only if no Default or Event of Default (each as
defined) has occurred and is continuing or would occur as a consequence
thereof and if on the Interest Payment Date (as defined) immediately prior to
the date of the obligation to make such tax payment first accrued, interest on
the Notes was paid in Cash. To the extent any tax payment is not permitted to
be paid by the Company to Flagstar as a result of such restrictions contained
in the Indenture, any such tax payment shall be deferred and Flagstar's claim
therefor shall rank junior in right of payment to the Notes. See "Description
of Notes--Certain Covenants--Restricted Payments."
FOOD PRODUCT PURCHASING
The Company uses Flagstar's purchasing department to make centralized
purchasing arrangements for the main ingredients, supplies and equipment needs
of all Coco's and Carrows restaurants. Pursuant to such purchasing
arrangements, the Company pays suppliers directly. See "Business--Food Product
Purchasing."
53
<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
The Credit Agreement was entered into as of May 23, 1996 among the Company,
as Guarantor, FRI-M, as Borrower (the "Borrower"), Bankers Trust Company,
Chemical Bank and Citicorp USA, Inc., as Co-Syndication Agents (collectively,
the "Co-Agents"), Credit Lyonnais New York Branch, as Administrative Agent and
the other lenders party thereto (collectively, the "Banks"). The Credit
Agreement provides for a $56 million term loan (the "Term Loan") and a $35
million revolving credit facility (the "Revolving Credit Facility"), which is
also available for letters of credit. A copy of the Credit Agreement is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part.
Proceeds from the Term Loan were used by the Company for the acquisition of
all of the outstanding shares of capital stock of FRI-M and its subsidiaries,
and to pay the transactions costs associated therewith. Proceeds from the
Revolving Credit Facility are to be used for working capital requirements and
other general corporate purposes, which may include the making of intercompany
loans to any of the Borrower's wholly owned subsidiaries for their own working
capital and other general corporate purposes. Letters of credit may be issued
under the Revolving Credit Facility for the purpose of supporting (i) workers'
compensation liabilities of the Borrower or any of its subsidiaries, (ii) the
obligations of third party insurers of the Borrower or any of its
subsidiaries, and (iii) certain other obligations of the Borrower and its
subsidiaries.
Term Loan. The Term Loan matures on August 31, 1999. Principal installments
of the Term Loan are payable quarterly as follows: $4 million per quarter for
four consecutive quarters beginning February 28, 1997; $5 million for four
consecutive quarters beginning February 28, 1998; $6 million on February 28,
1999; and $7 million for two consecutive quarters beginning May 31, 1999. All
amounts owing under the Term Loan are required to be repaid on August 31,
1999.
Revolving Credit Facility. The commitment to make loans or issue letters of
credit pursuant to the Revolving Credit Facility expires, and all amounts
outstanding under the Revolving Credit Facility must be repaid, on August 31,
1999 (the "Termination Date").
Interest and Letter of Credit Fees. Amounts outstanding under the Term Loan
and the Revolving Credit Facility bear interest at an annual rate equal to,
generally at Borrower's option, either (a) the sum of the Base Rate (as
defined) plus 1.50%, or (b) the sum of the Eurodollar Rate (as defined) plus
2.75%. At May 23, 1996, the interest rate in effect was 8.19%. Interest on
both the Term Loans and the Revolving Credit Facility is payable quarterly in
arrears on amounts at a rate determined by reference to the Base Rate, or, on
amounts at a rate determined by reference to the Eurodollar Rate ("Eurodollar
Rate Advances"), if applicable, on the last day of each Eurodollar interest
period (one, two, three or six months), or every three months in the case of a
six-month interest period. Letter of Credit Fees of 3.00% per annum of the
maximum amount available to be drawn under such Letters of Credit, consisting
of a 2.75% letter of credit fee and a 0.25% fronting fee, are payable
quarterly in arrears commencing May 31, 1996.
Optional Prepayments. Borrowings under the Credit Agreement may be repaid,
in whole or in part, in the case of Base Rate Advances, upon not less than one
Business Day's (as defined) notice, and in the case of Eurodollar Rate
Advances, upon not less than three Business Day's notice, provided that a
Eurodollar Rate Advance may only be prepaid on the expiration date of the
applicable Eurodollar interest period. Any optional partial prepayment of the
Term Loan shall be applied to installments scheduled to be paid during the
twelve months immediately following the date of such prepayment, with any
excess being applied ratably to the scheduled installments of the Term Loan.
Mandatory Prepayments. The Credit Agreement requires the Borrower to make
mandatory prepayments in certain circumstances out of its Consolidated Excess
Cash Flow (as defined), out of cash proceeds of certain asset sales, out of
assets distributed to the Company, the Borrower or any of Borrower's direct or
indirect subsidiaries (each, a "Loan Party") in connection with an employee
benefit plan termination and out of net cash proceeds received by a Loan Party
from certain other sources. Any mandatory partial prepayment of the Term
54
<PAGE>
Loan shall be applied to installments scheduled to be paid during the twelve
months immediately following the date of such prepayment, with any excess
being applied ratably to the scheduled installments of the Term Loan.
Certain Covenants. The Credit Agreement contains certain restrictive
covenants which, among other things, limit (subject to certain exceptions) the
Borrower and its subsidiaries with respect to (a) incurrence of debt; (b) the
existence of liens; (c) investments and joint ventures; (d) the declaration or
payment of dividends; (e) the making of guarantees and other contingent
obligations; (f) the amendment or waiver of certain related agreements; (g)
mergers, consolidations, liquidations and sales of assets (including sale and
leaseback transactions); (h) payment obligations under leases; (i)
transactions with shareholders and affiliates; (j) the sale, assignment,
pledge or other disposition of shares of Borrower or its subsidiaries by
Borrower or its subsidiaries; (k) capital expenditures; and (l) material
changes in their business.
The Credit Agreement also imposes on the Company, the Borrower and its
subsidiaries certain financial tests and minimum ratios which, among other
things, require that Borrower (a) shall not permit the ratio of Consolidated
Adjusted EBITDA (as defined) to Consolidated Interest Expense (as defined) to
be less than levels increasing from 1.50 to 1 for the fiscal quarter ending
September 26, 1996 to 2.10 to 1 for the fiscal quarter ending September 23,
1999 and for each fiscal quarter thereafter; (b) permit the ratio of
Consolidated Total Debt (as defined) to Consolidated Adjusted EBITDA (as
defined) to exceed a level varying from 5.65 to 1 for the fiscal quarters
ending September 26, 1996 to 3.65 to 1 for the fiscal quarter ending September
23, 1999 and for each fiscal quarter thereafter; and (c) shall not permit
Consolidated Adjusted EBITDA to be less than an amount increasing from $11.2
million for the fiscal quarter ending September 26, 1996 to $49.5 million for
the fiscal year ending June 25, 1998 and each four-fiscal quarter period
thereafter.
Guarantees and Collateral. The Company and all of the Borrower's
subsidiaries have guaranteed the obligations of the Borrower under the Credit
Agreement and the other Loan Documents (as defined). All of the issued and
outstanding common stock of the Borrower and its subsidiaries has been pledged
as security for the obligations of the Company under the Credit Agreement and
the other Loan Documents. The obligations of the Borrower under the Credit
Agreement and the other Loan Documents are secured by substantially all assets
of the Borrower and its subsidiaries.
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DESCRIPTION OF NOTES
GENERAL
The 12 1/2% Senior Notes due 2004 of FRD Acquisition Co. were issued
pursuant to an Indenture (the "Indenture") between the Company and The Bank of
New York, as trustee (the "Trustee"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Notes are subject to all such terms, and holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. Copies of the Indenture and
Registration Rights Agreement have been filed as exhibits to the Registration
Statement of which this Prospectus is a part and are available as set forth
under "Available Information". The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes are senior, unsecured, general obligations of the Company. The
Notes rank senior in right of payment to all existing and future subordinated
Indebtedness of the Company and will rank pari passu in right of payment with
all existing and future unsubordinated Indebtedness of the Company. In
addition, the Notes are effectively subordinated to secured Indebtedness of
the Company, including borrowings under the Credit Agreement and any
Indebtedness under the Company's guaranty of borrowings under the Credit
Agreement, to the extent of the value of the assets securing such
Indebtedness. Borrowings under the Credit Agreement and any Indebtedness under
the Company's guaranty of borrowings under the Credit Agreement are secured by
substantially all of the Company's assets. The Company on a stand alone basis
does not currently have any outstanding senior indebtedness other than the
Notes and its guarantee of FRI-M's borrowings under the Credit Agreement. As
of June 27, 1996, FRI-M had $1.4 million in borrowings outstanding under the
Credit Agreement which were guaranteed by the Company and which rank pari
passu to the Notes.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
Subsidiaries. Any right of the Company to receive assets of any of its
Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that Subsidiary's creditors,
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary, in which case the claims of the Company would still be
subordinate to any security in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150 million
(excluding Secondary Securities (as defined below) and additional Securities,
if any, issued pursuant to the purchase price adjustment provisions set forth
in the Purchase Agreement) and mature on July 15, 2004. Interest on the Notes
accrues at the rate of 12 1/2% per annum and will be payable semi-annually in
arrears on January 15 and July 15, commencing on July 15, 1996, to holders of
record on the immediately preceding January 1 and July 1. Interest on the
Notes accrues from the most recent date to which interest has been paid or, if
no interest has been paid, from the date of original issuance. Interest is
computed on the basis of a 360-day year comprised of twelve 30-day months. If
on any Record Date occurring on or prior to the 39-month anniversary of the
Issue Date, the ratio of (a) the sum of (i) the Company's Consolidated EBITDA
for the Reference Period plus (ii) the aggregate amount of expenses relating
to Permitted Royalties and Permitted Management Fees deducted in calculating
such Consolidated EBITDA to (b) the Company's Consolidated Interest Expense
for the Reference Period (excluding to the extent included therein (A)
amortization of original issue discount and deferred financing frees and (B)
that portion of the principal amount of the Securities issued in payment of
interest on the Securities that is in excess of the amount of interest that
would have been payable if interest had been paid in cash) is less than
1.25:1, then the
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Company may at its option pay the interest due on the Securities on the
applicable Interest Payment Date in additional Securities ("Secondary
Securities") having a principal amount equal to the amount of such interest
due (accrued at an annual interest rate of 14%); provided, that interest may
be paid in Secondary Securities on no more than four Interest Payment Dates.
In such event, the Credit Agreement requires the Company to pay interest in
Secondary Securities.
Principal, premium and interest on the Notes is payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the holders of the Notes at their respective addresses set
forth in the register of holders of Notes. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof; provided, however, that Secondary
Securities issued in lieu of cash interest payments pursuant to the Indenture
may be in denominations of greater or less than $1,000.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to May 23, 2001.
Thereafter, the Notes are subject to redemption at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at
the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest to the applicable redemption date, if
redeemed during the twelve-month period beginning on May 23 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001.......................................... 105.0%
2002.......................................... 102.5%
2003 and thereafter........................... 100.0%
</TABLE>
Notwithstanding the foregoing, at any time prior to May 23, 1999, the
Company may also redeem up to $50 million aggregate principal amount of the
Notes, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, with the Net Cash Proceeds from one Initial Public Equity
Offering of the Company, if redeemed during the twelve-month period ending on
May 23 of the years indicated below; provided that at least $60 million in
aggregate principal amount of the Notes originally issued remain outstanding
immediately after such redemption and provided, further, that such redemption
occurs within 60 days of the date of receipt of such Net Cash Proceeds:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1997.......................................... 110.00%
1998.......................................... 108.75%
1999.......................................... 107.50%
</TABLE>
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Notes on a date (the
"Change of Control Payment Date") that is no later than 70 business days after
the occurrence of such Change of Control, pursuant to the offer described
below (the "Change of Control Offer") at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase (the "Change of Control Payment"). Within ten
business days following any Change of Control, the Company will mail a notice
to each holder describing the transaction or transactions that constitute
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the Change of Control and offering to repurchase Notes pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
Prior to the mailing of the notice of a Change of Control Offer, the Company
shall either (i) repay, or cause to be repaid, in full all Indebtedness and
terminate, or cause to be terminated, all commitments under the Credit
Agreement to the extent the terms thereof require repayment upon a Change of
Control (or offer to repay, or cause to be offered to repay all such
Indebtedness in full and terminate, or cause to be terminated, all commitments
under the Credit Agreement and repay, or cause to be repaid, the Indebtedness
owed to each lender which has accepted such offer), or (ii) obtain, or cause
to be obtained, the requisite consent under the Credit Agreement, the terms of
which require repayment upon a Change of Control, to permit the repurchase of
the Notes as provided for herein. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain prohibited from
purchasing the Notes. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default under the Indenture.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will,
within one business day following the Change of Control Payment Date,
authenticate and mail (or cause to be transferred by book entry) to each
holder a new Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
The occurrence of a Change of Control under the Indenture would constitute
an event of default under the Credit Agreement. In addition, the exercise by
the holders of Notes of their right to require the Company to repurchase the
Notes would cause a default under the Credit Agreement absent consent under
the Credit Agreement to such repurchase. In the event of an Event of Default
under the Credit Agreement, the Notes would be effectively subordinated to
Indebtedness under the Credit Agreement. Finally, the Company's ability to pay
cash to the holders of Notes upon a repurchase may be limited by the Company's
then existing financial resources.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, engage in an Asset Sale unless (1) either (a) the Net
Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the
repurchase of Notes pursuant to an irrevocable, unconditional offer (the
"Asset Sale Offer") to repurchase
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Notes at a purchase price (the "Asset Sale Offer Price") of 100% of principal
amount, plus accrued interest to the date of payment or (b) within 360 days of
such Asset Sale, the Asset Sale Offer Amount is (i) invested in assets
(excluding inventory, other than inventory for new restaurants) that
constitute a Related Business or (ii) used to permanently reduce the amount of
Indebtedness incurred under the Credit Agreement (including that in the case
of a revolver or similar arrangement that makes credit available, such
commitment is so reduced by such amount), (2) at least 75% of the
consideration for such Asset Sale consists of Cash or Cash Equivalents;
provided, that this clause (2) shall not apply to the sale of an existing
restaurant and related equipment to a franchisee of the Company, (3) no
Default or Event of Default shall have occurred and be continuing at the time
of, or would occur after giving effect, on a pro forma basis, to, such Asset
Sale, and (4) the Company or such Subsidiary, as applicable, receives fair
market value for such Asset Sale.
An Asset Sale Offer may be deferred until the accumulated Net Cash Proceeds
from Asset Sales not applied to the uses set forth in (1)(b) of the prior
paragraph (the "Accumulated Amount") exceeds $5.0 million. When the
Accumulated Amount exceeds $5.0 million, the Company will be required to make
an Asset Sale Offer to purchase the maximum principal amount of Notes that may
be purchased out of the Accumulated Amount, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase, in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate amount of Notes
tendered pursuant to an Asset Sale Offer is less than the Accumulated Amount,
the Company may use any remaining Accumulated Amount for general corporate
purposes. If the aggregate principal amount of Notes surrendered by holders
thereof exceeds the Accumulated Amount, the Trustee shall select the Notes to
be purchased on a pro rata basis. Upon completion of such offer to purchase,
Accumulated Amount shall be reset at zero.
Notwithstanding the foregoing, the Company and its Subsidiaries may (i) in
the ordinary course of business, consistent with past practice, (A) sell
assets acquired and held for resale in the ordinary course of business and (B)
sell obsolete equipment, (ii) convey, sell, lease, transfer, assign or
otherwise dispose of assets pursuant to and in accordance with the provisions
of the Indenture and (iii) convey, sell, transfer, assign or otherwise dispose
of assets to the Company or any of its Wholly Owned Subsidiaries; and such
transactions shall not be deemed Asset Sales.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of an Asset Sale.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at
its registered address. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest ceases to accrue on Notes or portions of them called for
redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend
or make any distribution on account of the Company's or any of its
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Subsidiaries' Equity Interests (other than dividends or distributions payable
in Equity Interests (other than Disqualified Stock) of the Company or
dividends, distributions or other payments payable to the Company or any
Wholly Owned Subsidiary of the Company by the Company or any of its
Subsidiaries); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any Subsidiary or other Affiliate of
the Company; (iii) make any principal payment on, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness of the Company
(other than (A) any obligations under the Credit Agreement or (B) Indebtedness
of the Company owed to any of its Wholly Owned Subsidiaries) that is pari
passu with or subordinated to the Notes (other than Notes), except at final
maturity, scheduled repayment of principal, or scheduled sinking fund payment
of such Indebtedness; (iv) make any payment or distribution to Flagstar
Companies, Inc. ("FCI"), Flagstar, or any of their respective Affiliates
(other than the Company and its Subsidiaries); or (v) make any Restricted
Investment (all such payments and other actions set forth in clauses
(i) through (v) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the test set forth in clause
(i) of the covenant described below under the caption "--Incurrence of
Indebtedness and Issuance of Capital Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indenture is less than the sum of (i) 50% of the Adjusted
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the last day of the Company's
most recently ended fiscal quarter (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Indenture of Equity Interests of the Company or of
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests sold to a Subsidiary of the Company
and other than Disqualified Stock).
The foregoing provisions will not prohibit (u) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (v) the defeasance, redemption or repurchase of Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness
incurred under clause (xii) of the covenant described below under the caption
"--Incurrence of Indebtedness and Issuance of Capital Stock"; (w) if no
Default or Event of Default has occurred and is continuing or would occur as a
consequence thereof, the payment of Permitted Royalties to Flagstar or FCI or
any of their respective Affiliates and the payment of Permitted Management
Fees; provided, that on the date (the "Reference Date") of such payment (after
giving effect thereto) (1) the aggregate amount of Permitted Management Fees
and Permitted Royalties paid in cash on or after the first day of the second
quarter of the Reference Period (the "Start Date") does not exceed (2) the
excess of (A) the Company's Consolidated EBITDA for the Reference Period
(calculated to exclude all expenses related to the Permitted Royalties and
Permitted Management Fee) over (B) 2.0 times the Company's Consolidated Fixed
Charges for the Reference Period (provided, that if the Start Date is prior to
the Issue Date, for purposes of clause (1) above, the aggregate amount of
Permitted Royalties and Permitted Management Fees paid in cash shall be deemed
to equal those amounts paid in cash on or after the Issue Date and on or prior
to the Reference Date multiplied by a fraction, the numerator of which is 365
and the denominator of which is the number of days from the Issue Date through
the Reference Date); (x) if no Default or Event of Default has occurred and is
continuing or would occur as a consequence thereof, payments required to be
made pursuant to the Tax Allocation Agreement in accordance with the terms
thereof; provided, that on the Interest Payment Date immediately prior to the
date of the obligation to make such payment first accrued, interest on the
Notes was paid in cash; (y) Investments in securities or other non-cash
consideration received in and solely as a result of (i) any restructuring or
bankruptcy proceeding of any
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Person; provided, that the interest of the Company and its Subsidiaries in
such Person giving rise to such Investment were permitted under the Indenture
or (ii) any Asset Sale made in compliance with the terms of the Indenture; or
(z) the payment of Permitted Advertising Fees to Flagstar or FCI or any of
their respective Subsidiaries.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Capital Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guaranty, extend the maturity of or otherwise become directly or indirectly
liable, contingently or otherwise (collectively, "incur"), with respect to any
Indebtedness (including as a result of an Acquisition) or issue any
Disqualified Capital Stock. Notwithstanding the foregoing:
(i) The Company may incur Indebtedness if (i) no Default or Event of
Default shall have occurred and be continuing at the time of, or would
occur after giving effect on a pro forma basis to, such incurrence, (ii) on
the date of such incurrence, the Consolidated Coverage Ratio of the Company
for the Reference Period, after giving effect on a pro forma basis to such
incurrence of such Indebtedness, would be at least 2.0 to l, and (iii) the
Average Life of such Indebtedness is longer than that of the Notes and the
stated maturity of such Indebtedness is later than that of the Notes.
(ii) The Company may incur Indebtedness evidenced by the Notes and
represented by the Indenture.
(iii) FRI-M and its subsidiaries may incur Indebtedness in existence on
the Issue Date.
(iv) The Company and its Subsidiaries may incur Indebtedness pursuant to
the Credit Agreement in an aggregate amount outstanding at any time not to
exceed (a) $136 million minus (b) the sum of (1) the amount of any such
Indebtedness retired with Net Cash Proceeds from any Asset Sale or assumed
by a transferee in an Asset Sale and (2) all refinancings of Indebtedness
incurred under the Credit Agreement with Indebtedness incurred under
paragraph (v) below; provided, that the aggregate principal amount of term
Indebtedness incurred under this paragraph (iv) shall not exceed $86
million at any time and the aggregate principal amount of working capital
or other revolving Indebtedness incurred under this paragraph (iv)
(including letters of credit) shall not exceed $80 million at any time.
(v) The Company and its Subsidiaries may incur Indebtedness related to
mortgage financings, mortgage refinancings or sale and lease-back
transactions; provided, that the aggregate principal amount of such
Indebtedness is used solely to repay senior secured Indebtedness of such
person.
(vi) The Company and its Subsidiaries may incur Purchase Money
Indebtedness and Capitalized Lease Obligations; provided, that the
aggregate amount of such Indebtedness outstanding at any time, other than
Capitalized Lease Obligations existing on the Issue Date and permitted
Refinancings thereof, shall not exceed $25 million.
(vii) The Company and its Subsidiaries may incur Indebtedness
constituting reimbursement obligations with respect to letters of credit
(including workers' compensation claims); provided that such letters of
credit were permitted to be issued hereunder.
(viii) The Company may incur Indebtedness to any Wholly Owned Subsidiary,
and any Wholly Owned Subsidiary may incur Indebtedness to any other Wholly
Owned Subsidiary or to the Company but only so long as such Indebtedness is
owed to and held by the Company or a Wholly Owned Subsidiary.
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(ix) The Company and its Subsidiaries may incur Indebtedness arising from
the overdraft of zero balanced bank accounts; provided, that the aggregate
amount of such Indebtedness outstanding at any time shall not exceed $5
million.
(x) The Company and its Subsidiaries may incur Indebtedness related to
surety and performance bonds issued in the ordinary course of business;
provided, that such incurrence does not result in the Incurrence of any
obligation for the payment of borrowed money of others.
(xi) The Company and its Subsidiaries may incur Indebtedness related to
Interest Swap and Hedging Obligations.
