<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997
REGISTRATION NO. 333-34635
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C>
FRIENDLY ICE CREAM FRIENDLY'S RESTAURANTS
CORPORATION FRANCHISE, INC.
(Exact name of registrant issuer as specified in its (Exact name of registrant guarantor as specified in its
charter) charter)
MASSACHUSETTS DELAWARE
(State of Incorporation) (State of Incorporation)
04-2053130 51-0296446
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
5812 5812
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
1855 BOSTON ROAD 1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095 WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400 (415) 543-2400
(Address, including zip code, and (Address, including zip code,
telephone number, including area code, and telephone number, including
of registrant's principal executive offices) area code, of agent for service)
</TABLE>
AARON B. PARKER
FRIENDLY ICE CREAM CORPORATION
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL A. CAMPBELL JOHN B. TEHAN
Mayer, Brown & Platt Simpson Thacher & Bartlett
190 South LaSalle Street 425 Lexington Avenue
Chicago, Illinois 60603-3441 New York, NY 10017
(312) 782-0600 (212) 455-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SENIOR NOTE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Senior Notes due 2007......................... $175,000,000 100% $175,000,000 $53,031(3)
Guarantee of % Senior Notes due 2007 by
Friendly's Restaurants Franchise, Inc........... (2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantee.
(3) Previously paid.
--------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 6, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT,
WITHOUT NOTICE. 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.
<PAGE>
$175,000,000
[LOGO]
FRIENDLY ICE CREAM CORPORATION
% SENIOR NOTES DUE 2007
----------------
Friendly Ice Cream Corporation (the "Company") is offering (the "Senior Note
Offering") its % Senior Notes due 2007 (the "Senior Notes"). Concurrently
with the Senior Note Offering, the Company is offering to the public 5,000,000
shares of the Company's Common Stock at an estimated initial public offering
price of between $19.00 and $21.00 per share (the "Common Stock Offering" and,
together with the Senior Note Offering, the "Offerings"). Contingent upon the
consummation of the Offerings, the Company will enter into the New Credit
Facility (as defined herein). The Offerings, the New Credit Facility and the
application of the estimated net proceeds therefrom are hereinafter referred to
as the "Recapitalization." Consummation of each of the Senior Note Offering and
the Common Stock Offering is contingent upon consummation of the other. See "Use
of Proceeds."
Interest on the Senior Notes will be payable semi-annually on and
of each year, commencing on , 1998. The Senior Notes will mature on
, 2007 unless previously redeemed. The Senior Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest thereon, if any, to the date of redemption. In addition, on or prior to
, 2000, the Company may redeem, at any time and from time to time, up to
$60 million of the aggregate principal amount of the Senior Notes at a
redemption price of % of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption, with the net cash
proceeds from one or more Qualified Equity Offerings (as defined herein);
provided, however, that at least $115 million of the aggregate principal amount
of the Senior Notes remains outstanding following each such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of Senior
Notes may require the Company to repurchase such holder's Senior Notes, in whole
or in part, at a repurchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of repurchase. There is
no assurance that in the event of a Change of Control the Company will have, or
will have access to, sufficient funds to repurchase Senior Notes upon tenders by
such holders. See "Description of Senior Notes."
The Senior Notes will be unsecured, senior obligations of the Company, will
rank PARI PASSU in right of payment with all other existing and future senior
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. The Senior Notes
will be effectively subordinated to all existing and certain future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility, to the extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally subordinated to all existing
and future indebtedness of any subsidiary of the Company that is not a guarantor
of the Senior Notes. The Senior Notes will be unconditionally guaranteed on an
unsecured, senior basis, by Friendly's Restaurants Franchise, Inc., the
Company's franchise subsidiary. As of June 29, 1997, on a pro forma basis after
giving effect to the Recapitalization and the Related Transactions (as defined
herein), the Company would have had a total of $293.3 million of long-term debt
and capital lease obligations outstanding, $91.4 million of which would have
been secured and none of which would have been subordinated. As of June 29,
1997, on a pro forma basis after giving effect to the Recapitalization and the
Related Transactions, non-guarantor subsidiaries of the Company would have had
no debt outstanding. The Indenture relating to the Senior Notes (the
"Indenture") will permit the Company to incur additional indebtedness, including
senior indebtedness and indebtedness of non-guarantor subsidiaries, subject to
certain limitations. See "Description of Senior Notes."
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR 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.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (A) DISCOUNT (B) COMPANY (A) (C)
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<S> <C> <C> <C>
Per Senior Note................................. % % %
Total........................................... $ $ $
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</TABLE>
(a) Plus accrued interest, if any, from the date of issuance.