(xii) The Company and its Subsidiaries may incur Permitted Refinancing
Indebtedness with respect to any Indebtedness incurred under paragraphs (i)
and (iii) above.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien on any asset now owned or hereafter acquired, except
Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, assume or otherwise cause
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital
Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any Indebtedness owed to the Company or
any of its Subsidiaries, (ii) make loans or advances to the Company or any of
its Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or (a) set forth in any instruments or agreements
evidencing or governing Indebtedness of the Company or any such Subsidiary
(1) existing on the Issue Date (including the Credit Agreement as in effect on
the Issue Date) or (2) amending, supplementing, amending and restating, or
refinancing such Indebtedness; provided that the restrictions contained in
such refinancing (which, in the case of the Credit Agreement, may apply to any
present or future Subsidiary) are no more restrictive than those contained in
the agreements governing the debt being amended, supplemented, amended and
restated or refinanced, (b) existing under applicable law, (c) set forth in
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Subsidiaries as in effect at the time of such
acquisition, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, (d) existing by reason of
customary non-assignment provisions in existing leases or leases entered into
after the Issue Date and otherwise permitted under the Indenture, or (e)
existing by reason of Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
Merger, Sale or Consolidation
The Indenture provides that the Company may not consolidate or merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and the Indenture; (iii) no Default
or Event of
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Default shall exist or shall occur immediately before or after giving effect
on a pro forma basis to such transaction; (iv) immediately after giving effect
to such transaction on a pro forma basis, the Consolidated Net Worth of the
consolidated surviving or transferee entity is at least equal to the
Consolidated Net Worth of the Company immediately prior to such transaction;
(v) immediately after giving effect to such transaction on a pro forma basis,
the consolidated surviving or transferee entity would immediately thereafter
be permitted to Incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage Ratio test set forth in paragraph (i) under the
caption "--Incurrence of Indebtedness and Issuance of Capital Stock" above;
and (vi) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and, if a supplemental indenture is required, such supplemental
indenture complies with the Indenture and that all conditions precedent
therein relating to such transactions have been satisfied.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to enter into or make any contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate
Transaction is 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 by the Company or such Subsidiary with an unrelated Person, (ii)
if such transaction, individually or when aggregated with all other Affiliate
Transactions undertaken during the preceding twelve months, involves
consideration in excess of $50,000, a majority of the disinterested members of
the Board of Directors of the Company shall have made a determination prior to
the consummation thereof that such transaction complies with clause (i) above,
and (iii) if such Affiliate Transaction involves consideration in excess of
$5.0 million, prior to the consummation thereof, the Company obtains a written
favorable opinion as to the fairness of such transaction to the Company or
such Subsidiary from a financial point of view from an independent investment
banking firm of national reputation provided that the foregoing shall not
prohibit (w) transactions permitted by the provisions of the Indenture
described above under "--Restricted Payments," (x) customary fees paid to
independent directors of the Company by the Company or its Subsidiaries, (y)
the Management Services Agreement and a Permitted Franchise Agreement, and (z)
the Tax Allocation Agreement, provided that no Subsidiary is obligated to make
payments thereunder other than to the Company or a Wholly Owned Subsidiary.
Restrictions on Sale and Issuance of Subsidiary Stock
The Company shall not sell, and shall not permit any of its Subsidiaries to
issue or sell, any shares of Capital Stock of any Subsidiary to any Person
other than the Company or a Wholly Owned Subsidiary of the Company (other than
the sale of all of the Capital Stock of any Subsidiary (a) permitted under the
Indenture as described in "--Asset Sales" and "--Merger, Sale or
Consolidation" or (b) pursuant to a foreclosure by the lenders conducted
pursuant to the Credit Agreement).
Line of Business
The Company will not, and will not permit any Subsidiary to, directly or
indirectly engage in any business other than (a) the ownership, operation or
franchising of family restaurants and (b) any business that in the reasonable,
good faith judgment of the Board of Directors of the Company is directly
related to such business.
Reports
The Indenture provides that, whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall timely file with the SEC (provided such filing is accepted by the SEC)
all reports, information and other documents that the Company is required or
would have been required to file with the SEC if the Company were subject to
Section 13 or 15(d) of the Exchange Act, including, with respect to annual
information, a report thereon by the Company's certified independent public
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accountants as such would be required in such reports to the SEC, and, in each
case, together with a management's discussion and analysis of financial
condition and results of operations which would be so required. The Company
shall deliver a copy of all such reports, information and other documents to
the Trustee (regardless of whether such filing is accepted by the SEC), and
cause the Trustee to provide a copy to each holder (at no cost to the holder)
and to prospective purchasers of Securities identified to the Company by the
holder (if requested, in writing), within 15 days after such reports,
information or documents are filed or would have been required to be filed
with the SEC. In addition, the Company has agreed that, for so long as any
Notes remain outstanding, it will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due at maturity, redemption, by
acceleration, or otherwise, of the principal of or premium, if any, on the
Notes; (iii) failure by the Company to comply with the payment provisions
described under the captions "--Change of Control" or "--Asset Sales"; (iv)
failure by the Company for 30 days after notice from the Trustee or the
holders of at least 25% in aggregate principal amount of the outstanding Notes
to observe or perform any covenant, agreement or warranty contained in the
Notes or the Indenture (other than a default in the performance of any
covenant, agreement or warranty specifically covered by (i) or (ii) above);
(v) default under the Credit Agreement or other Indebtedness of the Company or
any of its Subsidiaries with an aggregate principal amount in excess of $5
million, in each case (a) resulting from failure to pay principal at final
stated maturity (giving effect to extensions thereof) or (b) as a result of
which the maturity of such Indebtedness has been accelerated prior to its
stated maturity; (vi) failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are not
paid, discharged, bonded or stayed for a period of 60 days; and (vii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes by written
notice to the Company (and to the Trustee if given by holders) may declare all
the Notes to be due and payable immediately. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any Significant Subsidiary all
outstanding Notes will become immediately due and payable without further
action or notice by the Trustee or holders. Notwithstanding the foregoing, in
the event a declaration of acceleration resulting from an Event of Default
described in clause (v) above has occurred and is continuing, such declaration
of acceleration shall be automatically annulled if such default is cured or
waived or the holders of the Indebtedness which is the subject of such default
have rescinded their declaration of acceleration in respect of such
Indebtedness within 60 days thereof and the Trustee has received written
notice of such cure, waiver or rescission and no other Event of Default
described in clause (v) above has occurred that has not been cured or waived
within 60 days of the declaration of such acceleration in respect of such
Indebtedness. The holders of a majority in principal amount of the then
outstanding Notes are generally authorized to rescind such acceleration if all
existing Events of Default, other than the non-payment of the principal of,
premium, if any, and interest on the Notes which have become due solely by
such acceleration, have been cured or waived.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes or a Default or Event
of Default with respect to any covenant or provision which cannot be modified
or amended without the consent of the holder of each outstanding Note
affected.
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Subject to certain limitations, holders of a majority in principal amount of
the then outstanding Notes may direct the Trustee in its exercise of any trust
or power, provided that such direction shall not be in conflict with any rule
or law or with the Indenture and that the Trustee does not determine that the
action so directed would be unjustly prejudicial to the holders not taking
part in such direction.
The Company is required upon becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement specifying such Default or
Event of Default and what action the Company is taking or proposes to take
with respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No direct or indirect partner, director, officer, employee, incorporator or
stockholder, as such, past or future of the Company shall have any liability
for any obligations of the Company under the Notes, the Indenture by reason of
his or its status as such partner, director, officer, employee, incorporator
or stockholder. Each holder of Notes by accepting a Note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that
such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be; (ii) in the case of Legal Defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day
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after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound and the Trustee shall receive a certificate from
the administrative agent under the Credit Agreement, if still in effect, to
the effect that there is no violation of the Credit Agreement; (vi) the
Company must have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was
not made by the Company with the intent of preferring the holders of Notes
over the other creditors of the Company with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
percentage of principal amount of Notes whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the rate of or change the time
for payment of interest on any Note, (iii) reduce the principal amount of any
Note, or reduce the Change of Control Payment, the Offer Price (as defined) or
the Redemption Price (as defined), (iv) change the Stated Maturity of any Note
or the Change of Control Payment Date or Purchase Date (as defined) of any
Note, (v) alter the redemption provisions of the Indenture described above in
"Optional Redemption," or the terms or provisions of the covenant in the
Indenture limiting sales of assets and subsidiary stock, described above in
"--Repurchase at the Option of Holders--Asset Sales," or the terms or
provisions of the Indenture described above in "--Repurchase at the Option of
Holders--Change of Control," in any case, in a manner adverse to any holder,
(vi) make any changes in the provisions of the Indenture concerning waivers of
Defaults or Events of Default by holders of the Securities or the rights of
holders to recover the principal or premium of, interest on, or redemption
payment with respect to, any Note, including without limitation any changes to
the amendment and waiver provisions of the Indenture referenced in (i) through
(vii) of this paragraph, or (vii) make the principal of, or the interest on,
any Note payable with anything or in any manner other than as provided for in
the Indenture (including changing the place of payment where, or the coin or
currency in which, any Note or any premium or the interest thereon is payable)
and the Notes as in effect on the date of the Indenture.
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Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for collateral for
or guarantors of the Notes, to provide for the assumption of the Company's
obligations to holders of Notes in the case of a merger or consolidation, to
make any change that would provide any additional rights or benefits to the
holders of Notes or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict and within 90 days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions and procedures. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Adjusted Consolidated Net Income" means, for any period, Consolidated Net
Income reduced by 100% of the amount of any writedowns, writeoffs, or negative
extraordinary charges not otherwise reflected in Consolidated Net Income
during such period.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company, FCI
or Flagstar. For purposes of this definition, the term "control" means the
power to direct the management and policies of a person, directly or through
one or more intermediaries, whether through the ownership of voting
securities, by contract, or otherwise; provided, that, a beneficial owner of
10% or more of the total voting power of the voting securities of any person
then outstanding shall for such purposes be deemed to constitute control.
"Asset Sale" means (i) the sale, conveyance, transfer, assignment or other
disposition of any assets of the Company other than in the ordinary course of
business consistent with past practices, including by merger or consolidation,
and (ii) the issue or sale by the Company or any of its Subsidiaries of
Capital Stock of any of the Company's Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions. Notwithstanding the foregoing: a conveyance, sale, lease,
transfer, assignment or other disposal of assets (i) in accordance with the
provisions of the Indenture described above under "--Asset Sales," or (ii) to
the Company or any of its Wholly Owned Subsidiaries, will not be deemed to be
Asset Sales.
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"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years (or partial years) from the date of
determination to the date or dates of each successive scheduled principal (or
redemption) payment of such security or instrument and (b) the amount of each
such respective principal (or redemption) payment by (ii) the sum of all such
principal (or redemption) payments.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Capitalized Lease Obligation" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations on
any date shall be the capitalized amount of such obligations on such date, as
determined in accordance with GAAP.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support 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 $500 million and commercial paper issued by others rated
at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at
least P-2 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.
"Change of Control" means (i) any sale, lease, transfer, conveyance or other
disposition, whether direct or indirect, of all or substantially all of the
assets of the Company and its Subsidiaries, on a consolidated basis, in one
transaction or a series of related transactions, (ii) any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) (other than an Excluded Person), is
or becomes the beneficial owner, directly or indirectly, of more than 50% of
the total voting power of the voting securities of the Company, FCI or
Flagstar then outstanding, (iii) during any period of 24 consecutive months
after the Issue Date, individuals who at the beginning of any such 24 month
period constituted the Board of Directors of the Company (together with any
new directors whose election by such Board or whose nomination for election by
the shareholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office, or (iv) Flagstar ceases to be the
beneficial owner of at least 51% of the voting securities of the Company then
outstanding, or the Company ceases to be the beneficial owner of 100% of the
Capital Stock of FRI-M or any Significant Subsidiary then outstanding.
"Consolidated Coverage Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such person for the Reference
Period to (b) the aggregate Consolidated Fixed Charges of such person during
the Reference Period; provided, that for purposes of such calculation, (i)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (ii) the incurrence of any Indebtedness or issuance of any
Disqualified Capital Stock on or after the first day of the Reference Period
and on or prior to the Transaction Date (and the application of the proceeds
therefrom to the extent used to refinance or retire other Indebtedness) shall
be assumed to have occurred on the first day of such Reference Period, and
(iii) Consolidated Fixed Charges attributable to interest on any Indebtedness
or dividends on any Disqualified Capital Stock bearing a floating interest (or
dividend) rate shall be computed on a pro forma basis as if the average rate
in effect from the beginning of the Reference Period to the Transaction Date
had been the applicable rate for the entire period, unless such Person or any
of its subsidiaries is a party to an Interest Swap or Hedging Obligation
(which shall remain in effect for the 12-month period immediately following
the Transaction Date) that has the effect of fixing the interest rate on the
date of computation, in which case such rate (whether higher or lower) shall
be used.
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"Consolidated Depreciation and Amortization" means, with respect to any
person, for any period, the total consolidated depreciation and amortization
of such person and its Consolidated Subsidiaries for such period, as
determined in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any person, for any period, the
Consolidated Net Income of such person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining such Consolidated Net
Income), without duplication, the sum of (i) Consolidated Income Tax Expense,
(ii) Consolidated Depreciation and Amortization, and (iii) Consolidated Fixed
Charges.
"Consolidated Fixed Charges" means, with respect to any person, for any
period, the aggregate amount (without duplication) of (a) Consolidated
Interest Expense of such person for such period and (b) the amount of
dividends accrued, paid or payable by such person or any of its Consolidated
Subsidiaries in respect of Capital Stock (other than by subsidiaries of such
person to such person or such person's wholly owned subsidiaries).
"Consolidated Income Tax Expense" means, with respect to any person, for any
period, the total consolidated net income tax expenses of such person and its
Consolidated Subsidiaries for such period, as determined in accordance with
GAAP.
"Consolidated Interest Expense" means, with respect to any person, for any
period, the total consolidated interest expense of such person and its
Consolidated Subsidiaries for such period, whether paid or accrued (including
amortization of original issue discount, deferred financing fees, non-cash
interest payment, and the interest component of Capitalized Lease
Obligations). For purposes of this definition, interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by the Company to be the rate of interest implicit in such Capitalized Lease
Obligation in accordance with GAAP.
"Consolidated Net Income" means, with respect to any person, for any period,
the consolidated net income (or loss) of such person and its Consolidated
Subsidiaries (determined in accordance with GAAP) for such period, adjusted to
exclude (only to the extent included in computing such net income (or loss)
and without duplication) (a) all gains (but not losses) which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
Capital Stock), (b) the net income, if positive, of any person, other than a
wholly owned Consolidated Subsidiary, in which such person or any of its
Consolidated Subsidiaries has an interest, except to the extent of the amount
of any dividends or distributions actually paid in cash to such person or a
wholly owned Consolidated Subsidiary of such person during such period, but in
any case not in excess of such person's pro rata share of such person's net
income for such period, (c) the net income or loss of any person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition, and (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation
of the terms of its charter or bylaws or any other agreement (other than the
Credit Agreement), instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Consolidated Subsidiary.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person and its Consolidated
Subsidiaries, as would be shown on the consolidated balance sheet of such
person prepared in accordance with GAAP, adjusted to exclude (to the extent
included in calculating such equity), (a) the amount of any such stockholders'
equity attributable to Disqualified Capital Stock or treasury stock of such
person and its Consolidated Subsidiaries, and (b) 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 Issue Date, and (c)
all investments in subsidiaries of such person that are not Consolidated
Subsidiaries and in persons that are not subsidiaries of such person.
"Consolidated Subsidiary" means, for any Person, each subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which shall be (or should have been) consolidated for financial
statement reporting purposes with the financial statements of such Person in
accordance with GAAP; provided, that Unrestricted Subsidiaries shall not be
Consolidated Subsidiaries of the Company.
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"Credit Agreement" means (a) the credit agreement, dated as of the date
hereof, by and among the Company, FRI-M, certain financial institutions and
Credit Lyonnais New York Branch, as administrative agent, initially providing
for (A) an aggregate $56 million term loan facility, and (B) an aggregate $35
million revolving credit facility, together with the documents to be executed
by the Company, FRI-M or any of their respective subsidiaries in favor of the
banks under the Credit Agreement (including, without limitation, any related
guarantees and security agreements) in connection therewith, as such credit
agreement and/or related documents may be amended, amended and restated,
extended, supplemented or otherwise modified from time to time and (b) all
refundings, refinancings, replacements and other restructurings (whether by
the same or any other agent, lender or group of lenders) of all or any portion
of the Indebtedness under the agreements identified in clause (a) or this
clause (b) (including for purposes of clause (a) or clause (b) above, without
limitation, those adding Subsidiaries as additional borrowers or guarantors,
or increasing the amount of available borrowings thereunder); provided that
the same would be permitted pursuant to that covenant described above under
clause (iv) of "--Incurrence of Indebtedness and Issuance of Capital Stock."
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, Capital Stock of such person that, by its terms or by
the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or repurchased (including at the option of
the holder thereof) by such person or any of its subsidiaries, in whole or in
part, on or prior to July 15, 2004 and (b) with respect to any Subsidiary, any
Capital Stock of such Subsidiary (other than Capital Stock of such Subsidiary
so long as it is owned by the Company or any wholly owned Subsidiary).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"GAAP" means United States 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 as in effect as of the Issue Date.
"Indebtedness" means, with respect to any Person (without duplication), (i)
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, notes, debentures or similar instruments, (c) representing
the balance deferred and unpaid of the purchase price of any property or
services (other than trade payables to trade creditors incurred in the
ordinary course, on customary terms, no more than 90 days past due), (d)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (e) under Capitalized Lease Obligations, (f) evidenced by a letter of
credit or a reimbursement obligation of such Person with respect to any letter
of credit or (g) 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);
(ii) all net obligations of such person under Interest Swap and Hedging
Obligations; (iii) all obligations to, directly or indirectly, purchase,
redeem, retire or otherwise acquire any Capital Stock of such Person or any of
its subsidiaries; (iv) all liabilities of others of the kind described in the
preceding clauses (i), (ii) or (iii) that such Person has, directly or
indirectly, guaranteed or that, directly or indirectly, is otherwise its legal
liability; and (v) all Indebtedness of the type referred to in clauses (i)
through (iv) above 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, even though such person has not assumed or become liable for
the payment of such Indebtedness; provided, that the amount of such
Indebtedness shall be the lesser of (x) the fair market value of such property
at the time of determination and (y) the amount of such Indebtedness.
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"Initial Public Equity Offering" means a bona fide initial underwritten
offering of primary shares of common stock of the Company pursuant to an
effective registration statement on Form S-1 or other appropriate form under
the Securities Act.
"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investments" by any Person means (a) the acquisition by such Person
(whether for cash, property, services, securities or otherwise) of Capital
Stock, bonds, notes, debentures, partnership or other ownership interests or
other securities, including any option or warrants, of any other Person or any
agreement to make any such acquisition; (b) the making by such person of any
deposit with, or advance, loan or other extension of credit to, any other
Person (including the purchase of property from another Person subject to an
understanding or agreement, contingent or otherwise, to resell such property
to such other person) or any commitment to make such advance, loan or
extension (but excluding accounts receivable or deposits arising in the
ordinary course of business and travel and other advances of business expenses
to employees made in the ordinary course of business); (c) the entering into
by such Person of any guarantee of, or other credit support or contingent
obligation with respect to, any liability of any other Person (other than any
such guarantee that would constitute Indebtedness permitted to be incurred by
the covenant described above under "--Incurrence of Indebtedness and Issuance
of Capital Stock"); and (d) the making by such Person of any capital
contribution to or other investment in any other Person.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, 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).
"Management Services Agreement" means that certain Management Services
Agreement, dated as of the Issue Date, between the Company and Flagstar, as
such agreement is in effect on the Issue Date.
"Net Cash Proceeds" means (a) in the case of a sale of Qualified Capital
Stock (i) the aggregate amount of Cash received by the Company, plus (ii) in
the case of an issuance of Qualified Capital Stock upon any exercise, exchange
or conversion of securities of the Company that were issued for Cash after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities, less (iii) the sum of all payments, fees,
commissions and expenses (including, without limitation, the fees and expenses
of legal counsel and investment banking fees and expenses) incurred in
connection with such sale of Qualified Capital Stock, and (b) in the case of
an Asset Sale, the aggregate amount of Cash and Cash Equivalents received by
the Company and its subsidiaries from such sale (including Cash and Cash
Equivalents received on or with respect to any non-cash proceeds), less the
sum of all reasonable and customary, direct, out-of-pocket fees and expenses
actually incurred and paid by the Company and its subsidiaries (other than
fees and expenses payable to, or on behalf of, Affiliates) in connection with
such Asset Sale.
"Permitted Franchise Agreement" means an agreement between the Company and
Flagstar or any of its subsidiaries pursuant to which the Company franchises
the Denny's or El Pollo Loco concepts from Flagstar or such subsidiary;
provided, that (i) the terms of such agreement are no less favorable to the
Company than those available to franchisees that are not Affiliates of or
otherwise related to Flagstar, (ii) all up-front and similar fees are waived,
(iii) advertising fees payable in any fiscal quarter do not exceed 3% of the
subject restaurant's net revenue for the immediately preceding fiscal quarter
("Permitted Advertising Fees") and (iv) no other royalties or fees are payable
by the Company thereunder except Permitted Royalties.
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"Permitted Liens" means (a) Liens imposed by governmental authorities for
taxes not yet subject to penalty or which are being contested in good faith
and by appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (b) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen
or other like Liens arising by operation of law in the ordinary course of
business; provided that (i) the underlying obligations are not overdue for a
period of more than 30 days, or (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(c) pledges or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security legislation; (d) Liens incurred or deposits made securing the
performance of tenders, bids, leases, statutory obligations, surety and appeal
bonds, and governmental contracts incurred in the ordinary course of business;
(e) easements (or similar rights), rights-of-way, zoning, and similar
restrictions or right reserved to or vested in any governmental office or
agency to control or regulate the use of any real property, and immaterial
title defects and irregularities, in each case that do not, singly or in the
aggregate, materially detract from the value of the property subject thereto
or materially interfere with the ordinary conduct of the business of the
Company or any of its Subsidiaries; (f) Liens arising by operation of law in
connection with judgments, only to the extent, for an amount and for a period
not resulting in an Event of Default with respect thereto; (g) Liens securing
Purchase Money Indebtedness and Capitalized Lease Obligations permitted to be
incurred under this Indenture; provided, that such Liens relate only to the
property that is subject to such Purchase Money Indebtedness or Capitalized
Lease Obligation; (h) Liens securing Indebtedness permitted to be incurred
under subclause (iv) of the covenant described above in "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Capital Stock"; (i) Liens on assets
of the Subsidiaries existing on the Issue Date; (j) any (i) interest or title
of a lessor or sublessor under any lease permitted by this Indenture entered
into in the ordinary course of business, (ii) restriction or encumbrance that
the interest or title of such lessor or sublessor may be subject to, or (iii)
subordination of the interest of the lessee or sublessee under such lease to
any restriction or encumbrance referred to in the preceding clause (ii), so
long as the holder of such restriction or encumbrance agrees to recognize the
rights of such lessee or sublessee under such lease; (k) Liens in favor of
customs and revenue authorities arising as a matter of law to secure payment
of customs duties in connection with the importation of goods in the ordinary
course of business; (l) licenses of patents, trademarks and other intellectual
property rights granted by Company or any of its Subsidiaries in the ordinary
course of business and not interfering in any material respect with the
ordinary conduct of the business of the Company or such Subsidiary; and (m)
other Liens on assets with an aggregate value not to exceed $1 million at any
time incurred in the ordinary course of business with respect to obligations
that do not exceed $1 million in the aggregate at any time outstanding.