(b) The Company and the Subsidiary Guarantor have agreed, jointly and severally,
to indemnify the Underwriters (as defined herein) against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."
(c) Before deducting expenses payable by the Company estimated at $ .
---------------------------
The Senior Notes are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Senior Notes will be made against payment therefor
on or about , 1997, in book-entry form through the facilities of The
Depository Trust Company.
SOCIETE GENERAL
SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES, INC.
-------------
, 1997
<PAGE>
[Inside Front Cover: the Company's "Friendly" logo, the words "Leave room for
the ice cream" and color pictures of three of the Company's products (a large
hamburger, a banana split and a Frozen dessert drink.)]
[Gatefold: the Company's "Friendly" logo and the words "Expanded Building,"
"Hand-Dipped Frozen Dessert Station," Revitalized Interior Decor," "Retail
Dessert Center," "Hearty Breakfasts," "Delicious Lunches," "Entree Salads,"
"Home Style Dinners," "Premium Half Gallons, "Great Temptations-TM- Low Fat Half
Gallons" and "Candy Shoppe Sundae Cup." Color picture of a Friendly's
restaurant, an ice cream dipping station, the interior of a revitalized
Friendly's restaurant, a grocery store ice cream freezer decorated with the
Company's logo, a truck with the Friendly's logo on its side, various frozen
dessert products (three half gallon packages, a sundae cup and two types of
sundaes), a "Kids meal" (including a sundae, drink, hamburger and fries) and
various other food presentations (chili, omelette, eggs, sandwich wraps, salad,
steak, shrimp and vegetables.)]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES,
INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE
"COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS
CONSOLIDATED SUBSIDIARIES, (II) ALL RESTAURANT NUMBERS STATED HEREIN ARE AS OF
JUNE 29, 1997, AFTER GIVING EFFECT TO THE DAVCO AGREEMENT (AS DEFINED HEREIN),
(III) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH
INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK,
PENNSYLVANIA, RHODE ISLAND AND VERMONT, (IV) THIS PROSPECTUS ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (V)
THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR
TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27,
1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY.
THE COMPANY
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein) and incurred $44.2
million of interest expense. During the same period, management estimates that
over $225 million of total revenues were from the sale of approximately 20
million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a
3
<PAGE>
sandwich and ice cream shoppe to a full-service, family-oriented restaurant with
broader menu and day-part appeal, (iii) elevated customer service levels by
recruiting more qualified managers and expanding the Company's training program,
(iv) disposed of 123 under-performing restaurants and (v) capitalized upon the
Company's strong brand name recognition by initiating the sale of Friendly's
unique line of packaged frozen desserts through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "--Recent Developments."
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. However, the high
leverage associated with the TRC Acquisition has severely impacted the liquidity
and profitability of the Company. The Company has reported net losses and had
earnings that were insufficient to cover fixed charges for each fiscal year
since the TRC Acquisition and for the six months ended June 29, 1997. It is
anticipated that upon completion of the Recapitalization and the Related
Transactions (as defined herein) approximately 9.8% of the Company's Common
Stock will be owned by the lenders under the Company's Old Credit Facility (as
defined herein) as a group. See "Risk Factors," "Selected Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Ownership of Common Stock."
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization in
order to continue to grow the Company's revenues and earnings by implementing
the following key business strategies: (i) continuously upgrade the menu and
introduce new products, (ii) revitalize and re-image existing Friendly's
restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining
experience, (v) expand the restaurant base through high-quality franchisees,
(vi) increase market share through additional retail accounts and restaurant
locations, (vii) introduce modified formats of the Friendly's concept into
non-traditional locations and (viii) extend the Friendly's brand into
international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
4
<PAGE>
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.
BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line including
freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.
MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.
STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Nut Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.
VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.
MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In
5
<PAGE>
addition, the Company minimizes turnover of both managers and line personnel
through extensive employee training and retention programs. In 1996, the
Company's turnover among its restaurant salaried management was approximately
24%, which was significantly lower than the industry average.
BUSINESS STRATEGIES
FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:
UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.7% during the first six months of 1997 as compared to the same period of 1996.
REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The Company has revitalized
approximately 631 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $855,000 in the twelve months ended
June 29, 1997. Further, the Company has initiated its FOCUS 2000 program which
includes an advanced re-imaging of restaurants and the installation of custom
designed restaurant automation systems in a majority of its restaurants. In
addition, as part of its ongoing capital spending program, the Company plans to
refurbish substantially all of its restaurants every five to six years to
further enhance customer appeal. The Company also expects to increase market
share in its existing and contiguous markets through the opening of five new
Company owned restaurants in 1997 (one of which has opened to date) and between
10 and 20 new restaurants per year through 2000.
ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.
EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.
INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 700 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations through new product introductions
and more prominent freezer displays and (iii) increasing consumer and trade
merchandising.
6
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INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These modified
formats include (i) Friendly's Cafe, a quick service concept offering frozen
desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering
freshly-scooped and packaged frozen desserts and (iii) Friendly's branded
display cases and novelty carts with packaged single-serve frozen desserts. The
first Friendly's Cafe is expected to open in early 1998. The Company supplies
frozen desserts to non-traditional locations such as colleges and universities,
sports facilities, amusement parks, secondary school systems and business
cafeterias directly or through selected vendors pursuant to multi-year license
agreements.
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") sells the Company's
frozen desserts in several chain restaurants, theaters and food courts in the
United Kingdom. In South Korea, FII participates in a licensing agreement with a
South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes. As of August 22, 1997, the licensee and its sublicensees were operating
20 ice cream shoppes, and the Company expects such parties to operate 45 ice
cream shoppes by the end of 1997. The Company selects its international markets
based on the high quality of the Company's frozen desserts relative to
locally-produced frozen desserts and the propensity of consumers in these
regions to purchase American-branded products.
The principal executive offices of the Company are located at 1855 Boston
Road, Wilbraham, Massachusetts 01095, and the telephone number is (413)
543-2400.
RECENT DEVELOPMENTS
On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo has purchased certain assets and rights in 34
existing Friendly's restaurants in this franchising region, has committed to
open an additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, has further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. DavCo will also manage under contract 14 other Friendly's
locations in this franchising region with an option to acquire these restaurants
in the future. Friendly's received approximately $8.2 million in cash for the
sale of certain non-real property assets and in payment of franchise and
development fees, and will receive (i) a royalty based on franchised restaurant
revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's
frozen desserts and other products. DavCo is required to purchase from
Friendly's all of the frozen desserts to be sold in these restaurants. See
"Business--Restaurant Operations--Franchising Program."
7
<PAGE>
THE RECAPITALIZATION
The Offerings are part of a series of related transactions to refinance all
of the indebtedness under the Company's existing credit facilities (the "Old
Credit Facility") and thereby lengthen the average maturities of the Company's
outstanding indebtedness, reduce interest expense and increase liquidity and
operating and financial flexibility. Concurrent with, and contingent upon, the
consummation of the Offerings, the Company expects to enter into a new senior
secured credit facility consisting of (i) a $105 million term loan facility (the
"Term Loan Facility"), (ii) a $55 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $15 million letter of credit facility
(the "Letter of Credit Facility" and, together with the Term Loan Facility and
the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the
New Credit Facility and the application of the estimated net proceeds therefrom
are hereinafter referred to as the "Recapitalization." In addition, subsequent
to June 29, 1997, the Company (i) has applied $8.2 million of cash received
pursuant to the DavCo Agreement toward amounts outstanding under the Old Credit
Facility and recorded $2.0 million of associated net income, (ii) has paid $10.0
million of interest on the Old Credit Facility, (iii) will record $1.7 million
of net income related to deferred interest no longer payable under the Old
Credit Facility, (iv) will record $5.8 million of stock compensation expense,
net of taxes, arising out of the issuance of certain shares to management and
the vesting of certain restricted stock previously issued to management, (v)
will write-off $455,000 of deferred financing and debt restructuring costs, net
of taxes, related to the Old Credit Facility and (vi) will apply $10.0 million
of previously restricted cash to be received from Restaurant Insurance
Corporation, its insurance subsidiary ("RIC"), in exchange for a letter of
credit, toward amounts outstanding under the Old Credit Facility (collectively,
the "Related Transactions").
Upon completion of the Recapitalization, Friendly's total available
borrowings under the New Credit Facility are expected to be $55.0 million,
excluding $3.1 million of letter of credit availability (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability), which borrowings may be used, with
certain limitations, for capital spending and general corporate purposes. After
giving effect to the Recapitalization and the Related Transactions, the
aggregate pro forma net decrease in interest expense would have been $16.0
million for 1996 and $8.1 million for the six-month period ended June 29, 1997.
See "Selected Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
</TABLE>
- ----------------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
8
<PAGE>
THE SENIOR NOTE OFFERING
<TABLE>
<S> <C>
Issuer....................... Friendly Ice Cream Corporation.