"Permitted Management Fee" means a management fee payable in any fiscal
quarter not to exceed (a) 1.0% of net revenues of the Company and its
Subsidiaries during the immediately preceding fiscal quarter plus (b) the
actual allocated share of the cost of shared administrative services provided
by Flagstar or its subsidiaries to the Company and its Subsidiaries during
such quarter (which shall be calculated on a reasonable and consistent basis
and shall be certified quarterly by a certificate of the Chief Financial
Officer of Flagstar delivered to the Trustee); provided, that such amounts
shall be payable only to the extent that (after giving effect to such payment)
there is no Default or Event of Default.
"Permitted Refinancing Indebtedness" means Indebtedness (a) issued in
exchange for, or the proceeds from the issuance and sale of which are used
substantially concurrently to repay, redeem, defease, refund, refinance,
discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness in a principal amount not to exceed the lesser of (i) the
principal amount of the Indebtedness so refinanced and (ii) if such
Indebtedness being refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such Refinancing; provided, that (A) Permitted Refinancing Indebtedness shall
(x) not have an Average Life shorter than the Indebtedness being so refinanced
and (y) in all respects, be no less subordinated, if applicable, to the rights
of holders of the Securities than was the Indebtedness to be refinanced and
(B) such Permitted Refinancing Indebtedness shall
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have no installment of principal (or redemption payment) scheduled to come due
earlier than the scheduled maturity of any corresponding installment of
principal of the Indebtedness to be so refinanced which was scheduled to come
due prior to July 15, 2004.
"Permitted Royalty" means a royalty payable pursuant to a Permitted
Franchise Agreement in any fiscal quarter not to exceed 4% of the subject
restaurant's net revenues for the immediately preceding fiscal quarter;
provided, that such amount shall be payable only to the extent that (after
giving effect to such payment) there is no Default or Event of Default.
"Purchase Money Indebtedness" means any Indebtedness incurred to finance the
acquisition of any real or personal tangible property; provided that (i) the
principal amount of such Indebtedness does not exceed 100% of such cost, (ii)
any Lien securing such Indebtedness does not extend to or cover any other
asset or property other than the asset or property being so acquired and (iii)
such Indebtedness is incurred, and any Liens with respect thereto are granted,
within 180 days of the acquisition of such property or asset.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Reference Period" means the last four full fiscal quarters of the Company
ended prior to the date upon which any determination is to be made pursuant to
the terms of the Notes or the Indenture for which financial statements have
been (or were required to be) delivered to the Trustee pursuant to the
Indenture, it being understood that if such four fiscal quarters include any
period prior to the Issue Date, the Reference Period shall include such period
on a pro forma basis.
"Related Business" means (a) the ownership, operation or franchising of
family restaurants and (b) any business that in the reasonable, good faith
judgment of the Board of Directors of the Company is directly related to such
business.
"Restricted Investment" means any direct or indirect Investment, other than
Investments (a) in Cash and Cash Equivalents, (b) in the Company or any Wholly
Owned Subsidiary, (c) made prior to the Issue Date, (d) in any Affiliate
solely for the purpose of obtaining liquor licenses and (e) other Investments
that do not exceed $100,000 in the aggregate at any time.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" with respect to any Note, means July 15, 2004.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Tax Allocation Agreement" means that certain Tax Allocation Agreement,
dated as of the Issue Date between FCI and the Company, as such agreement is
in effect on the Issue Date.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
THE EXCHANGE OFFER
In the opinion of Latham & Watkins, counsel to the Company, the following
discussion describes the material federal income tax consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer and is based on the opinion of Latham & Watkins. Such opinion
is based upon current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service ("the Service") will not take a contrary view, and no
ruling from the Service has been or will be sought with respect to the
Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences to holders.
Certain holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN
TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES
FOR EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a "non-
event" for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes. As a
result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes.
THE NOTES
The following discussion is a summary of the material federal tax
consequences expected to result to holders from the purchase, ownership and
disposition of the Notes and is based on the opinion of Latham & Watkins
except as otherwise noted below. This discussion is based on current
provisions of the Code, applicable Treasury Regulations, judicial authority
and current administrative rulings and pronouncements of the Service. There
can be no assurance that the Service will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
The following summary is for general information only. The tax treatment of
a holder of the Notes may vary depending upon such holder's particular
situation. Certain holders (including, but not limited to, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States) may be subject to special rules not discussed below. EACH
PURCHASER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Original Issue Discount
General Original Issue Discount Rules
The amount of original issue discount, if any, on a debt instrument is the
excess of its "stated redemption price at maturity" over its "issue price,"
subject to a statutorily defined de minimis exception. The "issue price" of a
debt instrument issued in exchange for stock, such as the Notes, depends on
whether the debt instrument or the stock is treated as "traded on an
established securities market." If the debt instrument is "traded on an
established securities market," its issue price will be its trading price
immediately following issuance. If the stock is so traded (but the debt
instrument received in exchange therefor is not), the issue price of the debt
instrument received will generally be equal to the trading price of the stock
immediately after the exchange.
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If neither the debt instrument nor the stock is traded on an established
securities market, the issue price of the debt instrument will be equal to its
stated principal amount, assuming the debt instrument provides for "adequate
stated interest" (i.e., interest at least equal to the applicable federal
rate), and will be equal to its "imputed principal amount" (the sum of the
present values of all payments due under the debt instrument, using a discount
rate equal to the applicable federal rate) if either the debt instrument does
not provide for "adequate stated interest" or in the case of any "potentially
abusive situation" (including certain recent sales transactions).
The "stated redemption price at maturity" of a debt instrument is the sum of
its principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest" (defined generally as stated interest
that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
In general, the amount of original issue discount that a holder of a debt
instrument with original issue discount must include in gross income for
federal income tax purposes will be the sum of the daily portions of original
issue discount with respect to such debt instrument for each day during the
taxable year or portion of a taxable year on which such holder holds the debt
instrument. The daily portion is determined by allocating to each day of an
accrual period (generally, a period of any length corresponding to the
interval between payment dates) a pro rata portion of an amount equal to the
"adjusted issue price" of the debt instrument at the beginning of the accrual
period multiplied by the yield to maturity of the debt instrument. The
"adjusted issue price" is the issue price of the debt instrument increased by
the accrued original issue discount for all prior accrual periods (and
decreased by the amount of cash payments made in all prior accrual periods or
on the first day of the current accrual period, other than qualified stated
interest payments). The tax basis of the debt instrument in the hands of the
holder will be increased by the amount of original issue discount, if any, on
the debt instrument that is included in the holder's gross income and will be
decreased by the amount of any cash payments (other than qualified stated
interest payments) received with respect to the debt instrument, whether such
payments are denominated as principal or interest.
Notwithstanding the original issue discount rules described in the preceding
paragraphs, a holder of a debt instrument will not be required to include
original issue discount in income if such holder's tax basis in the debt
instrument were to exceed the debt instrument's stated principal amount. In
addition, a holder would be permitted to offset any original issue discount
income by an amount equal to the excess of such holder's tax basis (if less
than or equal to the stated principal amount) over the issue price of the debt
instrument.
Notes
Because interest on the Notes may, upon failure of the Company to maintain
certain EBITDA to consolidated interest expense ratios, be paid in cash or in
additional Notes, no payments made on the Notes will be treated as qualified
stated interest, and the general rules set forth above with respect to the
reporting of original issue discount income will apply. As a result, the Notes
will initially be treated as having been issued with original issue discount
equal to the excess of their stated redemption price at maturity (which will
be equal to the sum of the principal amount plus all payments of stated
interest) over their issue price. In general, such original issue discount
will be includable in income in amounts equal to the stated interest paid in
cash on the Notes.
If, in fact, the Company's financial results were to deteriorate to the
point at which the Company could elect to pay interest in additional Notes and
were the Company to elect to do so, the additional Notes will not be treated
as payments of interest on the Notes. In this event, the Notes and the
additional Notes will be treated as a single original issue discount
obligation which will be deemed to be reissued for an issue price equal to the
original issue price of the Notes plus the principal amount of the additional
Notes issued with respect thereto, and will have original issue discount equal
to the excess of the stated redemption price at maturity of such obligation
(which will be equal to the sum of the principal amounts of the Notes and the
additional Notes plus
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all payments of stated interest on such debt instruments) over the newly
determined issue price. The Notes will similarly be deemed to be reissued with
a new issue price each time the Company issued additional Notes in lieu of
paying cash interest on the Notes.
Certain original issue discount obligations are also subject to additional
provisions of the Code governing Applicable High Yield Discount Obligations
(an "AHYDO"). In general, AHYDO's are defined as original issue discount
obligations having (A) a term of more than 5 years, (B) a yield to maturity
which equals or exceeds the Applicable Federal Rate for the month of issue
plus 5 percentage points, and (C) "significant original issue discount."
Because the Company believes that it will be able to make all interest
payments in cash under the alternative payment schedule which provides for the
payment of interest in cash, the Company does not believe that the Notes will
be issued with significant original issue discount and therefore the AHYDO
rules should not apply.
If the AHYDO rules were to apply to the Notes, the Company would not be
entitled to deduct any original issue discount until paid in cash and a
minimal portion of such original issue discount would not be deductible by the
Company even when paid in cash but would instead be treated as a dividend
eligible for the dividends received deduction under Section 243 of the Code.
No Treasury Regulations have been proposed or issued under the AHYDO provision
and consequently counsel is unable to opine on the applicability of the AHYDO
rules. Holders of the Notes are urged to consult their tax advisors concerning
the potential application of the AHYDO rules to Notes.
MARKET DISCOUNT
The Code generally requires holders of "market discount bonds" to treat as
ordinary income any gain realized on the disposition (or gift) of such bonds
to the extent of the market discount accrued during the holders' period of
ownership. A "market discount bond" is a debt obligation purchased at a market
discount, subject to a statutory de minimis exception. For this purpose, a
purchase at a market discount includes a purchase at or after the original
issue at a price below the stated redemption price at maturity, or, in the
case of a debt instrument issued with original issue discount, at a price
below its "issue price," plus the amount of original issue discount includable
in income by all prior holders of the debt instrument, minus all cash payments
(other than payments constituting qualified stated interest) received by such
previous holders. The accrued market discount generally equals a ratable
portion of the bond's market discount, based on the number of days the
taxpayer has held the bond at the time of such disposition, as a percentage of
the number of days from the date the taxpayer acquired the bond to its date of
maturity.
AMORTIZABLE BOND PREMIUM
Generally, if the tax basis of an obligation held as a capital asset exceeds
the amount payable at maturity of the obligation, such excess will constitute
amortizable bond premium that the holder may elect to amortize under the
constant interest rate method and deduct over the period from this acquisition
date to the obligation's maturity date or to an earlier call date, if the use
of such date results in a smaller amount of amortizable bond premium. A holder
who elects to amortize bond premium must reduce his tax basis in the related
obligation by the amount of the aggregate deductions allowable for amortizable
bond premium. Amortizable bond premium will be treated under the Code as an
offset to interest income on the related debt instrument for federal income
tax purposes, subject to the promulgation of Treasury Regulations altering
such treatment.
DISPOSITION
In general, a holder of Notes will recognize gain or loss upon the sale,
exchange, redemption or other taxable disposition of such Notes measured by
the difference between (D) the amount of cash and the fair market value of
property received (except to the extent attributable to accrued interest on
the Notes) and (E) the holder's tax basis in the Notes (as increased by any
original issue discount and market discount previously included in
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income by the holder and decreased by any amortizable bond premium, if any,
deducted over the term of the Notes and any cash payments of interest under
the Notes). Subject to the market discount rules discussed above, any such
gain or loss will generally be long-term capital gain or loss, provided the
Notes have been held for more than one year.
ELECTION
A holder of Notes, subject to certain limitations, may elect to include all
interest and discount on the Notes in gross income under the constant yield
method. For this purpose, interest includes stated and unstated interest,
acquisition discount, original issue discount, de minimis market discount and
market discount, as adjusted by any acquisition premium. Such election, if
made in respect of a market discount bond, will constitute an election to
include market discount in income currently on all market discount bonds
acquired by such holder on or after the first day of the first taxable year to
which the election applies. See "--Market Discount."
BACKUP WITHHOLDING
A holder of Notes may be subject to backup withholding at the rate of 31%
with respect to interest paid on, original issue discount accrued on and gross
proceeds from the sale of, the Notes unless (i) such holder is a corporation
or comes within certain other exempt categories and, when required,
demonstrates this fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding
rules. A holder of Notes who does not provide the Company with his or her
correct taxpayer identification number may be subject to penalties imposed by
the Service.
The Company will report to holders of the Notes and the Service the amount
of any "reportable payments" (including any interest paid and any original
issue discount accrued on the Notes) and any amount withheld with respect to
the Notes during the calendar year.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN LIGHT OF HIS
OR HER PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF NOTES
SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Private Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchases such Exchange Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act; provided that the holder is acquiring the Exchange Notes in
the ordinary course of its business and is not participating, and had no
arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes. Holders of Private Notes wishing to accept
the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Company believes that none of the registered holders
of the Private Notes is an affiliate (as such term is defined in Rule 405
under the Securities Act) of the Company.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities,
including liabilities under the Securities Act.
78
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for the
Company by Latham & Watkins, Los Angeles, California.
EXPERTS
The combined financial statements of FRI-M, which includes FRI-M and certain
subsidiaries of FRI-M including those restaurants that make up the Family
Restaurant Division and including the FRD Commissary, as of December 25, 1994
and December 31, 1995 and the related combined statements of operations and net
combined equity and cash flows for the year ended December 26, 1993, the one
month ended January 26, 1994, the eleven months ended December 25, 1994 and the
year ended December 31, 1995 have been included herein and in the Prospectus in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
The balance sheet of FRD Acquisition Co. as of May 22, 1996 has been included
herein and in the Prospectus in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
4 (including all amendments thereto, the "Registration Statement") under the
Securities Act, with respect to the Notes offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Notes, reference is hereby made to the Registration Statement and the exhibits
and schedules thereto. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description thereof, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
may be inspected, without charge, and copied at prescribed rates at the public
reference facilities maintained by the Commission at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 75
Park Place, 14th Floor, New York, New York 10007. Copies of such material can
be obtained from the Public Reference Section of the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
To the extent permitted by applicable law or regulation, whether or not the
Company is subject to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company will file
with the Commission all quarterly and annual reports and such other
information, documents or other reports required to be filed pursuant to such
provisions of the Exchange Act. If the Company is not permitted by applicable
law or regulations to file such reports, the Company will furnish to each
holder of the Notes annual reports containing audited financial statements and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year, as well as such other reports as it may
determine or as may be required by law.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FRD ACQUISITION CO. COMBINED BALANCE SHEET
Independent Auditors' Report.............................................. F-2
Balance Sheet as of May 22, 1996.......................................... F-3
Note to Balance Sheet..................................................... F-4
FRI-M COMBINED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-5
Combined Balance Sheets as of December 25, 1994 and December 31, 1995..... F-6
Combined Statements of Operations for the year ended December 26, 1993,
the one month ended January 26, 1994, the eleven months ended December
25, 1994 and the year ended December 31, 1995............................ F-7
Combined Statements of Cash Flows for the year ended December 26, 1993,
the one month ended January 26, 1994, the eleven months ended December
25, 1994 and the year ended December 31, 1995............................ F-8
Notes to Combined Financial Statements.................................... F-9
FRD ACQUISITION CO. UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
Combined Condensed Balance Sheet as of June 27, 1996 (unaudited).......... F-18
Combined Condensed Statements of Operations for the six months ended June
25, 1995 (unaudited) and the five months ended May 23, 1996 (unaudited)
and the one month ended June 27, 1996 (unaudited)........................ F-19
Combined Condensed Statements of Cash Flows for the six months ended June
25, 1995 (unaudited) and the five months ended May 23, 1996 (unaudited)
and the one month ended June 27, 1996 (unaudited)........................ F-20
Notes to Combined Condensed Financial Statements (unaudited).............. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FRD Acquisition Co.:
We have audited the accompanying balance sheet of FRD Acquisition Co. (a
wholly owned subsidiary of Flagstar Corporation) as of May 22, 1996. This
balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of FRD Acquisition Co. at May 22,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
May 22, 1996
F-2
<PAGE>
FRD ACQUISITION CO.
(A WHOLLY OWNED SUBSIDIARY OF FLAGSTAR CORPORATION)
BALANCE SHEET
MAY 22, 1996
<TABLE>
<S> <C>
ASSETS
Total assets............................................................ $ --
=====
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Common Stock, $.01 par value; authorized 1,000 shares; no shares
issued or outstanding................................................ --
Additional paid-in capital............................................ --
Common stock subscribed (1,000 shares)................................ $ 100
Less: stock subscriptions receivable.................................. $(100)
-----
Total liabilities and stockholder's equity.............................. $ --
=====
</TABLE>
See accompanying note to balance sheet.
F-3
<PAGE>
FRD ACQUISITION CO.
(A WHOLLY OWNED SUBSIDIARY OF FLAGSTAR CORPORATION)
NOTE TO BALANCE SHEET
MAY 22, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
FRD Acquisition Co. (the Company) was incorporated in the State of Delaware
in February 1996 as a wholly owned subsidiary of Flagstar Corporation.
On May 23, 1996 the Company acquired all of the outstanding common stock of
FRI-M Corporation and certain of its Family Restaurant Division operating
subsidiaries which operate principally under the Coco's and Carrows names.
The Company is in the process of filing a registration statement with the
Securities and Exchange Commission to register $150 million 12 1/2% Senior
Notes due 2004 which were issued on May 23, 1996.
The operations of the Company from the date of incorporation through May 22,
1996 are not considered material.
Fiscal Year
The Company will utilize a 52 or 53 week accounting period which ends on the
last Thursday of December each year.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FRD Acquisition Co.:
We have audited the accompanying combined balance sheets of FRI-M which
includes FRI-M Corporation, a wholly owned subsidiary of Family Restaurants,
Inc. (The Parent), and certain subsidiaries including those restaurants that
make up the Family Restaurant Division and including the FRD Commissary
(collectively FRI-M or the Company) as of December 25, 1994 and December 31,
1995 and the related combined statements of operations and net combined equity
and cash flows for the year ended December 26, 1993 and the one month ended
January 26, 1994 (FRI-Predecessor Company), and the eleven months ended
December 25, 1994 and the year ended December 31, 1995 (FRI-Successor
Company). These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 25, 1994 and December 31, 1995 and the results of their operations
and their cash flows for the year ended December 26, 1993 and the one month
ended January 26, 1994 (FRI-Predecessor Company), and the eleven months ended
December 25, 1994 and the year ended December 31, 1995 (FRI-Successor Company)
in conformity with generally accepted accounting principles.
As discussed in note 1 to the combined financial statements, the Parent
commenced a Chapter 11 bankruptcy case on November 23, 1993, which was
confirmed by the United States Bankruptcy Court for the District of Delaware
on January 7, 1994. Accordingly, the accompanying combined financial
statements have been prepared in conformity with American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting
for Entities in Reorganization Under the Bankruptcy Code."
KPMG Peat Marwick LLP
Orange County, California
February 9, 1996 except as to the fifth
paragraph of note 7 and note 14 which
are as of May 23, 1996
F-5
<PAGE>
FRI-M (NOTE 1)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 31,
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 4,220 $ 5,497
Receivables........................................ 7,414 5,439
Merchandise inventories............................ 6,063 5,288
Net assets held for sale........................... -- 13,248
Other.............................................. 2,220 2,240
-------- --------
Total current assets............................. 19,917 31,712
Property and equipment, net.......................... 165,285 146,042
Reorganization value in excess of amounts allocable
to identifiable assets, net......................... 150,632 145,352
Other assets......................................... 15,159 9,741
-------- --------
$350,993 $332,847
======== ========
LIABILITIES AND NET COMBINED EQUITY
Current liabilities:
Loans payable to bank.............................. $ 59,600 $ 79,815
Current maturities of long-term debt, including
capitalized lease obligations..................... 4,347 4,915
Accounts payable................................... 18,930 23,316
Self-insurance reserve............................. 13,870 16,868
Other.............................................. 29,393 27,830
-------- --------
Total current liabilities........................ 126,140 152,744
Debt, including capitalized lease obligations, less
current maturities.................................. 32,499 27,502
Net combined equity.................................. 192,354 152,601
-------- --------
$350,993 $332,847
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
FRI-M (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FRI-PREDECESSOR COMPANY FRI-SUCCESSOR COMPANY
------------------------ -------------------------
FOR THE YEAR ONE MONTH ELEVEN FOR THE YEAR
ENDED ENDED MONTHS ENDED ENDED
DECEMBER 26, JANUARY 26, DECEMBER 25, DECEMBER 31,
1993 1994 1994 1995
<S> <C> <C> <C> <C>
Operating revenues.......... $487,433 $43,538 $460,636 $501,248
-------- ------- -------- --------
Product cost................ 143,619 12,946 131,436 143,206
Payroll and benefits........ 187,757 17,175 170,346 180,922
Occupancy and other
operating expenses......... 78,370 7,130 72,509 79,331
Depreciation and
amortization............... 10,042 778 23,221 28,447
General, administrative and
selling expenses........... 41,035 4,341 40,083 43,535
Franchise fees.............. (4,850) (539) (5,389) (4,371)
Loss on disposition of
properties, net............ 938 -- 3,064 2,269
-------- ------- -------- --------
456,911 41,831 435,270 473,339
-------- ------- -------- --------
Operating income............ 30,522 1,707 25,366 27,909
Interest expense............ 4,594 458 6,476 16,515
-------- ------- -------- --------
Income before income taxes.. 25,928 1,249 18,890 11,394
Pro forma income tax
provision.................. 10,692 532 9,496 6,670
-------- ------- -------- --------
Net income.............. $ 15,236 $ 717 9,394 4,724
======== =======
Net combined equity,
beginning of period........ 242,275 192,354
Intercompany and equity
activity, net.............. (59,315) (44,477)
-------- --------
Net combined equity, end of
year....................... $192,354 $152,601
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
FRI-M (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FRI-PREDECESSOR COMPANY FRI-SUCCESSOR COMPANY
------------------------ -------------------------
FOR THE YEAR ONE MONTH ELEVEN FOR THE YEAR
ENDED ENDED MONTHS ENDED ENDED
DECEMBER 26, JANUARY 26, DECEMBER 25, DECEMBER 31,
1993 1994 1994 1995
<S> <C> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating
activities:
Net income.............. $ 15,236 $ 717 $ 9,394 $ 4,724
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization......... 10,042 778 23,221 28,447
Amortization of debt
issuance costs....... -- -- 463 4,785
Loss on disposition of
properties........... 938 -- 3,064 2,269
(Increase) decrease in
assets:
Receivables......... (3,032) 503 (486) 1,975
Inventories......... 1,413 199 (377) 775
Other current
assets............. (1,510) 3,365 (3,941) (2,888)
Increase (decrease) in
liabilities:
Accounts payable.... (748) (312) (4,376) 4,386
Self-insurance
reserves........... 1,917 (2,430) (1,776) 2,998
Other accrued
liabilities........ (2,003) 2,029 3,431 (1,598)
-------- ------- -------- --------
Total adjustments. 7,017 4,132 19,223 41,149
Net cash provided
by operating
activities....... 22,253 4,849 28,617 45,873
-------- ------- -------- --------
Cash flows from investing
activities--proceeds from
disposal of property and
equipment................ 346 -- 283 7,866
Capital expenditures...... (14,720) (412) (23,742) (22,890)
Other..................... 650 317 (199) (881)
-------- ------- -------- --------
Net cash used in
investing
activities....... (13,724) (95) (23,658) (15,905)
-------- ------- -------- --------
Cash flows from financing
activities:
Net intercompany and
equity activity........ (5,730) (4,425) (59,315) (44,477)
Borrowings (repayments)
of loans payable to
bank and long-term
debt, including
capitalized lease
obligations............ (1,746) (686) 56,184 15,786
-------- ------- -------- --------
Net cash used in
financing
activities....... (7,476) (5,111) (3,131) (28,691)
-------- ------- -------- --------
Net increase
(decrease) in
cash and cash
equivalents...... 1,053 (357) 1,828 1,277
Cash and cash equivalents at
beginning of period........ 1,696 2,749 2,392 4,220
-------- ------- -------- --------
Cash and cash equivalents at
end of period.............. $ 2,749 $ 2,392 $ 4,220 $ 5,497
======== ======= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(1) ORGANIZATION AND BASIS OF PRESENTATION
The FRI-M combined financial statements combine the financial position and
operations of FRI-M Corporation, a wholly owned subsidiary of Family
Restaurants, Inc. (the Parent), and certain subsidiaries including those
restaurants that make up the Family Restaurant Division (FRD) and including
the FRD Commissary, a division of the Parent (collectively, the Company). FRD
primarily represents the Coco's and Carrows concept restaurants. The FRI-M
combined financial statements exclude the financial position and operations of
FRI-MRD Corporation, a wholly owned subsidiary of the FRI-M Corporation which
owns El Torito Restaurants, Inc. and Chi-Chi's, Inc., the Traditional
Dinnerhouse Division, which operates the Charley Brown's and Reuben's concept
restaurants, FRI-Admin Corporation and the Parent. See note 14 regarding the
sale of the Company.