Securities Offered........... $175,000,000 aggregate principal amount of % Senior Notes
due 2007 (the "Senior Notes").
Maturity Date................ , 2007.
Interest Payment Dates....... and of each year, commencing , 1998.
Optional Redemption.......... The Senior Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the date of
redemption. In addition, on or prior to , 2000, the
Company may redeem, at any time and from time to time, up to
$60 million of the aggregate principal amount of the Senior
Notes at a redemption price of % of the principal amount
thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption, with the net cash proceeds from
one or more Qualified Equity Offerings (as defined herein);
PROVIDED, HOWEVER, that at least $115 million of the
aggregate principal amount of the Senior Notes remains
outstanding following each such redemption.
Subsidiary Guarantees........ The Senior Notes will be fully and unconditionally
guaranteed (the "Subsidiary Guarantees"), on an unsecured,
senior basis, by Friendly's Restaurants Franchise, Inc., the
Company's franchise subsidiary, and will also be guaranteed
by each new subsidiary (other than Unrestricted Subsidiaries
and Foreign Subsidiaries (as defined herein)) created or
acquired after the issue date of the Senior Notes
(collectively, the "Subsidiary Guarantors"). See
"Description of Senior Notes--Guarantees."
Ranking...................... The Senior Notes will be unsecured, senior obligations of
the Company, will rank PARI PASSU in right of payment with
all existing and future senior indebtedness of the Company
and will rank senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior
Notes will be effectively subordinated to all existing and
certain future secured indebtedness of the Company,
including indebtedness under the New Credit Facility, to the
extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally
subordinated to all existing and future indebtedness of any
subsidiary of the Company that is not a Subsidiary
Guarantor. As of June 29, 1997, on a pro forma basis after
giving effect to the Recapitalization and the Related
Transactions, the Company would have had a total of $293.3
million of long-term debt and capital lease obligations
outstanding, $91.4 million of which would have been secured
and none of which would have been subordinated. The
Subsidiary Guarantees will be unsecured, senior obligations
of the Subsidiary Guarantors. As of June 29, 1997, on a pro
forma basis after giving effect to the Recapitalization and
the Related Transactions, non-guarantor subsidiaries of the
Company would have had no long-term debt or capital lease
obligations outstanding. See "Description of Senior
Notes--Ranking."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Change of Control............ Upon the occurrence of a Change of Control (as defined
herein), each holder of Senior Notes may require the Company
to repurchase any or all outstanding Senior Notes owned by
such holder at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of repurchase. See "Description of Senior
Notes--Change of Control."
Restrictive Covenants........ The Indenture under which the Senior Notes will be issued
will contain certain covenants pertaining to the Company and
its Restricted Subsidiaries (as defined herein), including
but not limited to covenants with respect to the following
matters: (i) limitations on indebtedness and preferred
stock, (ii) limitations on restricted payments such as
dividends, repurchases of the Company's or subsidiaries'
stock, repurchases of subordinated obligations, and
investments, (iii) limitations on restrictions on
distributions from Restricted Subsidiaries, (iv) limitations
on sales of assets and of subsidiary stock, (v) limitations
on transactions with affiliates, (vi) limitations on liens,
(vii) limitations on sales of subsidiary capital stock and
(viii) limitations on mergers, consolidations and transfers
of all or substantially all assets. However, all of these
covenants are subject to a number of important
qualifications and exceptions. See "Description of Senior
Notes--Certain Covenants."
Concurrent Common Stock
Offering................... Concurrent with the Senior Note Offering, the Company is
offering to the public 5,000,000 shares of Common Stock at
an estimated initial public offering price of between $19.00
and $21.00 per share. Consummation of each of the Senior
Note Offering and the Common Stock Offering is contingent
upon consummation of the other.
Use of Proceeds.............. The Company intends to use up to approximately $362 million
of the net proceeds from the Offerings and borrowings under
the New Credit Facility to refinance indebtedness and
thereby lengthen the average maturities of the Company's
outstanding indebtedness, reduce interest expense and
increase liquidity and operating and financial flexibility.
See "Use of Proceeds."