Reference to the "FRI-Predecessor Company" refers to the period of ownership
of the Company by The Restaurant Enterprises Group, Inc. prior to January 27,
1994. Reference to the "FRI-Successor Company" refers to the period of
ownership of the Company by Family Restaurants, Inc. giving effect to
information about events occurring upon the Parent's emergence from a Chapter
11 bankruptcy code reorganization (the Reorganization).
At December 31, 1995, the Company operated 349 full-service restaurants
located in 10 states, with approximately 74% of its restaurants located in
California. FRD restaurants primarily offer moderately priced breakfast, lunch
and dinner items. Additionally, as of December 31, 1995, the Company was the
licensor of 251 full-service restaurants in Japan and South Korea and the
franchisor of 6 family restaurants in the United States.
The combined financial statements of the FRI-Predecessor Company were
prepared on a going concern basis, which contemplated continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. While the reorganization plan was in process, the
Parent continued in possession of its properties and operated and managed its
business as a debtor-in-possession pursuant to the bankruptcy code. The
Company applied the provisions of the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," (SOP 90-7) in the December 23, 1993
combined financial statements.
Pursuant to SOP 90-7, the FRI-Predecessor Parent qualified for fresh start
reporting as of January 27, 1994. Under this concept, all assets and
liabilities of the Parent are restated to current value at the date of
reorganization. The Parent obtained an appraisal of the assets and liabilities
of the FRI-Successor Company. This appraisal determined the reorganization
value (i.e., fair value) of the assets and liabilities of the FRI-Successor
Company. The Company utilized the results of this appraisal to implement fresh
start reporting, which resulted in reorganization value in excess of amounts
allocable to identifiable assets of $155,540,000 at January 27, 1994.
The retained earnings of the FRI-Predecessor Company and the receivable from
the Parent Company were eliminated as required by fresh start reporting. The
combined balance sheets of the Company as of December 25, 1994 and December
31, 1995 and the accompanying combined statements of operations for the eleven
months ended December 25, 1994 and the year ended December 31, 1995 represent
that of the FRI-Successor Company which, in effect, is a new entity with
assets and liabilities having carrying values not comparable with prior
periods. The accompanying combined statements of operations for the year ended
December 26, 1993 and for the one month ended January 26, 1994 represent that
of the FRI-Predecessor Company.
F-9
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company reported 1993 and 1994 results of operations based on 52 weeks
ending on last Sunday in December.
The Company reported 1995 results of operations based on 53 weeks ending on
the last Sunday in December.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the operations
described in note 1 including their affiliated subsidiaries. All significant
affiliated intercompany balances and transactions have been eliminated.
ESTIMATIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories consist primarily of food and liquor and are stated at the lower
of cost or market. Costs are determined using the first-in, first-out (FIFO)
method.
NET ASSETS HELD FOR SALE
Net assets held for sale are carried at the lower of their cost or their
fair values, less estimated selling costs.
PRE-OPENING EXPENSES
Certain costs incurred in connection with opening a restaurant which consist
solely of direct incremental costs which the Company believes provide a
specific quantifiable benefit to future periods and are probable of recovery
(principally stocking the restaurant and training staff) are capitalized and
amortized on a straight-line basis over one year after opening. Capitalized
pre-opening expenses are classified as other current assets in the
accompanying combined balance sheet and amounted to $1,285,000 and $745,000 at
December 25, 1994 and December 31, 1995, respectively. Amortization of pre-
opening expenses, included in depreciation and amortization in the combined
statements of income, was $2,747,000 for the year ended December 26, 1993,
$235,000 for the one month ended January 26, 1994, $2,644,000 for the eleven
months ended December 25, 1994 and $1,917,000 for the year ended December 31,
1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated at appraised value or cost and are
depreciated on a straight-line basis over estimated useful lives (buildings
principally over 25 to 35 years and furniture, fixtures and equipment over 3
to 10 years). Leasehold improvements are amortized on a straight-line basis
over the shorter of estimated useful lives or the terms of related leases.
Property under capitalized leases is amortized over the terms of the leases
using the straight-line method.
F-10
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
Losses on disposition of properties are recognized when a commitment to
divest a restaurant property is made by the Company and include estimated
carrying costs through the expected date of disposal.
REORGANIZATION VALUE
Reorganization value in excess of amounts allocable to identifiable assets
is amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $4,912,000 and $10,192,000 at
December 25, 1994 and December 31, 1995, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets for impairment by comparison of the
carrying value of the assets to estimated undiscounted cash flows expected to
be generated from the asset over its estimated useful life. In addition, the
Company's evaluation considers data such as continuity of personnel, changes
in the operating environment, name identification, competitive information and
market trends. Finally, the evaluation considers changes in management's
strategic direction or market emphasis. When the foregoing considerations
suggest that a deterioration of the financial condition of the Company or any
of its restaurants has occurred, the Company measures the amount of an
impairment, if any, based on the estimated fair value of each of its
restaurants over the remaining amortization period. The Company believes its
long-lived assets are not impaired as of December 25, 1994 and December 31,
1995.
SELF-INSURANCE RESERVES
The Parent is self-insured for workers compensation and general liability
claims up to $500,000. Provisions for expected future payments are accrued
based on the Parent's estimate of its aggregate liability for all open claims,
using actuarially determined methods.
FRANCHISE AND LICENSE FEES
Initial franchise and license fees are recognized when all material services
have been performed and conditions have been satisfied. Initial fees for all
periods presented are insignificant. Monthly fees are accrued as earned based
on the respective monthly sales. Such fees totaled $4,850,000 for the year
ended December 26, 1993, $539,000 for the one month ended January 26, 1994,
$5,389,000 for the eleven months ended December 25, 1994 and $4,371,000 for
the year ended December 31, 1995.
ADVERTISING
Production costs of commercials, programming and the costs of other
advertising, promotion and marketing programs are expensed in the year
incurred and are included in occupancy and other operating expenses in the
combined statement of operations. Such costs totaled $12,910,000 for the year
ended December 26, 1993, $1,318,000 for the one month ended January 26, 1994,
$13,068,000 for the eleven months ended December 25, 1994 and $16,328,000 for
the year ended December 31, 1995.
PRO FORMA INCOME TAXES
The accompanying combined financial statements combine the accounts of
subsidiaries and divisions and exclude some operations of the combined
entities. Some combined entities are not taxable entities, but all are
included in the consolidated tax return of the parent. For financial reporting
purposes, a pro forma tax expense has been provided at 40% of reported
combined income excluding amortization of certain intangibles.
F-11
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(3) RECEIVABLES
A summary of receivables follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Trade, principally credit cards........................ $ 886,000 $ 924,000
License and franchise fees and related receivables..... 4,751,000 3,286,000
Receivable from distributors........................... 668,000 645,000
Note receivable, net................................... 751,000 31,000
Other, net............................................. 358,000 553,000
---------- ----------
$7,414,000 $5,439,000
========== ==========
</TABLE>
(4) NET ASSETS HELD FOR SALE
As a result of the Parent's efforts to improve cash flows (see note 7), the
Company has identified certain FRD restaurants for potential sale/leaseback
financing transactions. During 1995, the Company entered into 8 such
transactions, resulting in proceeds of $8,665,000, $999,000 less than carrying
values. As of December 31, 1995, 12 additional restaurants, whose estimated
fair value approximates carrying value, are to be financed under this program.
The carrying value of these restaurants at December 31, 1995 is $13,248,000.
These transactions result in estimated proceeds being less than carrying
amounts by $1,869,000, which will be deferred and amortized over the lease
terms, as these net losses result from financing transactions and the
estimated fair values cover the deferred losses.
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Land............................................. $ 19,783,000 $ 11,821,000
Buildings and improvements....................... 110,974,000 110,385,000
Furniture, fixtures and equipment................ 41,090,000 54,569,000
Projects under construction...................... 7,885,000 3,662,000
------------ ------------
179,732,000 180,437,000
Less accumulated depreciation and amortization... (14,447,000) (34,395,000)
------------ ------------
$165,285,000 $146,042,000
============ ============
</TABLE>
Property under capitalized leases in the amount of $37,520,000 and
$36,869,000 at December 25, 1994 and December 31, 1995, respectively, is
included in buildings and improvements. Accumulated amortization of property
under capital leases amounted to $4,219,000 and $8,811,000 at December 25,
1994 and December 31, 1995, respectively. Capital leases primarily relate to
the building on certain restaurants properties; the land portions of these
leases are accounted for as operating leases.
Depreciation and amortization relating to property and equipment was
$6,494,000 for the year ended December 26, 1993, $463,000 for the one month
ended January 26, 1994, $15,728,000 for the eleven months ended December 25,
1994, and $21,297,000 for the year ended December 31, 1995, of which
$2,600,000, $204,000, $4,647,000 and $4,624,000, respectively, was related to
amortization of property under capitalized leases.
F-12
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2005 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. The total amount of contingent rent under capitalized leases for
the year ended December 26, 1993, the one month ended January 26, 1994, the
eleven months ended December 25, 1994 and the year ended December 31, 1995 was
$3,089,000, $207,000, $2,914,000 and $3,107,000 respectively. Total rental
expense for all operating leases comprised the following:
<TABLE>
<CAPTION>
ONE MONTH ELEVEN MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 26, JANUARY 26, DECEMBER 25, DECEMBER 31,
1993 1994 1994 1995
<S> <C> <C> <C> <C>
Minimum rent............... $11,130,000 $ 845,000 $11,066,000 $12,568,000
Contingent rent............ 1,651,000 113,000 1,621,000 2,245,000
Leased equipment rent...... 2,070,000 189,000 1,810,000 1,343,000
Sublease rent.............. (81,000) (5,000) (174,000) (321,000)
----------- ---------- ----------- -----------
$14,770,000 $1,142,000 $14,323,000 $15,835,000
=========== ========== =========== ===========
</TABLE>
At December 31, 1995, the present value of capitalized lease payments and
the future minimum lease payments on noncancelable operating leases were:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
DUE IN LEASES LEASES
<S> <C> <C>
1996............................................. $ 6,699,000 $ 13,711,000
1997............................................. 6,559,000 13,041,000
1998............................................. 6,297,000 12,692,000
1999............................................. 5,867,000 12,157,000
2000............................................. 5,095,000 11,365,000
Later years...................................... 14,137,000 74,027,000
------------ ------------
Total minimum lease payments................. 44,654,000 $136,993,000
============
Interest......................................... (13,201,000)
------------
Present value of minimum lease payments...... $ 31,453,000
============
</TABLE>
The future lease payments summarized above include commitments for lease
properties included in the Company's divestiture program.
(6) OTHER ASSETS
A summary of other assets follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Debt issuance costs.................................. $ 5,534,000 $ --
Franchise operating rights........................... 8,728,000 8,108,000
Liquor licenses...................................... 383,000 411,000
Other................................................ 514,000 1,222,000
----------- ----------
$15,159,000 $9,741,000
=========== ==========
</TABLE>
Franchise operating rights are stated at their appraised value determined as
of the date of the Reorganization, based on royalty income streams, and are
amortized over 15 years. Debt issuance costs are amortized over the term of
the related debt agreement (see note 7).
F-13
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(7) LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS
Long-term debt, including capitalized lease obligations, is comprised of the
following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Revolving credit facility............................ $59,600,000 $79,815,000
=========== ===========
Capitalized lease obligations........................ $35,591,000 $31,453,000
Mortgage notes, 12 1/4%-12 1/2%, due 1996-1998....... 1,005,000 750,000
Other................................................ 250,000 214,000
----------- -----------
36,846,000 32,417,000
Amount due within one year........................... 4,347,000 4,915,000
----------- -----------
$32,499,000 $27,502,000
=========== ===========
</TABLE>
In January 1994, FRI-M Corporation entered into a Credit Facility Agreement
with $150 million in senior secured revolving credit facilities with a $100
million sub-limit for standby letters of credit which is used for general
corporate purposes including working capital, debt service and capital
expenditure requirements. The Credit Facility terminates and obligations
thereunder are immediately due and payable on January 27, 1999.
Borrowings outstanding under the Credit Facility bear interest at a rate of
10.0% at December 31, 1995. On August 1, 1995, the Company borrowed
$14,625,000 under this Credit Facility to fund an interest payment made on the
Parent's 10 7/8% Senior Subordinated Notes (Senior Notes). This amount was
paid off in December 1995. On February 1, 1996, the Company borrowed
$14,625,000 to fund an additional interest payment on the Parent's Senior
Notes.
Standby letters of credit are issued under the Credit Facility primarily to
provide security for future amounts payable by the Company under its workers'
compensation insurance program ($37,600,000 of such letters of credit were
outstanding as of December 31, 1995).
The Credit Facility contains various covenants including the maintenance of
certain financial ratios. At December 31, 1995, the Parent and certain of its
subsidiaries were suffering from deficit cash flows from operations and made
required debt service payments on other obligations through borrowings on the
Credit Facility. Accordingly, the Parent has failed to comply with certain of
such financial covenants. However, the banks under the Credit Facility (the
Banks) have agreed to waive such noncompliance, through July 31, 1996. In
accordance with generally accepted accounting principles, and since the
waivers only extend to July 31, 1996, at this time the Company classified the
outstanding balance of $79,815,000 at December 31, 1995 as a current
liability. Further, the amortization of the related debt issuance costs was
accelerated assuming the debt will be retired or replaced earlier. In
connection with the sale of the Company (see note 14), the Credit Facility was
paid off and is not available for additional borrowings by FRI-M.
The mortgage notes were issued to a group of institutional lenders and are
collateralized by mortgages covering nine restaurants having book values of
approximately $8,197,000 at December 31, 1995.
Maturities of long-term debt, including capitalized lease obligations,
during the five years subsequent to December 31, 1995 are as follows:
$4,915,000 in 1996, $4,307,000 in 1997, $4,300,000 in 1998, $4,009,000 in
1999, $3,661,000 in 2000 and $11,225,000 thereafter.
F-14
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(8) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of the Company's cash, self-insurance reserves, other
accrued liabilities, and revolving credit borrowings at December 25, 1994 and
December 31, 1995 approximate fair value. The fair value of the Company's
long-term debt, excluding capitalized lease obligations, based on an estimate
using a discount rate which the Company believes would be currently available
to it for debt with similar terms and average maturities, approximates its
carrying value.
(9) OTHER ACCRUED LIABILITIES
A summary of other accrued liabilities follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Wages, salaries, accrued vacation and bonuses....... $13,128,000 $13,894,000
Sales tax........................................... 6,363,000 4,452,000
Property taxes...................................... 1,225,000 1,354,000
Accrued rent........................................ 2,584,000 2,707,000
Utilities........................................... 1,255,000 1,300,000
Other............................................... 4,838,000 4,123,000
----------- -----------
$29,393,000 $27,830,000
=========== ===========
</TABLE>
(10) PRO FORMA INCOME TAXES
The Company reported income before income tax provision for the year ended
December 26, 1993, the one month ended January 26, 1994, the eleven months
ended December 25, 1994 and the year ended December 31, 1995. For financial
reporting purposes, a pro forma tax expense equal to 40% of reported earnings,
excluding certain amortization of intangibles, has been provided in the
statements of operations.
Upon the Reorganization on January 27, 1994, the Parent's net operating loss
carryovers and other tax attributes were reduced significantly for Federal
income tax purposes. In addition, because the consummation of the
Reorganization triggered an ownership change of the Parent for Federal income
tax purposes, the Parent's and the Company's post-Reorganization use of its
remaining net operating loss carryovers for regular and alternative minimum
Federal income tax purposes is subject to an annual limitation in an amount
equal to the product of (i) the long-term tax-exempt rate prevailing on the
closing date of the Reorganization and (ii) the value of the Parent's stock,
increased to reflect the cancellation of indebtedness pursuant to the
Reorganization (but without taking into account contributions to capital
pursuant to the Reorganization). The Parent's annual limit is approximately
$5,300,000.
At December 31, 1995, the Parent and its subsidiaries had additional tax
credit carryforwards of approximately $1,981,000 not utilized by a former
owner (Former Owner). In accordance with a previous acquisition, the Parent
must reimburse the Former Owner for 75% of the benefit of these tax credits if
they are utilized in future Company tax returns.
(11) RELATIONSHIPS WITH PARENT
The Company's FRI-Successor and FRI-Predecessor Parent provide certain
financial, administrative, legal and staff functions and services. These costs
are allocated to the Company based on number of opened and operating units.
The Company believes that this method is reasonable. The management fee for
these services was $3,410,000 for the year ended December 26, 1993, $257,000
for the one month ended January 26, 1994,
F-15
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
$2,626,000 for the eleven months ended December 25, 1994, and $2,634,000 for
the year ended December 31, 1995. These costs are included in general and
administrative expenses in the combined statements of operations. Further,
interest expense associated with the revolving credit loan is also allocated
to the subsidiaries, based on current liabilities outstanding. The Company
deposits cash in excess of its operating requirements with its Parent, and the
Parent advances funds to the Company to finance expansion of its restaurant
business. These deposits and advances have been made on an interest-free
basis.
The Company is charged premiums by its Parent for certain insurance coverage
provided under the Parent's insurance plans (employee group medical and life,
workers compensation, general liability and property insurance). During the
year ended December 26, 1993, the one month ended January 26, 1994, the eleven
months ended December 25, 1994 and the year ended December 31, 1995, such
premium charges amounted to $16,393,000, $1,286,000, $14,358,000 and
$12,730,000, respectively.
A summary of intercompany and equity activity, for 1994 and 1995 follows.
FRI-Predecessor information is not presented as it is not considered relevant.
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED
DECEMBER 25, DECEMBER 31,
1994 1995
------------- ------------
<S> <C> <C>
Net combined equity, beginning of period......... $242,275 $192,354
Allocation of management expenses................ 2,626 2,634
Pro forma income tax provision................... 9,496 6,670
(Borrowings) repayments on revolving credit
facility........................................ (56,184) (15,786)
Self-insurance premium charges................... 14,358 12,730
Change in intercompany........................... (29,611) (50,725)
Net income....................................... 9,394 4,724
-------- --------
Net combined equity, end of period............... $192,354 $152,601
======== ========
</TABLE>
(12) BENEFIT PLANS
The Parent maintains several incentive compensation and related plans for
executives and key operating personnel of its subsidiaries, including
restaurant and field management. Total expenses for these plans included in
the combined statements of operations were $5,252,000 for the year ended
December 26, 1993, $413,000 for the one month ended January 26, 1994,
$4,718,000 for the eleven months ended December 25, 1994 and $2,235,000 for
the year ended December 31, 1995.
The Company participated in savings and investment plans sponsored by the
Parent. Substantially all of the Company's salaried employees were eligible to
participate in the plans. The Company's expenses under such plans for the year
ended December 26, 1993, the one month ended January 26, 1994, the eleven
months ended December 25, 1994, and the year ended December 31, 1995 were
$15,000, $0, $17,000 and $159,000, respectively.
(13) CONTINGENCIES
The Parent and the Company are involved in various litigation matters
incidental to their business. The Company does not believe that any of the
claims or actions filed against it will have a material adverse effect upon
the combined financial position and results of operations of the Company.
F-16
<PAGE>
FRI-M (NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 25, 1994 AND DECEMBER 31, 1995
(14) SUBSEQUENT EVENTS
Flagstar Corporation (Flagstar), through a newly-formed company, FRD
Acquisition Co. (Acquisition Co.), acquired 100% of the capital stock of FRI-M
Corporation and certain of its Family Restaurant Division operating
subsidiaries (see note 1) on May 23, 1996 for a purchase price of
approximately $306,000,000 (the Acquisition). Acquisition Co. financed the
Acquisition with $125,000,000 in cash, $150,000,000 in 12 1/2% senior notes
and the assumption of approximately $31,000,000 in lease and other debt
obligations of FRI-M Corporation. The $125,000,000 in cash paid to the Parent
was funded by a $75,000,000 equity investment from Flagstar and a $50,000,000
loan from FRI-M Corporation. In order to fund the loan and provide a source of
working capital, FRI-M obtained at the May 23, 1996 closing of the
Acquisition, a new credit facility consisting of a $56,000,000, 39-month
senior term loan and a $35,000,000 working capital facility to support letters
of credit and for working capital purposes.
F-17
<PAGE>
FRD ACQUISITION CO. (NOTE 1)
COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 27,
1996
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 3,986
Receivables...................................................... 3,808
Merchandise inventories.......................................... 5,191
Other............................................................ 1,100
--------
Total current assets........................................... 14,085
Property and equipment, net........................................ 135,452
Deferred financing costs, net...................................... 4,500
Goodwill........................................................... 220,503
Other assets....................................................... 8,414
--------
$382,954
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt, including capitalized lease
obligations..................................................... $ 14,189
Accounts payable................................................. 17,249
Self-insurance reserve........................................... 6,257
Other............................................................ 30,744
--------
Total current liabilities...................................... 68,439
Debt, including capitalized lease obligations, less current
maturities...................................................... 223,238
Other non-current liabilities.................................... 15,784
Stockholder's equity:
Common stock..................................................... 0
Additional paid-in-capital....................................... 75,000
Retained earnings................................................ 493
--------
Total stockholder's equity..................................... 75,493
--------
$382,954
========
</TABLE>
See accompanying notes to combined financial statements.
F-18
<PAGE>
FRD ACQUISITION CO. (NOTE 1)
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FRD-PREDECESSOR FRD-SUCCESSOR
-------------------------- -------------
SIX MONTHS FIVE MONTHS ONE MONTH
ENDED ENDED ENDED
JUNE 25, 1995 MAY 23, 1996 JUNE 27, 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating revenues.................... $243,630 $194,464 $48,950
-------- -------- -------
Product cost.......................... 70,402 54,370 14,126
Payroll and related costs............. 89,018 74,642 17,481
Occupancy and other operating
expenses............................. 39,852 32,772 7,718
Depreciation and amortization......... 12,839 11,886 2,508
General, administrative, and selling
expenses............................. 21,655 20,092 4,246
Franchise fees........................ (2,707) (1,479) (326)
(Gain) loss on disposition of
properties........................... 218 (5,738) 12
-------- -------- -------
231,277 186,545 45,765
-------- -------- -------
Operating income...................... 12,353 7,919 3,185
Interest expense...................... 5,925 4,658 2,496
-------- -------- -------
Income before income taxes............ 6,428 3,261 689
Income tax provision.................. 3,634 2,160 196
-------- -------- -------
Net income............................ $ 2,794 $ 1,101 $ 493
Net combined equity, beginning of
period............................... 192,354 152,601 75,000
Intercompany and equity activity, net. (25,180) 52,949 --
======== ======== =======
Net combined equity, end of period.... $167,174 $206,651 $75,493
======== ======== =======
</TABLE>
See accompanying notes to combined financial statements.
F-19
<PAGE>
FRD ACQUISITION, CO. (NOTE 1)
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FRD-PREDECESSOR FRD-SUCCESSOR
---------------------- -------------
SIX MONTHS FIVE MONTHS ONE MONTH
ENDED ENDED ENDED
JUNE 25, MAY 23, JUNE 27,
1995 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Increase (decrease) in cash:
Cash Flows from operating activities:
Net income ........................... $ 2,794 $ 1,101 $ 493
Adjustments to reconcile net income to
cash provided by operating
activities:
Depreciation and amortization....... 9,302 9,487 1,884
Amortization of other intangible
assets............................. 2,968 2,399 624
Deferred tax (benefit) ............. 0 0 20
Loss (gain) on disposition of
properties......................... 218 (5,738) 12
(Increase) decrease in assets:
Receivables....................... 494 1,676 (46)
Inventories....................... 931 68 29
Other current assets.............. 444 0 (111)
Other assets...................... 0 1,251 (139)
Increase (decrease) in liabilities:
Accounts payable.................. (186) (4,762) (5,059)
Self-insurance reserves........... 2,778 2,133 (214)
Other accrued liabilities......... (811) (2,290) 2,512
-------- -------- -------
Total adjustments............... 16,138 4,224 (488)
Net cash provided by operating
activities..................... 18,932 5,325 5
-------- -------- -------
Cash flows from investing activities:
Capital expenditures.................... (15,393) (2,216) (311)
Proceeds from disposal of property and
equipment.............................. 461 20,087 59
-------- -------- -------
Net cash provided by (used in)
investing activities........... (14,932) 17,871 (252)
-------- -------- -------
Cash flows from financing activities:
Net intercompany and equity activity.. (25,180) 54,050 --
Borrowing on term loan................ -- -- 56,000
Transfer of cash to FRI............... -- -- (53,949)
Borrowings on line of credit.......... -- -- 1,400
(Repayment of) borrowings on loans
payable to bank and long-term debt,
including payments on capitalized
lease obligations.................... 20,920 (81,755) (206)
-------- -------- -------
Net cash provided by (used in)
financing activities........... (4,260) (27,705) 3,245
-------- -------- -------
Net increase (decrease) in cash
and cash equivalents........... (260) (4,509) 2,998
Cash and cash equivalents at beginning
of period.............................. 4,220 5,497 988
-------- -------- -------
Cash and cash equivalents at end of
period................................. $ 3,960 $ 988 $ 3,986
======== ======== =======
</TABLE>
See accompanying notes to combined financial statements.
F-20
<PAGE>
FRD ACQUISITION CO. (NOTE 1)
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
JUNE 25, 1995 AND JUNE 27, 1996
(UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
On May 23, 1996, Flagstar Corporation, through FRD Acquisition Co. ("FRD"),
consummated the acquisition of the Company (the Coco's and Carrows restaurant
chains consisting of 347 company-owned units within the family dining
segment). The acquisition price of $306.5 million (which was paid in exchange
for all of the outstanding stock of FRI-M Corporation ("FRI-M"), the
subsidiary of Family Restaurants, Inc. which owned the Coco's and Carrows
chains) was financed with $125.0 million in cash ($75.0 million of which was
provided from the Company's cash balances and the remaining $57.4 million
pursuant to bank term loans), the issuance of $150.0 million in senior notes
of FRD to the seller and the assumption of certain capital lease obligations
of approximately $31.5 million. The purchase price is subject to adjustment
and based on preliminary calculations such adjustment will result in the
issuance of an additional $5.7 million in senior notes. An accrual for this
amount is included in other non-current liabilities in the accompanying June
27, 1996 balance sheet. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the assets and liabilities and results of
operations of Coco's and Carrows are included in the Company's consolidated
financial statements for the period subsequent to the acquistion.
In accordance with the purchase method of accounting, the purchase price has
been allocated to the underlying assets and liabilities of FRI-M based on
their respective fair values at the date of acquisition. Because the purchase
price is subject to adjustment and the final allocation of the purchase price
is dependent upon certain valuations and other studies not yet completed, the
current allocation and resulting goodwill is preliminary in nature. Based on
this preliminary valuation, the excess cost over the fair value of net assets
acquired is $221,015,000 and is being amortized over a 40-year period on a
straight line basis. The Company anticipates finalizing this allocation by the
end of 1996, and does not anticipate the impact of the reallocation to be
significant to the financial statements.
The following unaudited pro forma financial information shows the results of
operations of the Company as though the acquisition occurred as of January 1,
1995. These results include the amortization of excess of purchase price over
net assets acquired over a 40-year life, a reduction of overhead expenses due
to anticipated cost savings and efficiencies from combining the operations of
the Company and FRI-M, an increase in interest expense as a result of the debt
issued to finance the acquisition, and a reduction in income tax expense to
reflect the fact that the Company's net operating losses will offset FRI-M's
separate income tax provision (except for current foreign and state income
taxes) when calculated on a consolidated basis.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------
(IN THOUSANDS)
JUNE 27, JUNE 25,
1996 1995
<S> <C> <C>
Revenue.................................................... $243,414 $243,630
======== ========
Net loss................................................... $ 140 $ 1,429
======== ========
</TABLE>
The pro forma financial information presented above does not purport to be
indicative of either (i) the results of operations had the acquisition taken
place on January 1, 1995 or (ii) future results of operations of the combined
businesses.
Reference to "FRD-Predecessor" refers to the period of ownership of the
Company by Family Restaurants, Inc. prior to May 23, 1996. Reference to "FRD-
Successor" refers to the period of ownership of the Company by FRD Acquisition
Co., a wholly owned subsidiary of Flagstar Corporation, subsequent to May 23,
1996, the financial statements represent those of FRD Acquistion Co.
F-21
<PAGE>
FRD ACQUISITION CO. (NOTE 1)
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(2) FINANCIAL STATEMENTS
The accompanying combined condensed financial statements have been prepared
in accordance with Securities and Exchange Commission Regulation S-X.
Reference is made to the notes to the combined financial statements for the
year ended December 31, 1995, for information with respect to the Company's
significant accounting and financial reporting policies as well as other
pertinent information. The Company believes that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of the interim periods presented have been made. The results of
operations for the quarter ended June 27, 1996, are not necessarily indicative
of those for the full year.
(3) IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted SFAS No, 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which generally requires the assessment of certain long-lived assets for
possible impairment when events or circumstances indicate the carrying value
of these assets may not be recoverable.
The Company evaluates property and equipment for impairment by comparison of
the carrying value of the assets to estimated undiscounted cash flows (before
interest charges) expected to be generated by the asset over its estimated
useful life. In addition, the Company's evaluation considers data such as
continuity of personnel, changes in the operating environment, name
identification, competitive information and market trends. Finally, the
evaluation considers changes in management's strategic direction or market
emphasis. When the foregoing considerations suggest that a deterioration of
the financial condition of the Company or any of its assets has occurred, the
Company measures the amount of an impairment, if any, based on the estimated
fair value of each of its assets over the remaining amortization period.
The Company believes that there has been no impairment of its long-lived
assets based on re-engineering and re-positioning plans currently under
development, other than impairment already recognized in connection with
various properties held for sale.
F-22
<PAGE>
FRD ACQUISITION CO.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(4) INTERCOMPANY AND EQUITY ACTIVITY, NET
A summary of intercompany and equity activity, net follows:
<TABLE>
<CAPTION>
FRD-PREDECESSOR FRD-SUCCESSOR
---------------------- -------------
SIX MONTHS FIVE MONTHS ONE MONTH
ENDED ENDED ENDED
JUNE 25, MAY 23, JUNE 27,
1995 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net combined equity, beginning of period................................................. $192,354 $152,601 $ --
Allocation of management expenses........................................................ 1,616 1,630 --
Pro forma income tax provision........................................................... 3,634 2,160 --
(Borrowings) repayments on revolving credit facility..................................... (25,700) 79,815 --
Self-insurance premium charges........................................................... 6,473 7,089 --
Change in intercompany................................................................... (13,997) (37,745) --
Net income............................................................................... 2,794 1,101 --
-------- -------- -------
Net combined equity, end of period................................................... 167,174 206,651 --
Common stock........................................................................... -- -- --
Additional paid-in-capital............................................................. -- -- 75,000
Retained earnings...................................................................... -- -- 493
-------- -------- -------
Total stockholder's equity........................................................... $ -- $ -- $75,493
======== ======== =======
</TABLE>
F-23
<PAGE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLIC-
ITATION OF AN OFFER TO BUY, ANY OF THESE SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JU-
RISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 13
The Exchange Offer........................................................ 18
Use of Proceeds........................................................... 26
Capitalization............................................................ 26
Selected Combined Historical Financial Information........................ 27
Unaudited Pro Forma Combined Financial Information........................ 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business.................................................................. 37
Management................................................................ 47
Principal Stockholders.................................................... 52
Certain Relationships and Related Transactions............................ 53
Description of Credit Agreement........................................... 54
Description of Notes...................................................... 56
Certain Federal Income Tax Considerations................................. 74
Plan of Distribution...................................................... 78
Legal Matters............................................................. 79
Experts................................................................... 79
Available Information..................................................... 79
Index to Financial Statements............................................. F-1
</TABLE>
-------------
UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS.
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
FRD ACQUISITION CO.
OFFER TO EXCHANGE
12 1/2% SERIES B SENIOR NOTES
DUE 2004
FOR ALL OUTSTANDING
12 1/2% SERIES A SENIOR NOTES
DUE 2004
-----------------
PROSPECTUS
-----------------
, 1996
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
FRD Acquisition Co. is a Delaware corporation and its Certificate of
Incorporation and Bylaws provide for indemnification of their officers and
directors to the fullest extent permitted by law. Section 102(b)(7) of the
Delaware General Corporation Law (the "DGCL") eliminates the liability of a
corporation's directors to a corporation or its stockholders, except for
liabilities related to breach of duty or loyalty, actions not in good faith,
and certain other liabilities.
Section 145 of the DGCL provides for the indemnification by a Delaware
corporation of its directors, officers, employees and agents in connection
with actions, suits or proceedings brought against them by a third party or in
the right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against liabilities and expenses
incurred in any such action, suit or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
A list of exhibits filed with this Registration Statement on Form S-4 is set
forth in the Index to Exhibits on page E-1, and is incorporated herein by
reference.
(b) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the financial statements or the notes thereto.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrants hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"), may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or the registrant in the successful defense of
any action, suit paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, each Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement; (i) to
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement; (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, FRD
Acquisition Co. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on August 23, 1996.
FRD ACQUISITION CO.
By: /s/ Ann A. Wride
-----------------------------------
Name: Ann A. Wride
Title: Vice President, Finance
and Chief Financial Officer
(Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director August 23, 1996
- - - -------------------
James B. Adamson
* Director August 23, 1996
- - - -------------------
Ellen Downey
* Director August 23, 1996
- - - -------------------
Paul E. Raether
/s/ H. Jay Sarles Director August 23, 1996
- - - -------------------
H. Jay Sarles
Director and
* President (Principal
- - - ------------------- Executive Officer) August 23, 1996
Mark L. Shipman
* Director August 23, 1996
- - - -------------------
Michael T. Tokarz
* Power of Attorney by
/s/ Ann A. Wride
_____________________________________
Ann A. Wride
Vice President, Finance and
Chief Financial Officer
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<C> <S> <C>
3.1 Certificate of Incorporation of the Company+
3.2 Bylaws of the Company+
4.1 Indenture dated as of May 23, 1996 between the Company and The
Bank of New York, as Trustee (the "Indenture")+
4.1.1 Supplemental Indenture No. 1, dated as of , to the
Indenture*
4.2 Stock Purchase Agreement dated as of March 1, 1996 by and among
Flagstar, Flagstar Companies, Inc., the Company, and Family
Restaurants, Inc.+
4.3 Registration Rights Agreement dated as of May 23, 1996 between
the Company and Family Restaurants, Inc. (the "Registration
Rights Agreement")+
4.3.1 Amendment No. 1, dated as of , to the Registration Rights
Agreement*
5.1 Form of Opinion of Latham & Watkins regarding the legality of
the Notes, including consent
8.1 Form of Opinion of Latham & Watkins regarding tax matters,
including consent+
10.1 Credit Agreement dated as of May 23, 1996 by and among the
Company, as guarantor, FRI-M as borrower, the financial
institution listed therein, as lenders, Bankers Trust Company,
Chemical Bank and Citicorp USA, Inc., as co-syndication
agents, and Credit Lyonnais New York Branch, as administrative
agent+
10.2 Tax Sharing and Allocation Agreement dated as of May 23, 1996
among Flagstar Companies, Inc., the Company and the
subsidiaries of the Company+
10.3 Management Services Agreement dated as of May 24, 1996 between
the Company and Flagstar Corporation+
10.4 Flagstar Companies, Inc. 1989 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.9 to Flagstar
Companies, Inc.'s 1995 Form 10-K, File No. 0-18051)
10.5 Technical Assistance and License Agreement, dated as of April
14, 1995, between Coco's Restaurants, Inc. and Coco's Japan
Co., Ltd.
10.6 Memorandum regarding employment arrangement between the Company
and Mark Shipman
12.1 Statement regarding computation of ratio of earnings to fixed
charges
21.1 Subsidiaries of the Company+
23.1 Consent of Latham & Watkins (included as part of Exhibits 5.1
and 8.1)
23.2 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (included in the signature pages in Part II
of the Registration Statement)+
25.1 Statement of eligibility of trustee on Form T-1+
99.1 Letter of Transmittal
99.2 Notice of Guaranteed Delivery
99.3 Guidelines for Certification of Taxpayer Status on Substitute
Form W-9
</TABLE>
- - - --------
+ = previously filed
* = to be filed by amendment
E-1
<PAGE>
EXHIBIT 5.1
FORM OF OPINION OF LATHAM & WATKINS
[LATHAM & WATKINS LETTERHEAD]
____ __, 1996
FRD Acquisition Co.
18831 Von Karman Avenue
Irvine, CA 92714
Re: FRD ACQUISITION CO.
REGISTRATION STATEMENT ON FORM S-1/FORM S-4
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
and Form S-4 (the "Registration Statement") of FRD Acquisition Co., a Delaware
corporation (the "Company"), which you have filed with the Securities and
Exchange Commission on July __, 1996 in connection with the registration under
the Securities Act of 1933, as amended, of $150,000,000 principal amount of 12
1/2% Notes due 2004 (the "Notes").
We have examined such matters of fact and questions of law as we have
considered appropriate for purposes of this opinion. We have examined, among
other things, the terms of the Notes, and the indenture pursuant to which the
Notes are to be issued. In our examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
and the conformity to authentic original documents of all documents submitted to
us as copies.
We are opining herein as to the effect on the subject transaction only of
the federal securities laws of the United States, the internal laws of the State
of New York and the General Corporation Law of the State of Delaware, and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of any other laws.
Based upon the foregoing, we are of the opinion that, the Notes are legally
valid and binding obligations of the Company, except as may be limited by the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to or affecting the rights or remedies
of creditors; the affect of general principles of equity, whether enforcement is
considered in a proceeding in equity or at law, and the discretion of the court
before which any proceeding therefor may be brought; and the unenforceability
under certain circumstances under law or
<PAGE>
FRD Acquisition Co.
____ __, 1996
Page 2
court decisions of provisions providing for the indemnification of or
contribution to a party with respect to a liability where such indemnification
or contribution is contrary to public policy.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the references to our firm therein.
Very truly yours,
LATHAM & WATKINS
2
<PAGE>
EXHIBIT 10.5
TECHNICAL ASSISTANCE AND
------------------------
LICENSE AGREEMENT
-----------------
THIS AGREEMENT is signed and entered into by and between COCO'S
RESTAURANTS, INC., a corporation of the State of California, U.S.A., having
offices at 18831 Von Karman Avenue, Irvine California 92715 (hereinafter
referred to as "COCO'S") and COCO'S JAPAN CO., LTD., a Japanese corporation
having offices at 599-1 Nishiohhashi, Tsukuba-Shi, Ibaraki-Ken, 305 Japan
(hereinafter referred to as "CJCL") and is to take effect on the Effective Date
(as hereinafter defined).
WITNESSETH THAT:
---------------
WHEREAS, on January 22, 1980, a Technical Assistance and License
Agreement ("1980 Agreement") was entered into by and between COCO'S (formerly
Far West Services, Inc.), Kasumi Stores K.K. and CJCL (formerly Robin Hood
K.K.); and
WHEREAS, pursuant to the 1980 Agreement COCO'S made available to CJCL
the experience, expertise, technical information and know-how relating to its
restaurant business and licensed CJCL to use the trade name "COCO'S"; and
WHEREAS, CJCL has developed as of December 31, 1994, two hundred
twenty-five (225) restaurants in Japan and South Korea; and
WHEREAS, CJCL is desirous of continuing to develop in Japan and South
Korea restaurants using the COCO'S name and the COCO'S family restaurant
concept; and
-1-
<PAGE>
WHEREAS, CJCL is desirous of obtaining exclusive rights to develop
restaurants using the COCO' S name and the COCO'S family restaurant concept in
People's Republic of China and Taiwan; and
WHEREAS, CJCL additionally was granted under the 1980 Agreement
exclusive rights to develop restaurants in Hong Kong, Thailand, Indonesia and
Singapore and desires to retain the possibility of developing restaurants in
those countries, as well as in Australia, Guam and Saipan; and
WHEREAS, COCO'S is willing to continue to furnish the technical
assistance and to license the trade name "COCO'S" to CJCL; and
WHEREAS, CJCL is desirous of developing in Japan Mexican restaurants
using the EL TORITO name and the Mexican restaurant concept licensed to COCO'S
by El Torito Restaurants, Inc., a corporation of the State of Delaware, U.S.A.
("ETR"); and
WHEREAS, the 1980 Agreement was amended on April 17, 1989, to release
Kasumi Stores K.K. from its obligations as a guarantor thereunder.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and obligations hereinafter contained, the parties hereto agree as
follows:
1. Definitions
-----------
For the purpose of this Agreement, the following terms shall have
the following meanings:
1.01 "Family Restaurant" shall mean eating facilities of the type
operated by COCO'S in the United States, which have been operated by CJCL and
its sublicensees under the 1980 Agreement, and which are known as Western-style
family restaurants in Japan, having a
-2-
<PAGE>
seating capacity of about seventy (70) to about two hundred (200) persons and
designed to serve a variety of appetizers, traditional breakfasts, luncheons and
dinners, desserts and the like; together with many kinds of beverages.
1.02 "Mexican Restaurant" shall mean eating facilities of the type
now operated by ETR in the United States, which are known as Western-style
Mexican restaurants in Japan, having a seating capacity of about one hundred
(100) to about three hundred (300) persons and designed to serve complete
luncheon and evening meals comprising one or more full courses; together with
many kinds of beverages.
1.03 "Subject Information" shall mean the confidential technical
information, experience, expertise and know-how relating to systems management
of restaurant chains, as set forth in detail in the attached Appendix I, owned
or licensed by a party hereto at any time prior to or during the term of this
Agreement and necessary or useful for the design, construction, furnishing,
provisioning, maintenance and operation of a Family Restaurant or a Mexican
Restaurant.
1.04 "Licensor Trade Names" shall mean the trade names including
the word "COCO'S" which are used or may be used by COCO'S during the term of
this Agreement in its Family Restaurant operations in the United States and the
trade names including the words "El Torito" which are used or may be used by ETR
during the term of this Agreement in its restaurant operations in the United
States.
1.05 "Primary Territory" shall mean Japan, People's Republic of
China and Taiwan.
1.06 "Secondary Territory" shall mean South Korea.
-3-
<PAGE>
1.07 "Tertiary Territory" shall mean Malaysia, Philippines, Hong
Kong, Thailand, Indonesia, Singapore, Australia, Guam and Saipan.
1.08 "Licensed Territory" shall mean the Primary Territory plus the
Secondary Territory.
1.09 "Licensed Units" shall mean any and all Family Restaurants
owned or operated by CJCL or its sublicensees in the Licensed Territory and in
the Tertiary Territory which are in operation during the term of this Agreement
or the respective sublicense agreement ("Family Licensed Units") and shall mean
any and all Mexican Restaurants owned or operated by CJCL which are in operation
during the term of this Agreement ("Mexican Licensed Units").
1.10 "Subsidiaries" shall mean any company, corporation or firm in
the Licensed Territory or in the Tertiary Territory in which CJCL owns one
hundred percent (100%) of the stock or other share interests entitled to vote
for the election of officers and directors.
1.11 "Gross Sales" shall mean the total amount of monies received
from food and beverage sales, in conducting the business of a Licensed Unit;
less only such amounts therein which are in the nature of food and beverage
taxes, sales taxes, added value taxes or the like payable directly to local,
regional or national authorities. Receipts from sales of "Goods" (toys, tobacco,
chocolate, candies and similar sundry non-food items) by Licensed Units shall
not be included in their Gross Sales, to the extent such receipts are separately
registered and accounted for.
1.12 "Effective Date" shall mean February 5, 1995.
-4-
<PAGE>
1.13 "Contract Year" shall mean (i) for the first year of this
Agreement February 5, 1995 through February 29, 1996, and (ii) each year
thereafter the twelve-month period beginning on the first day of March and
ending on the last day of February.
2. Grants
------
2.01 COCO'S hereby grants to CJCL, commencing on the Effective
Date, an exclusive right and license in the Primary Territory, with the right to
sublicense others (subject to the provisions of Articles 2.04 and 2.05), to use
Subject Information directed to Family Restaurant operations in all of CJCL's
and its sublicensees' Family Licensed Units in the Primary Territory.
2.02 On the condition set forth in the following paragraph, COCO'S
hereby grants to CJCL, commencing on the Effective Date, an exclusive right and
license in Japan, to use Subject Information directed to Mexican Restaurant
operations in all of CJCL's Mexican Licensed Units in Japan; provided, however,
that CJCL shall not open more than ten (10) Mexican Licensed Units pursuant to
this grant unless the tenth such unit is opened by February 4, 2000, in which
case CJCL may open no more than twenty (20) Mexican Licensed Units; however, if
the twentieth such unit is opened by February 4, 2005, CJCL may open a maximum
of thirty (30) Mexican Licensed Units.
The grant to CJCL-set forth above in this Article 2.02 shall
be ineffective unless and until CJCL shall have paid to COCO'S a licensing fee
of Fifty Thousand Dollars ($50,000).
2.03 On the conditions set forth in the following paragraph, COCO's
hereby grants to CJCL, commencing on the Effective Date, an exclusive right and
license in the
-5-
<PAGE>
Secondary Territory, with the right to sublicense MIDOPA CO., LTD. ("MIDOPA"),
to use Subject Information directed to Family Restaurant operations in all of
CJCL's and MIDOPA's Family Licensed Units in the Secondary Territory.
The grant to CJCL set forth above in this Article 2.03 shall
be ineffective unless the term of the existing sublicense agreement between CJCL
and MIDOPA is jointly accepted by CJCL and MIDOPA or is held to be enforceable
by an arbitrator or a court. The grant to CJCL set forth above in this Article
2.03 shall terminate June 11, 1997, unless on or before December 31, 1996, CJCL
and MIDOPA have signed an extended sublicense agreement terminating February 4,
2010, and CJCL has agreed to pay COCO'S a royalty payment of one percent (1%)
over the course of the extended sublicense agreement. If the two conditions set
forth in the preceding sentence occur, any effective grant to CJCL under this
Article 2.03 shall be for the term of this Agreement.
2.04 On the condition set forth in the following paragraph, COCO'S
hereby grants to CJCL, commencing on February 5, 1996, a non-exclusive right and
license in the Tertiary Territory, with the right to sublicense others (subject
to the provisions of Articles 2.05 and 2.06), to use Subject Information
directed to Family Restaurant operations in all of CJCL's and its sublicensees'
Family Licensed Units in the Tertiary Territory.
The grant to CJCL set forth above in this Article 2.04 shall
be ineffective as to each country in the Tertiary Territory with respect to
which COCO'S has sold exclusive rights and licenses by February 5, 1996.
2.05 CJCL shall obtain the prior written approval of COCO'S before
granting any sublicense under Articles 2.01, 2.03 and 2.04 to any party which is
not one of CJCL's
-6-
<PAGE>
Subsidiaries; and shall not grant a sublicense to any such party that does not
contractually obligate itself to open at least three (3) Licensed Units within
the first three (3) years of its sublicense agreement. Subject to the foregoing,
COCO'S agrees that its prior written approval shall not be unreasonably
withheld.
2.06 CJCL shall not enter into any sublicense agreement having a
term beyond February 4, 2010.
2.07 In all Licensed Units licensed or sublicensed under the
provisions of Articles 2.01, 2.02, 2.03 and 2.04, CJCL and, where applicable,
the respective sublicensees shall have the right, subject to all of the
provisions of Article 7, to use the Licensor Trade Names.
2.08 IT IS UNDERSTOOD BY CJCL THAT THE PARENT CORPORATION OF COCO'S
OWNS OTHER COMPANIES ENGAGED IN THE OPERATION OF EATING FACILITIES KNOWN IN
JAPAN AS WESTERN-STYLE FAMILY RESTAURANTS. IT IS UNDERSTOOD BY CJCL THAT THE
PARENT CORPORATION OF COCO'S OWNS CHI-CHI'S, INC., A COMPANY ENGAGED IN THE
OPERATION AND FRANCHISING OF EATING FACILITIES KNOWN IN JAPAN AS WESTERN-STYLE
MEXICAN RESTAURANTS THAT ARE SIMILAR TO THE MEXICAN RESTAURANTS OPERATED BY EL
TORITO AND, FURTHER, THAT CHI-CHI'S, INC. ENTERED INTO A MASTER INTERNATIONAL
LICENSE AGREEMENT DATED AUGUST 24, 1988 WITH CHI-CHI'S INTERNATIONAL OPERATIONS,
INC. ("C-CIO"), PURSUANT TO WHICH C-CIO MAY USE THE CHI-CHI'S TRADEMARK AND CHI-
CHI'S TRADE SECRETS WORLD-WIDE (EXCLUSIVE OF AMERICA AND CANADA), INCLUDING
JAPAN. CJCL WAIVES ANY FUTURE CLAIM FOR DAMAGES AS A RESULT OF THE LICENSING OF
TRADEMARKS
-7-
<PAGE>
AND TRADE SECRETS IN COUNTRIES COVERED BY THIS AGREEMENT BY COMPANIES OWNED BY
THE PARENT CORPORATION OF COCO'S.
3. Disclosure of Subject Information
---------------------------------
3.01 Not less than twice annually, COCO'S shall disclose in writing
to CJCL COCO'S most recent improvements, modifications, variations or additions
to Subject Information directed to Family Restaurant operations and ETR's most
recent improvements, modifications, variations or additions to Subject
Information directed to Mexican Restaurant operations.
3.02 It is understood and agreed that all Subject Information
disclosed by COCO'S under Article 3.01 shall be disclosed in the English
language.
4. Technical Assistance
--------------------
4.01 To implement CJCL's use of Subject Information with respect to
Family Restaurants in Japan and CJCL's use of Subject information with respect
to Mexican Restaurants in Japan, COCO'S further agrees to train CJCL personnel
at training facilities located in Irvine, California. Such traiining (as set
forth in more detail in Appendix I) shall be scheduled at times reasonably
convenient to COCO'S and CJCL. To further complement the disclosures to CJCL
under Article 3.01, COCO'S agrees that CJCL personnel shall be given adequate
opportunity upon reasonable advance notice, to visit, study and acquaint
themselves with the facilities in the United States where COCO'S conducts Family
Restaurant operations using the Subject Information that has been licensed to
CJCL hereunder and with the facilities in the United States where ETR conducts
Mexican Restaurant operations using the Subject Information that has been
licensed to CJCL hereunder, and to consult with knowledgeable personnel at such
facilities. Unless otherwise specifically agreed to by COCO'S in advance, the
number of CJCL personnel being trained by
-8-
<PAGE>
or visiting COCO'S facilities under this Article 4.01 shall not exceed thirty-
five (35) persons at any one time.
4.02 The expenses of CJCL personnel being trained at training
facilities or visiting COCO'S and ETR's facilities pursuant to Article 4.01
shall be borne as follows: COCO'S shall pay (i) hotel expenses, (ii) meal
expenses incurred at COCO'S restaurants, (iii) translation expenses and (iv)
ground transportation expenses. CJCL shall pay (i) air travel expenses, (ii)
personal expenses and (iii) meal expenses incurred at non-COCO'S and non-El
Torito restaurants. All assistance, training and consultations furnished by
COCO'S in the United States under the said Article shall be furnished without
separate fee or charge to CJCL.
4.03 Upon written request of CJCL, COCO'S shall, at its expense,
send to CJCL's or its sublicensees' facilities in Japan and in South Korea
(subject to the reasonable availability of suitable personnel) one or more
skilled restaurant experts to provide consultations, discussions and advice on
CJCL's or its sublicensees' Family Restaurant operations in Japan and in South
Korea and CJCL's or its sublicensees' use of the Subject Information in
connection therewith and to provide consultations, discussions and advice on
CJCL's Mexican Restaurant operations in Japan and CJCL's use of the Subject
Information in connection therewith; provided, however, that personnel shall be
-------- -------
sent by COCO'S no more often than twice a year, and provided, further, that the
-------- -------
personnel sent with respect to Mexican Restaurant operations shall not include
an El Torito chef, the visits of whom are covered in Appendix I.
4.04 To the extent reasonably possible under prevailing export-
import laws and regulations, COCO'S agrees to sell or obtain and re-sell to CJCL
such Family Restaurant or Mexican Restaurant food or equipment items as CJCL may
reasonably request, subject to
-9-
<PAGE>
availability of supply and to such terms and conditions of sale as COCO'S may
deem desirable or necessary.
4.05 It is understood and agreed that all consultations,
discussions and training services by COCO'S shall be provided by personnel
chosen by COCO'S in its sole discretion and shall be provided in the English
language. With respect to consultations, discussions and training services
conducted in Japan and South Korea, CJCL or any of its sublicensees shall
provide a translator or pay the travel expenses of a translator brought by
COCO'S.
4.06 It shall be CJCL's responsibility to make the necessary
disclosures of Subject Information and to provide all the necessary technical
assistance and training to all sublicensees hereunder, except as provided in
Article 4.03; and except that senior and junior seminars will be provided for
sublicensees in the Licensed Territory as set forth in Appendix I.
5. Secrecy
-------
5.01 During the term of this Agreement CJCL shall maintain in
confidence, and shall obligate its sublicensees to maintain in confidence, by
taking reasonable precautions to prevent publication or disclosure to third
parties, by disclosing only to those within its or their respective
organizations who have a need to know and using only as authorized and licensed
under this Agreement all of the Subject Information disclosed or made available
to it or them by COCO'S pursuant to Articles 3 and 4; provided, however, that
the foregoing obligations shall not apply to any of the Subject Information
which CJCL can show (a) was previously known to it (as evidenced by written
records of CJCL); (b) was previously known to the general public; or (c) has
subsequently become known to the general public through no fault or omission on
the part of CJCL or any of its sublicensees. It is understood that CJCL and/or
its sublicensees shall not be
-10-
<PAGE>
relieved of their keep confidence obligations merely because isolated individual
elements of the Subject Information should fall within one or more of the
exceptions (a) through (c), but shall be relieved of such obligations only with
respect to such portions of Subject Information which, considered as a whole,
can reasonably and fairly be shown to be within one or more of said exceptions.
6. Royalty Payments: Other Payments
--------------------------------
6.01 In consideration of the disclosure of Subject Information with
respect to Family Restaurants and Mexican Restaurants, the furnishing of
technical assistance with respect thereto and the grant of license rights with
respect thereto, CJCL agrees to pay to COCO'S for the term of this Agreement the
following running royalties:
A. On CJCL Family Licensed Units in Japan: 0.9% of Gross
Sales in each year by each Family Licensed Unit operating as of
February 5, 1995, and 0.6% of Gross Sales in each year by each Family
Licensed Unit opened after February 5, 1995.
B. On sublicensed Family Licensed Units in Japan: 1.0% of
Gross Sales in each year by each Family Licensed Unit through the term
of the existing sublicense agreements and thereafter one-third (1/3)
the royalty received by CJCL under any new sublicense agreements,
subject to a minimum of 0.75 % of Gross Sales in each year by each
Family Licensed Unit operating at the time of termination of the
existing sublicense agreement and 0.6% of Gross Sales in each year by
each Family Licensed Unit opened during the term of any new sublicense
agreement.
-11-
<PAGE>
C. On sublicensed Family, Licensed Units in People's
Republic of China and Taiwan: 1.0% of Gross Sales in each year by each
Family Licensed Unit opened under any initial sublicense agreement and
thereafter one-third (1/3) the royalty received by CJCL under any
subsequent sublicense agreement, subject to a minimum of 0.75% of
Gross Sales in each year by each Family Licensed Unit operating at the
time of termination of the initial sublicense agreement and 0.6% of
Gross Sales in each year by each Family Licensed Unit opened under any
subsequent sublicense agreement.
D. On MIDOPA Family Licensed Units in South Korea: 1.0% of
Gross Sales in each year by each Family Licensed Unit.
E. On Mexican Licensed Units in Japan: 1.0% of Gross Sales
in each year by each of the four Mexican Licensed Units operating at
the time of execution of this Agreement and continuing to operate
under this Agreement; 2.5% of Gross Sales in each year by the fifth,
sixth, seventh, eighth, ninth and tenth Mexican Licensed Unit opened
under this Agreement; and, if additional Mexican Licensed Units are
permitted to be opened by the provisions of the grant in Article 2.02,
2.5% of Gross Sales in each year by each such unit.
If an effective grant in the Tertiary Territory is made
to CJCL pursuant to Article 2.04, CJCL and COCO'S shall, as soon as
practicable after February 5, 1996, agree on the licensing fee that
shall be payable to COCO'S with respect to each sublicense agreement
entered into by CJCL in the Tertiary Territory and on the running
royalties to be paid to COCO's with respect to each sublicense
agreement.
- 12-
<PAGE>
Within thirty (30) days after the end of each Contract Year,
CJCL shall furnish to COCO'S written reports, specifying the amount of royalties
due, the number of Licensed Units currently in existence and the total Gross
Sales made by these Licensed Units under this Agreement during the preceding
Contract Year. The amount of royalties due from the People's Republic of China
and Taiwan, the Secondary Territory and the Tertiary Territory shall be
converted from the applicable local currency directly into Japanese currency at
the open market rate of exchange quoted by the Tokyo, Japan branch of Bank of
America, or any other major international bank of good repute designated by CJCL
on the last business day of the reporting period involved. CJCL shall keep
accurate and complete records of all data reasonably necessary to enable the
determination of royalties payable under this Article 6.01; and shall permit
such records as well as any other pertinent records to be examined at any time
during regular business hours upon appropriate reasonable prior notice in
writing by an independent certified public accountant selected by COCO'S. If
such examination reveals that the records of CJCL are faulty, the accountant's
reasonable costs shall be for the account of CJCL. All payments to COCO'S under
this Article 6.01 shall be made in Japanese yen and shall be made concurrently
with the submission of the annual report required by this Article 6.01.
6.02 Any taxes required to be withheld by the Japanese Government
and actually withheld by CJCL on the amounts payable by CJCL to COCO'S shall be
deductible from the payments due to COCO'S; provided that CJCL shall furnish
COCO'S with a copy of the written receipt for any such taxes actually withheld.
With respect to the remittance of royalties which may be payable on Gross Sales
of Family Licensed Units owned or operated by sublicensees of CJCL in the
Primary Territory, Secondary Territory and Tertiary Territory, any and all
taxes,
-13-
<PAGE>
charges and/or other levies which may be imposed on any royalty payment from
any such sublicensee of CJCL shall be borne solely by CJCL.
7. Trade Names
-----------
7.01 The rights granted by COCO'S hereunder to CJCL and its
sublicensees to use the Licensor Trade Names include only the right to reproduce
such Trade Names without change, modification or alteration in their design and
appearance from that furnished by COCO'S. CJCL recognizes and acknowledges
COCO'S ownership of or license with respect to the Licensor Trade Names and
agrees, upon request, to assign to COCO'S any and all right, title or interest
in the same as may be acquired by CJCL at any time.
7.02 Nothing in this Agreement shall be construed as giving CJCL or
any CJCL sublicensee the right or license to use or employ any Licensor Trade
Name on or in connection with any goods, wares or merchandise or services
whatsoever, except as herein specifically provided.
7.03 CJCL agrees to furnish to COCO'S, free of cost, for COCO'S
written approval, as the case may be, examples of each use of the Licensor's
Trade Names by CJCL or any CJCL sublicensee. CJCL agrees that COCO'S disapproval
of any such items shall be final; provided that approval shall not be
unreasonably withheld. CJCL agrees to submit such examples within two weeks
after initial adoption, immediately upon a change from a prior usage, and
thereafter at intervals not to exceed twelve months, thereby enabling COCO'S to
check the quality of such examples against COCO'S own standards, to the end of
preserving the reputation and public acceptance enjoyed by the Licensor Trade
Names in the United States and in other countries where they are now used or in
the future may be used.
-14-
<PAGE>
7.04 CJCL and its sublicensees shall also have the right to use the
Licensor Trade Names on window displays and in other customary advertising
matter usually employed in the merchandising and marketing of similar products
and services. Submission of such promotional and advertising materials shall be
made to COCO'S periodically as set forth in Article 7.03 above.
7.05 It is specifically understood and agreed between the parties
that nothing herein contained shall be construed as an assignment or grant to
CJCL of any right, title or interest, other than a license to use the Licensor
Trade Names in accordance with the provisions of this Agreement, and the parties
hereto specifically agree that all such uses hereunder by CJCL or CJCL
sublicensees shall inure to the benefit of COCO'S.
7.06 If any claim is made or action brought against CJCL or any
CJCL sublicensee based on the assertion that CJCL or said sublicensee is
wrongfully using or is not entitled to use one or more of the Licensor Trade
names, CJCL shall promptly notify COCO'S thereof and the parties shall then
consult with each other as to an appropriate course of action. However, it is
specifically understood that COCO'S does not warrant that the use of Licensor
Trade Names in the Licensed Territory and in the Tertiary Territory is free from
infringement of the rights of third parties in the Licensed Territory and the
Tertiary Territory and COCO'S shall not be liable to CJCL for any such
infringement of third-party rights which may occur. COCO'S shall advise CJCL
from time to time of the progress of COCO'S applications to register the
Licensor Trade Names in the Licensed Territory and in the Tertiary Territory.
7.07 If CJCL shall acquire knowledge or have reasonable cause to
believe that any person, firm, corporation or other entity is infringing one or
more of the Licensor Trade Names in the Licensed Territory or the Tertiary
Territory, CJCL shall promptly notify COCO'S
-15-
<PAGE>
to that effect and may, in its sole discretion, take or not take steps to enjoin
such infringement. COCO'S may, at its own expense and through counsel of its own
selection, if it so chooses, initiate an action or participate in an action
initiated by CJCL. Any monies collected by virtue of such action shall be shared
by the parties hereto in proportion to the amounts expended by each in
prosecuting the action.
7.08 In order to ensure uniformity of operation and of product, and
in order to protect the goodwill of the Licensor Trade Names licensed herein,
COCO'S shall make available to CJCL the specifications and requirements of
ingredients, commodities, supplies and merchandise recommended for use in the
Licensed Units owned or operated by CJCL and its sublicensees under one or more
of the Licensor Trade Names, and CJCL and its sublicensees shall use in such
operations, subject to modifications to suit the taste of the consumer and to
availability of suitable supplies, such ingredients, commodities, supplies and
merchandise as are in conformance with or equivalent to such specifications and
requirements. CJCL and its sublicensees may purchase their supplies from any
suitable source selected by it or them.
7.09 In order to protect the goodwill associated with the Licensor
Trade Names, and in order to prevent any deception to the public, CJCL and its
sublicensees shall operate their businesses which use Liceusor Trade Names in
accordance with the standards and requirements of quality, production,
appearance, cleanliness and service as are from time to time prescribed by
COCO'S. They shall maintain the premises in a neat, attractive condition and
shall make such repairs and renovations as may reasonably be required by COCO'S
in order to meet the standards set. CJCL and its sublicensees shall at all
times maintain adequate inventories and trained personnel to serve the public in
a manner commensurate with the reputation of other stores
-16-
<PAGE>
bearing the Licensor Trade Names. In order to ensure compliance with quality
specifications and standards set forth herein, CJCL and its sublicensees shall
allow representatives of COCO'S to visit their licensed premises at any
reasonable time, and shall permit said representatives to inspect the premises,
goods, products, supplies and merchandising methods, as well as to make such
tests as the representatives consider necessary.
8. Warranties and Guarantee
------------------------
8.01 COCO'S hereby represents and warrants that it has the right
and ability to make the disclosures, to provide the assistance and to make the
grants set forth in this Agreement; and to otherwise fully and faithfully carry
out its obligations to CJCL hereunder. However, COCO'S does not represent or
warrant that the use of Subject Information in the Licensed Territory or the
Tertiary Territory by CJCL or its sublicensees will achieve any given specific
results; or that such use will not possibly conflict with the rights of others.
COCO'S shall have no responsibility or liability to CJCL for any claims or
suits brought by third persons against CJCL or its sublicensees and shall be
under no obligation to indemnify or hold harmless CJCL or its sublicensees for
any liabilities, expenses or damages resulting from or caused by the use or
improper use of any of the Subject Information.
8.02 CJCL hereby represents and warrants that it has the right and
ability to enter into this amendment and to fully and faithfully carry out its
obligations to COCO'S hereunder.
9. Term and Termination
--------------------
9.01 Unless sooner terminated as hereinafier provided, this
Agreement shall come into force on the Effective Date and shall remain in full
force and effect through February 4, 2010. On February 4, 2010, CJCL shall have
and is hereby granted a fully-vested, paid-up,
-17-
<PAGE>
irrevocable, non-exclusive, royalty-free right and license to continue to use
all of the Subject Information and Licensor Trade Names which it had been
licensed to use during the term of this Agreement.
9.02 If CJCL fails to make any payment as herein provided, or if
any party fails to abide by any of the other terms and conditions hereof, and
such failure or default shall continue without remedy for sixty (60) days after
receipt of notice thereof from the non-defaulting party, then the non-defaulting
party may terminate this Agreement upon written notice to the party in default.
9.03 After any early termination of this Agreement pursuant to
Article 9.02, CJCL and its sublicensees shall have no further rights hereunder
and shall promptly return to COCO'S all Subject Information previously provided
to CJCL and any and all copies thereof in the possession of CJCL and shall make
no further use of the Licensor Trade Names.
9.04 Any early termination of this Agreement by COCO'S under
Article 9.02 shall be without prejudice to the rights of COCO'S to receive the
payment of any unpaid sums due to COCO'S pursuant to the provisions of this
Agreement.
10. Force Maieure
-------------
10.01 No failure or omission by any of the parties hereto in the
performance of any obligation of this Agreement shall be deemed a breach of this
Agreement nor create any liability if the same shall arise from any cause or
causes beyond the control of the party affected, including, but not limited to,
the following, which, for the purposes of this Agreement, shall be regarded as
beyond the control of the party in question: Acts of God, acts or omissions of
any Government or any agency thereof, compliance with requests, recommendations,
rules,
-18-
<PAGE>
regulations or orders of any governmental authority or any officer, department,
agency or instrumentality thereof; fire, storm, flood, earthquake, accident,
acts of the public enemy, war, rebellion, insurrection, riot, invasion, strikes
or lockouts. During any such case of force majeure, the Agreement shall not be
terminated, but only suspended and the party affected shall continue to perform
its obligations to the extent possible and resume the performance of its
suspended obligations as soon as such case of force majeure is removed or
alleviated. The payment of any monies due from CJCL to COCO'S shall not be
excused or suspended at any time, regardless of the circumstances.
11. Assignment
----------
This Agreement shall be assignable by any party to the successor of
the entire business of that party to which this Agreement pertains; provided
that said party has obtained the prior written consent of the other parties,
which consent shall not be unreasonably withheld; and provided further that the
assignee agrees in writing to be bound in all respects by the provisions of this
Agreement in the place and instead of the assigning party.
12. Notice
------
Any notice or other communication required or made pursuant to this
Agreement shall be in writing, shall be addressed to the party for whom intended
at the address first set forth above, shall be given manually, by mail or
cablegram or by courier delivery, and shall be deemed duly and properly given if
and when mailed by registered air mail or dispatched by cablegram, postage or
other charges prepaid, and if and when sent by courier delivery, charges
prepaid. Any party may, by notice to the other, change its address for receiving
such notices, provided, however, that any such notice shall only become
effective upon actual receipt.
-19-
<PAGE>
13. Governing Law and Arbitration
-----------------------------
Any and all disputes, controversies, or differences which may arise
between the parties out of, in relation to or in connection with this Agreement,
or the alleged breach thereof, which cannot be amicably resolved by the
reasonable efforts of the parties, shall be finally settled by arbitration
pursuant to the Japan-American Trade Arbitration Agreement of September 16,
1952, by which each party hereto is bound.
The arbitration shall be conducted in the English language in Los
Angeles, California, U.S.A. if CJCL is the complaining party, and in the
Japanese language in Tokyo, Japan, if COCO'S is the complaining party. In any
such arbitration, this Agreement shall be governed by, and construed and
enforced in accordance with the laws of the State of California, U.S.A.
The award in any such arbitrations proceeding shall be final and
binding upon all parties affected thereby.
14. Official Text
-------------
This Agreement is being executed in duplicate in the English language
and in the Japanese language. The English language version shall be the
governing and controlling text if there is any discrepancy between the two
versions in the interpretation to be applied.
15. Entire Agreement
----------------
The terms and conditions herein contained constitute the entire
Agreement between the parties and supersede all previous commitments,
agreements and understandings, whether oral or written, between the parties
hereto with respect to the subject matter hereof and no previous agreement or
understanding varying or extending the same shall be binding upon any party
hereto.
-20-
<PAGE>
Any subsequent amendments or modifications to this Agreement shall
have no force or effect unless duly set forth in writing and signed by the party
or parties to be bound thereby.
If any of the terms or provisions of this Agreement are ruled to be
invalid or unenforceable by a court or administrative bureau of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby and
the parties shall endeavor in good faith to replace such provision with a valid
and enforceable one which accomplishes the same general purpose to the greatest
possible extent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the 14th day of April, 1995.
----- -----
COCO'S RESTAURANTS, INC.
By: /s/ Barry Krantz
---------------------------------
Title: Authorized Signatory
------------------------------
COCO'S JAPAN CO., LTD.
By: /s/ Akin Kambayashi
---------------------------------
Title: Chairman
-----------------------------
By: /s/ Keisuka Koguri
--------------------------------
Title: President
-----------------------------
-21-
<PAGE>
APPENDIX I
----------
SUBJECT INFORMATION AND TECHNICAL ASSISTANCE
A. General
-------
(1) Restaurant design and layout
(2) Construction plans
(3) Menu planning and development
(4) Existing training manuals, audio-visual aids
(5) Training methods and programs
(6) Operations management control and computer programs
(7) Marketing and sales promotion materials
B. Details of Disclosures and Assistance under
Articles 3.01 and 4.01
----------------------
1. Restaurant design and layout
----------------------------
Review of preliminary plans and design
Review kitchen equipment and drawings
Review interior fixturization drawings
2. Construction plans
------------------
Review of preliminary floor plans
Review of elevations and sections
Review of kitchen equipment and food service
3. Menu planning and development
-----------------------------
Complete description of all breakfast, lunch and
dinner menu selections for a Coco's Family Restaurant.
Disclosure of proposed additions and modifications in
progress. Recipes where
-22-
<PAGE>
applicable. Consultations, advice and assistance to CJCL in
adapting same as reasonably possible, to suit Japanese and
South Korean customers, eating habits and tastes. El Torito
chef will be sent to Japan on a request basis. (CJCL to
pay all expenses including airfare.)
4. Training Seminars
-----------------
Eight seminars per year conducted by COCO's personnel
for Subject Information. (Maximum 35 people per seminar;
maximum seven days per seminar)
COCO'S to provide for translation, ground transportation,
lodging and meals eaten in Coco's Restaurants. All
personal expenses (e.g., telephone calls, beverages and
food consumed in hotels) to be paid by individuals attending
the seminars.
COCO'S will provide a TOP Seminar no less frequently than
once every two years hosted by COCO'S. (COCO'S to pay one-
half the airfare of attendees.)
5. Manuals and training aids
-------------------------
Employee benefit plans manual
Ten Phase manual for management training
Kitchen sanitation manuals
Food service manuals
Portion and styling manuals
Bussing manuals
customer service manuals
Customer service standard manuals
Hosting manuals
Hosting standard manuals
Administrative manuals
Facilities/maintenance manuals
Portion and styling - slide programs
-23-
<PAGE>
6. Operations management control and computer programs
---------------------------------------------------
Fixed asset control
Inventory control
Accounts payable processing
General ledger system (includes monthly P&L)
Menu analysis
Budget and bonus administration
Labor distribution
Sales and cash control
Weekly operations P&L key line item exception report
Personnel record keeping
Employee benefit program, group life, medical, profit sharing,
(eligibility and participation report)
General unit operations methods
Unit management scheduling
Personnel scheduling and methods
7. Marketing and sales promotion materials
---------------------------------------
Banners
Signs
Gift certificate program
To-Go packaging program
Plastic table tent holders
Variety of table tent inserts and fliers
Menus
Copy, photography and placement of newspaper advertising (if
requested)
-24-
<PAGE>
EXHIBIT 10.6
MEMORANDUM
TO : MARK SHIPMAN
FROM : STEPHEN WOOD
RE : CONFIRMING YOUR NEW POSITION
DATE : MAY 24, 1996
This is to confirm certain matters relative to your appointment as President of
our Coco's/Carrows division.
1. You will be a Senior Vice President of Flagstar Corporation.
2. Your base salary will be $250,000, effective May 23, 1996. Flagstar has
paid you in full through May. You will start on the Coco's/Carrows payroll
on June 1, and will receive a retroactive payment for the difference in
your new and old salaries for the May 23-31, period.
3. Your 1996 target bonus will remain at 65%.
4. You will be awarded the option to purchase an additional 50,000 shares of
Flagstar common stock at the greater of the stock's closing price on the
FRI transaction closing date, or $6.00. These additional options will have
a 10 year term and vest 20% per year over 5 years. This will bring your
total number of options to 75,000.
5. You will receive a $50,000 lump-sum relocation assistance bonus. It will be
grossed up at 36% for federal taxes, and an additional amount for
California state income and Medicare taxes. This will be paid to you by
Coco's/Carrows.
6. You will receive our regular Plan 1 (the top plan) relocation benefits,
including the cost-of-living adjustment allowances. If the
homefinding/temporary living allowance (which is grossed-up) proves
insufficient to meet your reasonable needs, you may request an additional
allowance.
7. Should Flagstar terminate your employment for a reason other than fraud,
dishonesty or other illegal acts, you will receive twenty-four (24) months
of severance benefits at your then existing base pay upon the signing of a
mutually acceptable release of claims. This protection will have no end
date and will replace your current "CORE" agreement.
<PAGE>
8. You will become covered under the Coco's/Carrows benefits programs
effective June 1, 1996. Judy Painter will work with you to ensure there are
no lapses of coverage, and to get you enrolled in coverages that best
approximate your current coverage.
A copy of this memo will be placed in your Human Resources file.
<PAGE>
EXHIBIT 12.1
FRD ACQUISITION CO.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (NOTE A)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------------------- -----------
SIX MONTHS FIVE MONTHS ONE MONTH
ENDED JUNE, ENDED MAY ENDED JUNE
FISCAL YEAR ENDED DECEMBER(B), 25, 1995 23, 1996 27, 1996
------------------------------------------- ----------- ----------- -----------
1991 1992 1993 1994 1995 (UNAUDITED) (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss)
before income
taxes........... $17,883 $18,634 $25,928 $20,139 $11,394 $6,428 $3,261 $689
Add:
Interest
expense (d)(e). 4,601 4,852 4,594 6,934 16,515 5,925 4,658 2,496
------- ------- ------- ------- ------- ------- ------ -----
Earnings
available for
fixed charges... $22,484 $23,486 $30,522 $27,073 $27,909 $12,353 7,919 3,185
======= ======= ======= ======= ======= ======= ====== =====
Fixed Charges:
Interest
expense (d)(e). $ 4,601 $ 4,852 $ 4,594 $ 6,934 $16,515 $ 5,925 4,658 2,496
======= ======= ======= ======= ======= ======= ====== =====
Ratio of earnings
to fixed
charges......... 4.9x 4.8x 6.6x 3.9x 1.7x 2.1x 1.7x 1.3x
======= ======= ======= ======= ======= ======= ====== =====
<CAPTION>
PRO FORMA
---------------------------------
SIX-
FIVE ONE MONTHS
MONTHS MONTH ENDED
YEAR ENDED ENDED JUNE
ENDED MAY JUNE 27,
DECEMBER 23, 27, 1996
31, 1995 1996 1996 (C)
--------- ------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Earnings (loss)
before income
taxes........... $ 3,134 439 689 $ 1,128
Add:
Interest
expense (d)(e). 29,756 9,983 2,496 12,479
--------- ------- ------ --------
Earnings
available for
fixed charges... $32,890 10,422 3,185 13,607
========= ======= ====== ========
Fixed Charges:
Interest
expense (d)(e). $29,756 9,983 2,496 12,479
========= ======= ====== ========
Ratio of earnings
to fixed
charges......... 1.1x 1.0x 1.3x 1.1x
========= ======= ====== ========
</TABLE>
- - - -------
(a) The table above sets forth the ratio of earnings to fixed charges for the
Company on a historical and pro forma basis which, for accounting purposes
only, upon consummation of the Acquisition, is considered the Predecessor
entity to the Company.
(b) The Company's five most recently completed fiscal years ended on December
30, 1991, December 28, 1992, December 26, 1993, December 25, 1994 and
December 31, 1995.
(c) The pro forma six months ended June 27, 1996 amounts represent a
combination of the Predecessor's activity for the five months ended May
23, 1996 and the Successor's activity for the one month ended May 23,
1996, after giving effect to the pro forma adjustments.
(d) Capitalized interest is not considered material to the Company's overall
financial position.
(e) Interest expense includes the interest portion of rentals.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
FRD Acquisition Co.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG Peat Marwick LLP
Orange County, California
August 23, 1996
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
To Tender for Exchange
12 1/2% Series A Senior Notes due 2004
of
FRD ACQUISITION CO.
Pursuant to the Prospectus dated , 1996
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 1996 (THE "EXPIRATION DATE"), UNLESS THE
EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION, IN
WHICH CASE THE TERM "EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME
TO WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY
TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
The Exchange Agent is:
The Bank of New York
Hand Delivery Mail/Overnight
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, NY 10286 7th East Side
New York, NY 10286
Attn: Arwen Gibbons
Tel. #(212) 815-6333
By Facsimile:
Fax #(212) 571-3080
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
<PAGE>
The undersigned acknowledges receipt of the Prospectus dated , 1996 (the
"Prospectus"), of FRD Acquisition Co., a Delaware corporation (the "Company"),
and this Letter of Transmittal (the "Letter of Transmittal"), which together
with the Prospectus constitutes the Company's offer (the "Exchange Offer") to
exchange $1,000 principal amount of its 12 1/2% Series B Senior Notes due 2004
(the "Exchange Notes") for each $1,000 principal amount of its outstanding 12
1/2% Series A Senior Notes due 2004 (the "Private Notes"). Recipients of the
Prospectus should read the requirements described in such Prospectus with
respect to eligibility to participate in the Exchange Offer. Capitalized terms
used but not defined herein have the meaning given to them in the Prospectus.
The undersigned hereby tenders the Private Notes described in the box
entitled "Description of Private Notes" below pursuant to the terms and
conditions described in the Prospectus and this Letter of Transmittal. The
undersigned is the registered owner of all the Private Notes and the
undersigned represents that it has received from each beneficial owner of
Private Notes ("Beneficial Owners") a duly completed and executed form of
"Instruction to Registered Holder from Beneficial Owner" accompanying this
Letter of Transmittal, instructing the undersigned to take the action
described in this Letter of Transmittal.
This Letter of Transmittal is to be used by a holder of Private Notes (i) if
certificates representing Private Notes are to be forwarded herewith, (ii) if
delivery of Private Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer--Procedures for Tendering," or (iii) if a tender is made pursuant to the
guaranteed delivery procedures in the section of the Prospectus entitled "The
Exchange Offer--Guaranteed Delivery Procedures."
The undersigned hereby represents and warrants that the information received
from the beneficial owners is accurately reflected in the boxes entitled
"Beneficial Owner(s)--Purchaser Status" and "Beneficial Owner(s)--Residence."
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder of Private Notes promptly and
instruct such registered holder of Private Notes to tender on behalf of the
beneficial owner. If such beneficial owner wishes to tender on its own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering its Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such beneficial
owner's name or obtain a properly completed bond power from the registered
holder of Private Notes. The transfer of record ownership may take
considerable time.
In order to properly complete this Letter of Transmittal, a holder of
Private Notes must (i) complete the box entitled "Description of Private
Notes," (ii) complete the boxes entitled "Beneficial Owner(s)--Purchaser
Status" and "Beneficial Owner(s)--Residence", (iii) if appropriate, check and
complete the boxes relating to book-entry transfer, guaranteed delivery,
Special Issuance Instructions and Special Delivery Instructions, (iv) sign the
Letter of Transmittal by completing the box entitled "Sign Here" and (v)
complete the Substitute Form W-9. Each holder of Private Notes should
carefully read the detailed instructions below prior to completing the Letter
of Transmittal.
Holders of Private Notes who desire to tender their Private Notes for
exchange and (i) whose Private Notes are not immediately available or (ii) who
cannot deliver their Private Notes, this Letter of Transmittal and all other
documents required hereby to the Exchange Agent on or prior to the Expiration
Date, must tender the Private Notes pursuant to the guaranteed delivery
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer--Guaranteed Delivery Procedures." See Instruction 2.
Holders of Private Notes who wish to tender their Private Notes for exchange
must complete columns (1) through (3) in the box below entitled "Description
of Private Notes," complete the boxes entitled and sign the box below entitled
"Sign Here." If only those columns are completed, such holder of Private Notes
will have tendered for exchange all Private Notes listed in column (3) below.
If the holder of Private Notes wishes to tender for exchange less than all of
such Private Notes, column (4) must be completed in full. In such case, such
holder of Private Notes should refer to Instruction 5.
<PAGE>
DESCRIPTION OF PRIVATE NOTES
- - - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2) (3) (4)
PRINCIPAL
PRIVATE AMOUNT
NOTE AGGREGATE TENDERED
NAME(S) AND ADDRESS(ES) OF REGISTERED NUMBER(S) PRINCIPAL FOR EXCHANGE
HOLDER(S) OF PRIVATE NOTE(S), EXACTLY AS (ATTACH AMOUNT (MUST BE IN
NAME(S) SIGNED REPRESENTED INTEGRAL
APPEAR(S) ON PRIVATE NOTE CERTIFICATE(S) LIST IF BY MULTIPLES OF
(PLEASE FILL IN, IF BLANK) NECESSARY) CERTIFICATE(S)/1/ $1,000)/2/
- - - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
</TABLE>
1. Unless indicated in the column "Principal Amount Tendered For Exchange,"
any tendering Holder of 12 1/2% Series A Senior Notes due 2004 will be
deemed to have tendered the entire aggregate principal amount represented
by the column labelled "Aggregate Principal Amount Represented by
Certificate(s)."
2. The minimum permitted tender is $1,000 in principal amount of 12 1/2%
Series A Senior Notes due 2004. All other tenders must be in integral
multiples of $1,000.
<PAGE>
[_]CHECK HERE IF TENDERED PRIVATE NOTES ARE ENCLOSED HEREWITH.
[_]CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER
DEFINED) ONLY):
Name of Tendering Institution: _____________________________________________
Account Number: ____________________________________________________________
Transaction Code Number: ___________________________________________________
[_]CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Registered Holder of Private Note(s): ______________________________
Date of Execution of Notice of Guaranteed Delivery: ________________________
Window Ticket Number (if available): _______________________________________
Name of Institution which Guaranteed Delivery: _____________________________
Account Number (if delivered by book-entry transfer): ______________________
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
_______________________________________________________________________________
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 6, 7 and 8)
To be completed ONLY (i) if
the Exchange Notes issued in
exchange for Private Notes,
certificates for Private Notes
in a principal amount not
exchanged for Exchange Notes, or
Private Notes (if any) not
tendered for exchange, are to be
issued in the name of someone
other than the undersigned or
(ii) if Private Notes tendered
by book-entry transfer which are
not exchanged are to be returned
by credit to an account
maintained at DTC.
Issue to:
Name ____________________________
(Please Print)
Address _________________________
---------------------------------
---------------------------------
(Include Zip Code)
---------------------------------
(Tax Identification or Social
Security No.)
Credit Private Notes not
exchanged and delivered by book-
entry transfer to DTC account
set forth below:
---------------------------------
(Account Number)
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 6, 7 and 8)
To be completed ONLY if the
Exchange Notes issued in
exchange for Private Notes,
certificates for Private Notes
in a principal amount not
exchanged for Exchange Notes, or
Private Notes (if any) not
tendered for exchange, are to be
mailed or delivered (i) to
someone other than the
undersigned or (ii) to the
undersigned at an address other
than the address shown below the
undersigned's signature.
Mail or delivered to:
Name ____________________________
(Please Print)
Address _________________________
---------------------------------
---------------------------------
(Include Zip Code)
---------------------------------
(Tax Identification or Social
Security No.)
<PAGE>
BENEFICIAL OWNER(S)--RESIDENCE
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATE OF DOMICILE/PRINCIPAL PLACE OF BUSINESS
OF PRINCIPAL AMOUNT OF PRIVATE NOTES
EACH BENEFICIAL OWNER OF PRIVATE NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER(S)
<S> <C>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
</TABLE>
BENEFICIAL OWNER(S)--PURCHASER STATUS
The beneficial owner of each of the Private Notes described herein is
(check the box that applies):
[_]A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[_]An "Institutional Accredited Investor" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act)
[_]A non "U.S. person" (as defined in Regulation S of the Securities Act)
that purchased the Private Notes outside the United States in
accordance with Rule 904 of the Securities Act
[_]Other (describe) _______________________________________________________
------------------------------------------------------------------------
<PAGE>
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Pursuant to the offer by FRD Acquisition Co., a Delaware corporation (the
"Company"), upon the terms and subject to the conditions set forth in the
Prospectus dated , 1996 (the "Prospectus") and this Letter of Transmittal
(the "Letter of Transmittal"), which together with the Prospectus constitutes
the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount
of its 12 1/2% Series B Senior Notes due 2004 (the "Exchange Notes") for each
$1,000 principal amount of its outstanding 12 1/2% Series A Senior Notes due
2004 (the "Private Notes"), the undersigned hereby tenders to the Company for
exchange the Private Notes indicated above.
By executing this Letter of Transmittal and subject to and effective upon
acceptance for exchange of the Private Notes tendered for exchange herewith,
the undersigned will have irrevocably sold, assigned, transferred and
exchanged, to the Company, all right, title and interest in, to and under all
of the Private Notes tendered for exchange hereby, and hereby will have
appointed the Exchange Agent as the true and lawful agent and attorney-in-fact
(with full knowledge that the Exchange Agent also acts as agent of the
Company) of such holder of Private Notes with respect to such Private Notes,
with full power of substitution to (i) deliver certificates representing such
Private Notes, or transfer ownership of such Private Notes on the account
books maintained by DTC (together, in any such case, with all accompanying
evidences of transfer and authenticity), to the Company, (ii) present and
deliver such Private Notes for transfer on the books of the Company and (iii)
receive all benefits and otherwise exercise all rights and incidents of
beneficial ownership with respect to such Private Notes, all in accordance
with the terms of the Exchange Offer. The power of attorney granted in this
paragraph shall be deemed to be irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (i) the undersigned is
the owner; (ii) has a net long position within the meaning of Rule 14e-4 under
the Securities Exchange Act as amended ("Rule 14e-4") equal to or greater than
the principal amount of Private Notes tendered hereby; (iii) the tender of
such Private Notes complies with Rule 14e-4 (to the extent that Rule 14e-4 is
applicable to such exchange); (iv) the undersigned has full power and
authority to tender, exchange, assign and transfer the Private Notes and (v)
that when such Private Notes are accepted for exchange by the Company, the
Company will acquire good and marketable title thereto, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claims. The undersigned will, upon receipt, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Private
Notes tendered for exchange hereby.
By tendering, the undersigned hereby further represents to the Company that
(i) the Exchange Notes to be acquired by the undersigned in exchange for the
Private Notes tendered hereby and any beneficial owner(s) of such Private
Notes in connection with the Exchange Offer will be acquired by the
undersigned and such beneficial owner(s) in the ordinary course of business of
the undersigned, (ii) the undersigned have no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes,
(iii) the undersigned and each beneficial owner acknowledge and agree that any
person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) the undersigned and each beneficial owner understand that a
secondary resale transaction described in clause (iii) above and any resales
of Exchange Notes obtained by the undersigned in exchange for the Private
Notes acquired by the undersigned directly from the Company should be covered
by an effective registration statement containing the selling securityholder
information required by Item 507 or Item 508, as applicable, of Regulation S-K
of the Commission and (vi) neither the undersigned nor any beneficial owner is
an "affiliate," as defined under Rule 405 under the Securities Act, of the
Company. If the undersigned is a broker-dealer that will receive
<PAGE>
Exchange Notes for its own account in exchange for Private Notes that were
acquired as a result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted for exchange, and to have exchanged, validly tendered Private Notes,
if, as and when the Company gives oral or written notice thereof to the
Exchange Agent. Tenders of Private Notes for exchange may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders" in the Prospectus. Any Private Notes
tendered by the undersigned and not accepted for exchange will be returned to
the undersigned at the address set forth above unless otherwise indicated in
the box above entitled "Special Delivery Instructions" as promptly as
practicable after the Expiration Date.
The undersigned acknowledges that the Company's acceptance of Private Notes
validly tendered for exchange pursuant to any one of the procedures described
in the section of the Prospectus entitled "The Exchange Offer" and in the
instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of
the Exchange Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Private Notes not tendered for exchange in
the name(s) of the undersigned. Similarly, unless otherwise indicated in the
box entitled "Special Delivery Instructions," please mail any certificates for
Private Notes not tendered or exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s). In the event that both "Special Issuance Instructions" and
"Special Delivery Instructions" are completed, please issue the certificates
representing the Exchange Notes issued in exchange for the Private Notes
accepted for exchange in the name(s) of, and return any Private Notes not
tendered for exchange or not exchanged to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to
transfer any Private Notes from the name of the holder of Private Note(s)
thereof if the Company does not accept for exchange any of the Private Notes
so tendered for exchange or if such transfer would not be in compliance with
any transfer restrictions applicable to such Private Note(s).
IN ORDER TO VALIDLY TENDER PRIVATE NOTES FOR EXCHANGE, HOLDERS OF PRIVATE
NOTES MUST COMPLETE, EXECUTE, AND DELIVER THIS LETTER OF TRANSMITTAL.
Except as stated in the Prospectus, all authority herein conferred or agreed
to be conferred shall survive the death, incapacity, or dissolution of the
undersigned, and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Private Notes is irrevocable.
<PAGE>
SIGN HERE
- - - --------------------------------------------------------------------------------
(Signature(s) of Owner(s))
Date: , 1996
Must be signed by the registered holder(s) of Private Notes exactly as
name(s) appear(s) on certificate(s) representing the Private Notes or on a
security position listing or by person(s) authorized to become registered
Private Note holder(s) by certificates and documents transmitted herewith. If
signature is by trustees, executors, administrators, guardians, attorneys-in-
fact, officers of corporations or others acting in a fiduciary or
representative capacity, please provide the following information. (See
Instruction 6).
Name(s): _______________________________________________________________________
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(Please Print)
Capacity (full title): _________________________________________________________
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
Address: _______________________________________________________________________
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(Include Zip Code)
Principal place of business (if different from address listed above): __________
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone No.: ( ) _____________________________________________
Tax Identification or Social Security Nos.: ____________________________________
Please complete Substitute Form W-9
GUARANTEE OF SIGNATURE(S)
(Signature(s) must be guaranteed if required by Instruction 1)
Authorized Signature: __________________________________________________________
Dated: _________________________________________________________________________
Name and Title: ________________________________________________________________
(Please Print)
Name of Firm: __________________________________________________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
which is (1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., (2) a commercial bank or
trust company having an office or correspondent in the Unites States, or (3)
an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under
the Securities Exchange Act of 1934 which is a member of one of the following
recognized Signature Guarantee Programs (an "Eligible Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if this
Letter of Transmittal is signed by the registered holder(s) of the Private
Notes tendered herewith and such registered holder(s) have not completed the
box entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" on this Letter of Transmittal or (ii) if such Private
Notes are tendered for the account of an Eligible Institution. IN ALL OTHER
CASES, ALL SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND PRIVATE NOTES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed by holders
of Private Notes (i) if certificates are to be forwarded herewith or (ii) if
tenders are to be made pursuant to the procedures for tender by book-entry
transfer or guaranteed delivery set forth in the section of the Prospectus
entitled "The Exchange Offer." Certificates for all physically tendered
Private Notes or any timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation"), as well as a properly completed and duly executed copy
of this Letter of Transmittal or facsimile hereof, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth on the cover of this Letter of Transmittal prior to
5:00 p.m., New York City time, on the Expiration Date. Holders of Private
Notes who elect to tender Private Notes and (i) whose Private Notes are not
immediately available or (ii) who cannot deliver the Private Notes, this
Letter of Transmittal or other required documents to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date, must tender their
Private Notes according to the guaranteed delivery procedures set forth in the
Prospectus. Holders may have such tender effected if: (a) such tender is made
through an Eligible Institution; (b) prior to 5:00 p.m., New York City time,
on the Expiration Date, the Exchange Agent has received from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery, setting forth the name and address of the holder of such Private
Notes, the certificate numbers(s) of such Private Notes and the principal
amount of Private Notes tendered for exchange, stating that tender is being
made thereby and guaranteeing that, within five New York Stock Exchange
trading days after the Expiration Date, this Letter of Transmittal (or a
facsimile thereof), together with the certificate(s) representing such Private
Notes (or a Book-Entry Confirmation), in proper form for transfer, and any
other documents required by this Letter of Transmittal, will be deposited by
such Eligible Institution with the Exchange Agent; and (c) a properly executed
Letter of Transmittal (or a facsimile hereof), as well as the certificate(s)
for all tendered Private Notes in proper form for transfer or a Book-Entry
Confirmation, together with any other documents required by this Letter of
Transmittal, are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
THE METHOD OF DELIVERY OF PRIVATE NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD
OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NEITHER THIS LETTER OF TRANSMITTAL NOR ANY PRIVATE NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
<PAGE>
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Private Notes, by execution of this Letter of Transmittal
(or facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Private Notes for exchange.
3. INADEQUATE SPACE. If the space provided in the box entitled "Description
of Private Notes" above is inadequate, the certificate numbers and principal
amounts of the Private Notes being tendered should be listed on a separate
signed schedule affixed hereto.
4. WITHDRAWALS. A tender of Private Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date by delivery of
written or facsimile notice of withdrawal to the Exchange Agent at the address
set forth on the cover of this Letter of Transmittal. To be effective, a
notice of withdrawal of Private Notes must (i) specify the name of the person
who tendered the Private Notes to be withdrawn (the "Depositor"), (ii)
identify the Private Notes to be withdrawn (including the certificate number
or numbers and aggregate principal amount of such Private Notes), and (iii) be
signed by the holder of Private Notes in the same manner as the original
signature on the Letter of Transmittal by which such Private Notes were
tendered (including any required signature guarantees). All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, whose determination
shall be final and binding on all parties. Any Private Notes so withdrawn will
thereafter be deemed not validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Private
Notes so withdrawn are validly retendered. Properly withdrawn Private Notes
may be retendered by following one of the procedures described in the section
of the Prospectus entitled "The Exchange Offer--Procedures for Tendering" at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
5. PARTIAL TENDERS. Tenders of Private Notes will be accepted only in
integral multiples of $1,000 principal amount. If a tender for exchange is to
be made with respect to less than the entire principal amount of any Private
Notes, fill in the principal amount of Private Notes which are tendered for
exchange in column (4) of the box entitled "Description of Private Notes," as
more fully described in the footnotes thereto. In case of a partial tender for
exchange, a new certificate, in fully registered form, for the remainder of
the principal amount of the Private Notes, will be sent to the holders of
Private Notes unless otherwise indicated in the appropriate box on this Letter
of Transmittal as promptly as practicable after the expiration or termination
of the Exchange Offer.
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL, ASSIGNMENT AND ENDORSEMENTS.
(a) The signature(s) of the holder of Private Notes on this Letter of
Transmittal must correspond with the name(s) as written on the face of the
Private Notes without alternation, enlargement or any change whatsoever.
(b) If tendered Private Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
(c) If any tendered Private Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as
many separate copies of this Letter of Transmittal and any necessary or
required documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of the Private
Notes listed and transmitted hereby, no endorsements of Private Notes or bond
powers are required. If, however, Private Notes not tendered or not accepted,
are to be issued or returned in the name of a person other than the holder of
Private Notes, then the Private Notes transmitted hereby must be endorsed or
accompanied by a properly completed bond power, in a form satisfactory to the
Company, in either case signed exactly as the name(s) of the holder of Private
Notes appear(s) on the Private Notes. Signatures on such Private Notes or bond
powers must be guaranteed by an Eligible Institution (unless signed by an
Eligible Institution).
(e) If this Letter of Transmittal or Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with this Letter of Transmittal.
<PAGE>
(f) If this Letter of Transmittal is signed by a person other than the
registered holder of Private Notes listed, the Private Notes must be endorsed
or accompanied by a properly completed bond power, in either case signed by
such registered holder exactly as the name(s) of the registered holder of
Private Notes appear(s) on the certificates. Signatures on such Private Notes
or bond powers must be guaranteed by an Eligible Institution (unless signed by
an Eligible Institution).
7. TRANSFER TAXES. Except as set forth in this Instruction 7, the Company
will pay all transfer taxes, if any, applicable to the exchange of Private
Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed
for any reason other than the exchange of the Private Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemptions
therefrom is not submitted with this Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
8. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the Exchange Notes are to
be issued, or if any Private Notes not tendered for exchange are to be issued
or sent to someone other than the holder of Private Notes or to an address
other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed. Holders of Private Notes tendering Private
Notes by book-entry transfer may request that Private Notes not accepted be
credited to such account maintained at DTC as such holder of Private Notes may
designate.
9. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), compliance with conditions, acceptance and
withdrawal of tendered Private Notes will be determined by the Company in its
sole discretion, which determination will be final and binding. The Company
reserves the absolute right to reject any and all Private Notes not properly
tendered or any Private Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Private Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
amend or modify certain of the specified conditions as described under "The
Exchange Offer--Conditions" in the Prospectus in the case of any Private Notes
tendered (except as otherwise provided in the Prospectus).
11. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES. Any tendering Holder
whose Private Notes have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address listed below for further
instructions:
The Bank of New York
101 Barclay Street
7th East Side
New York, NY 10286
Attn: Arwen Gibbons
Tel. #(212) 815-6333
Fax #(212) 571-3080
12. REQUESTS FOR INFORMATION OR ADDITIONAL COPIES. Requests for information
or for additional copies of the Prospectus and this Letter of Transmittal may
be directed to the Exchange Agent at the address or telephone number set forth
on the cover of this Letter of Transmittal.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF, IF
APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE
NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
<PAGE>
IMPORTANT TAX INFORMATION
Under current federal income tax law, a holder of Private Notes whose
tendered Private Notes are accepted for exchange may be subject to backup
withholding unless the holder provides the Company (as payor), through the
Exchange Agent, with either (i) such holder's correct taxpayer identification
number ("TIN") on Substitute Form W-9 attached hereto, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder of Private
Notes is awaiting a TIN) and that (A) the holder of Private Notes has not been
notified by the Internal Revenue Service that he or she is subject to backup
withholding as a result of a failure to report all interest or dividends or
(B) the Internal Revenue Service has notified the holder of Private Notes that
he or she is no longer subject to backup withholding; or (ii) an adequate
basis for exemption from backup withholding. If such holder of Private Notes
is an individual, the TIN is such holder's social security number. If the
Exchange Agent is not provided with the correct taxpayer identification
number, the holder of Private Notes may be subject to certain penalties
imposed by the Internal Revenue Service.
Certain holders of Private Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding
and reporting requirements. Exempt holders of Private Notes should indicate
their exempt status on Substitute Form W-9. A foreign individual may qualify
as an exempt recipient by submitting to the Exchange Agent a properly
completed Internal Revenue Service Form W-8 (which the Exchange Agent will
provide upon request) signed under penalty of perjury, attesting to the
holder's exempt status. See the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for
additional instructions.
If backup withholding applies, the Company is required to withhold 31% of
any payment made to the holder of Private Notes or other payee. Backup
withholding is not an additional federal income tax. Rather, the federal
income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of
taxes, a refund may be obtained from the Internal Revenue Service.
The holder of Private Notes is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Private Notes. If the Private Notes are held in more than one
name or are not held in the name of the actual owner, consult the enclosed
Guidelines for additional guidance regarding which number to report.
<PAGE>
INSTRUCTION TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF
12 1/2% SERIES A SENIOR NOTES DUE 2004 OF FRD ACQUISITION CO.
The undersigned hereby acknowledges receipt of the Prospectus dated ,
1996 (the "Prospectus") of FRD Acquisition Co., a Delaware corporation (the
"Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer"). Capitalized terms used but not defined herein have the meanings
ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the 12 1/2% Series A
Senior Notes due 2004 (the "Private Notes") held by you for the account of the
undersigned.
The aggregate face amount of the Private Notes held by you for the account
of the undersigned is (fill in amount):
$ of the Private Notes.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[_] To TENDER the following Private Notes held by you for the account of the
undersigned (insert principal amount of Private Notes to be tendered, if any):
$ of the Private Notes.
[_] NOT to TENDER any Private Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Private Notes held by you for
the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner of the Private Notes, including but not limited to the
representations that (i) the undersigned's principal residence is in the state
of (fill in state) , (ii) the undersigned is acquiring the Exchange Notes
in the ordinary course of business of the undersigned, (iii) the undersigned
has no arrangement or understanding with any person to participate in the
distribution of Exchange Notes, (iv) the undersigned acknowledges that any
person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended, in connection with a
secondary resale transaction of the Exchange Notes acquired by such person and
cannot rely on the position of the Staff of the Securities and Exchange
Commission set forth in certain no-action letters (See the section of the
Prospectus entitled "The Exchange Offer--Resale of the Exchange Notes"), (v)
the undersigned understands that a secondary resale transaction described in
clause (iv) above and any resales of Exchange Notes obtained by the
undersigned in exchange for the Private Notes acquired by the undersigned
directly from the Company should be covered by an effective registration
statement containing the selling securityholder information required by Item
507 or Item 508, if applicable, of Regulation S-K of the Commission, (vi) the
undersigned is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company, and (vii) if the undersigned is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Private Notes that
were acquired as a result of market-making activities or other trading
activities, it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
the undersigned will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act; (b) to agree, on behalf of the undersigned,
as set forth in the Letter of Transmittal; and (c) to take such other action
as necessary under the Prospectus or the Letter of Transmittal to effect the
valid tender of Private Notes.
<PAGE>
The purchaser status of the undersigned is (check the box that applies):
[_] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[_] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act)
[_] A non "U.S. person" (as defined in Regulation S of the Securities Act)
that purchased the Private Notes outside the United States in accordance
with Rule 904 of the Securities Act
[_] Other (describe)
-------------------------------------------------------------
- - - -------------------------------------------------------------------------------
SIGN HERE
Name of Beneficial Owner(s):
---------------------------------------------------------
- - - -------------------------------------------------------------------------------
Signature(s):
----------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Name(s) (please print):
--------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Address:
-------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Principal place of business (if different from address listed above):
-------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Telephone Number(s):
---------------------------------------------------------------
- - - -------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number(s):
-----------------------------------------
- - - -------------------------------------------------------------------------------
Date:
---------------------------------------------------------------------------
<PAGE>
PAYER'S NAME:
PART 1--PLEASE PROVIDE YOUR
TIN IN THE BOX AT RIGHT AND
CERTIFY BY SIGNING AND
DATING BELOW
------------------------
SUBSTITUTE Social Security Number
FORM W-9
DEPARTMENT OF THE TREASURY OR
INTERNAL
REVENUE
SERVICE
------------------------
Employer Identification
Number
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
PART 2--Certification Under Penalties
of Perjury, I certify that:
--------------------------------------------------------
PART 3 --
(1) The number shown on this form is Awaiting
my current taxpayer TIN [_]
identification number (or I am
waiting for a number to be issued
to me) and
(2) I am not subject to backup
withholding either because I have
not been notified by the Internal
Revenue Service (the "IRS") that
I am subject to backup
withholding as a result of a
failure to report all interest or
dividends, or the IRS has
notified me that I am no longer
subject to backup withholding.
--------------------------------------------------------
Certificate instructions--You must cross out item
(2) in Part 2 above if you have been notified by the
IRS that you are subject to backup withholding be-
cause of underreporting interest or dividends on
your tax return. However, if after being notified by
the IRS that you are subject to backup withholding
you receive another notification from the IRS stat-
ing that you are no longer subject to backup with-
holding, do not cross out item (2).
SIGNATURE __________________________ DATE ___________
NAME ________________________________________________
ADDRESS _____________________________________________
CITY _____________________________ STATE ZIP CODE
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE OFFER.
PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECK THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
PAYOR'S NAME: THE BANK OF NEW YORK
- - - --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office
or (b) I intend to mail or deliver such an application in the near future.
I understand that if I do not provide a taxpayer identification number
with sixty (60) days, 31% of all reportable payments made to me thereafter
will be withheld until I provide such a number.
---------------------------------------------------------- ------------
Signature Date
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
12 1/2% SERIES A SENIOR NOTES DUE 2004
THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY
HOLDER OF 12 1/2% SERIES A SENIOR NOTES DUE 2004 (THE "PRIVATE NOTES") OF
FRD ACQUISITION CO., A DELAWARE CORPORATION (THE "COMPANY"), WHO WISHES TO
TENDER PRIVATE NOTES PURSUANT TO THE COMPANY'S EXCHANGE OFFER, AS DEFINED
IN THE PROSPECTUS DATED , 1996 (THE "PROSPECTUS") AND
(i) WHOSE PRIVATE NOTES ARE NOT IMMEDIATELY AVAILABLE OR (ii) WHO CANNOT
DELIVER SUCH PRIVATE NOTES OR ANY OTHER DOCUMENTS REQUIRED BY THE LETTER
OF TRANSMITTAL ON OR BEFORE THE EXPIRATION DATE (AS DEFINED IN THE
PROSPECTUS) OR (iii) WHO CANNOT COMPLY WITH THE BOOK-ENTRY TRANSFER
PROCEDURE ON A TIMELY BASIS. SUCH FORM MAY BE DELIVERED BY FACSIMILE
TRANSMISSION, MAIL OR HAND DELIVERY TO THE EXCHANGE AGENT. SEE "THE
EXCHANGE OFFER--GUARANTEED DELIVERY PROCEDURES" IN THE PROSPECTUS.
FRD ACQUISITION CO.
NOTICE OF GUARANTEED DELIVERY
To: The Bank of New York, the Exchange Agent
HAND DELIVERY: MAIL/OVERNIGHT:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, NY 10286 7th East Side
New York, NY 10286
Attn: Arwen Gibbons
Tel. #(212) 815-6333
BY FACSIMILE:
Fax #(212) 571-3080
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to the Company upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Private Notes specified below pursuant to the guaranteed delivery procedures
set forth under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" in the Prospectus. By so tendering, the undersigned does hereby
make, at and as of the date hereof, the representations and warranties of a
tendering Holder of Private Notes set forth in the Letter or Transmittal. The
undersigned hereby tenders the Private Notes listed below:
<TABLE>
<CAPTION>
<S> <C>
CERTIFICATE NUMBERS PRINCIPAL AMOUNT TENDERED
(IF AVAILABLE)
</TABLE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the
death, incapacity, or dissolution of the undersigned and every obligation of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
If Private Notes will be tendered SIGN HERE
by book-entry transfer:
-------------------------------------
Signature(s)
Name of Tendering Institution:
-------------------------------------
- - - -------------------------------------
The Depository Trust Company -------------------------------------
Name(s) (Please Print)
Account No.:
------------------------- -------------------------------------
-------------------------------------
Address
-------------------------------------
Zip Code
-------------------------------------
Area Code and Telephone No.
Date: _______________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in a Recognized Signature Guarantee Medallion
Program, guarantees deposit with the Exchange Agent of the Letter of
Transmittal (or facsimile thereof), together with the Private Notes tendered
hereby in proper form for transfer, or confirmation of the book-entry transfer
of such Private Notes into the Exchange Agent's account at the Depository
Trust Company, pursuant to the procedure for book-entry transfer set forth in
the Prospectus, and any other required documents, all by 5:00 p.m., New York
City time, on the fifth New York Stock Exchange trading day following the
Expiration Date (as defined in the Prospectus).
SIGN HERE
-------------------------------------
Name of Firm
-------------------------------------
Authorized Signature
-------------------------------------
Name (Please print)
-------------------------------------
-------------------------------------
Address
-------------------------------------
Zip Code
-------------------------------------
Area Code and Telephone No.
Date: _______________________________
DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS FORM. ACTUAL SURRENDER OF
CERTIFICATES FOR PRIVATE NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL.
<PAGE>
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by
the Exchange Agent at one of its addresses set forth on the cover hereof prior
to the Expiration Date. The method of delivery of this Notice of Guaranteed
Delivery and all other required documents to the Exchange Agent is at the
election and risk of the Holder but, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange
Agent. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service, properly insured. If such delivery is by
mail, it is recommended that the Holder use properly insured, registered mail
with return receipt requested. For a full description of the guaranteed
delivery procedures, see the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures." In all cases, sufficient time should
be allowed to assure timely delivery. No Notice of Guaranteed Delivery should
be sent to the Company.
2. SIGNATURE ON THIS NOTICE OF GUARANTEED DELIVERY; GUARANTEE OF SIGNATURES.
If this Notice of Guaranteed Delivery is signed by the registered Holder(s) of
the Private Notes referred to herein, then the signature must correspond with
the name(s) as written on the face of the Private Notes without alteration,
enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered Holder(s) of any Private Notes listed, this Notice of Guaranteed
Delivery must be accompanied by a properly completed bond power signed as the
name of the registered Holder(s) appear(s) on the face of the Private Notes
without alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing, and, unless waived by the Company, evidence
satisfactory to the Company of their authority so to act must be submitted
with this Notice of Guaranteed Delivery.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
Exchange Offer or the procedure for consenting and tendering as well as
requests for assistance or for additional copies of the Prospectus, the Letter
of Transmittal and this Notice of Guaranteed Delivery, may be directed to the
Exchange Agent at the address set forth on the cover hereof or to your broker,
dealer, commercial bank or trust company.
<PAGE>
Exhibit 99.3
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
- - - -----------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- - - -----------------------------------------------
[S] [C]
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, any one of
the individuals(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4. a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust The actual
account that is owner(1)
not a legal or valid
trust under State law
5. Sole proprietorship The owner(3)
account
==================================================
- - - --------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF --
- - - --------------------------------------------------
6. A valid trust, estate, The legal entity
or pension trust (Do not furnish
the identifying
number of the
personal
representative or
trustee unless
the legal entity
itself is not
designated in the
account title.)(4)
7. Corporate The corporation
8. Religious, charitable, The organization
or educational
organization account
9. Partnership The partnership
10. Association, club, or The organization
other tax-exempt
organization
11. A broker or registered The broker or
nominee nominee
12. Account with the The public entity
Department of Agriculture
in the name of a public
entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
=====================================================
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Show individual name, but may also enter the business or "doing business
as" name. Use either individual's social security number or employer
identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you do not know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under Section 501(a), or an individual
retirement plan, or a custodial account under Section 403(b)(7).
. The United States or any agency or instrumentality thereof.
. A state, the District of Columbia, a possession of the United States, or
any political subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency or instrumentality thereof.
. A dealer in securities or commodities required to register in the U.S. or
a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under Section 584(a).
. A trust exempt from tax under Section 664 or described in Section 4947.
. An entity registered at all times during the tax year under the
Investment Company Act of 1940.
. A foreign central bank of issue.
. A middleman known in the investment community as a nominee or listed in
the most recent publication of the American Society of Corporate
Secretaries, Inc. Nominee List.
. A futures commission merchant registered with the Commodity Futures
Trading Commission.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under Section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends
under Section 852).
. Payments described in Section 6049(b)(5) to non-resident aliens.
. Payments on tax-free covenant bonds under Section 1451.
. Payments made by certain foreign organizations.
. Mortgage interest paid by you.
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous backup withholding. FILE SUBSTITUTE FORM W-9 WITH THE
PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE
OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST,
DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. If you are a
nonresident alien not subject to backup withholding, submit a completed Form
W-8, Certificate of Foreign Status.
Certain payments other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see Sections 6041, 6041(A)(a), 6042, 6044, 6045,
6049, 6050A and 6050N, and the regulations thereunder.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold
31% of certain taxable payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are sub-
ject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING .--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying certi-
fications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
(4) MISUSE OF TINS.--If the requester discloses or uses the TINs in violation
of Federal law, the requester may be subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