Risk Factors................. Prospective purchasers of the Senior Notes offered hereby
should carefully consider the information set forth under
the caption "Risk Factors" and all other information set
forth in this Prospectus before making any investment in the
Senior Notes. As set forth more fully in "Risk Factors," the
risk factors associated with such an investment include,
among others, those relating to the Company's (i)
substantial leverage and stockholders' deficit; (ii) history
of losses; (iii) implementation of new business concepts and
strategies; (iv) development of a franchising program; (v)
expansion of its international operations; (vi) geographic
concentration in the Northeast; and (vii) highly competitive
business environment, as well as those relating to
restrictions imposed under the New Credit Facility, factors
affecting the food service industry generally and
circumstances potentially impacting the trading markets for,
or value of, the Senior Notes offered hereby.
</TABLE>
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
TWELVE
MONTHS
SIX MONTHS ENDED ENDED
FISCAL YEAR (A) ------------------ --------
------------------------------------------------ JUNE 30, JUNE 29, JUNE 29,
1992 1993 1994 1995 1996 1996 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant...................................... $542,859 $580,161 $589,383 $593,570 $596,675 $284,025 $294,518 $607,168
Retail, institutional and other................. 20,346 30,472 41,631 55,579 54,132 24,759 28,310 57,683
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues.................................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828 664,851
-------- -------- -------- -------- -------- -------- -------- --------
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- 347 574
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 16,606 16,401 32,774
Operating income.................................. 25,509 8,116 36,870 16,670 30,501 7,958 15,117 37,660
Interest expense, net (c)......................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238 44,241
Cumulative effect of changes in accounting
principles, net of income taxes (d)............. -- (42,248) -- -- -- -- 2,236 2,236
Net income (loss)................................. $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (8,026) $ (2,404) $ (2,150)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
OTHER DATA:
EBITDA (e)........................................ $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865 $ 71,008
Net cash provided by operating activities......... 34,047 42,877 38,381 27,790 26,163 14,896 9,625 20,892
Capital expenditures:
Cash............................................ 33,577 37,361 29,507 19,092 24,217 10,912 8,810 22,115
Non-cash (f).................................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057 5,197
-------- -------- -------- -------- -------- -------- -------- --------
Total capital expenditures...................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867 $ 27,312
Ratio of earnings to fixed charges (g)............ -- -- -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)(i).................................. $ 64,653 $ 31,865 $ 71,481
Interest expense, net (c)(i)...................... 28,163 14,157 28,226
Net income (j).................................... 2,213 2,364 7,578
Net income per share.............................. $ 0.31 $ 0.33 $ 1.06
Weighted average shares outstanding (k)........... 7,125 7,125 7,125
Ratio of EBITDA to interest expense, net (l)...... 2.3x 2.3x 2.5x
Ratio of earnings to fixed charges (g)............ 1.1x 1.0x 1.3x
Ratio of total long-term debt to EBITDA (l)....... 4.0x
RESTAURANT OPERATING DATA:
Number of restaurants (end of period) (m)......... 764 757 750 735 707 721 700 700
Average revenue per restaurant (n)................ $ 708 $ 750 $ 783 $ 797 $ 828 -- -- $ 855
Change in comparable restaurant revenues (o)...... 6.0% 5.4% 3.4% 0.9% 1.8% (0.7)% 4.7% 7.7%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 29, 1997
------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(P)
-------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................................................................... $ (19,435) $ (19,130)
Total assets.................................................................................. 373,142 358,374
Total long-term debt and capital lease obligations, excluding current maturities.............. 385,622 289,050
Total stockholders' equity (deficit).......................................................... $ (175,534) $ (76,775)
</TABLE>
11
<PAGE>
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with generally accepted accounting principles ("GAAP"). The
Company has included information concerning EBITDA in this Prospectus
because it believes that such information is used by certain investors as
one measure of an issuer's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings
from operations or other traditional indications of an issuer's operating
performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and the incremental
benefit of $473 for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED
1996 JUNE 29, 1997
------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Elimination of interest on Old Credit Facility.......................................... $ (41,827) $ (21,213)
Reduction of interest on capital lease obligations...................................... (873) (437)
Interest on Revolving Credit Facility................................................... 237 301
Interest on Letter of Credit Facility................................................... 268 134
Interest on Term Loan Facility.......................................................... 8,279 4,165
Interest on Senior Notes................................................................ 17,938 8,969
------------- -------------
Net decrease in Interest expense, net................................................. $ (15,978) $ (8,081)
------------- -------------
------------- -------------
</TABLE>
In calculating pro forma Interest expense, net, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively,
and 7.72%, 2.25%, 7.93% and 10.25% for the six months ended June 29, 1997,
respectively.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes, of $9,427, $4,768 and
$9,449 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively, as a result of the Recapitalization and
the Related Transactions, and (ii) the benefit, net of income taxes, related
to the change in accounting for pensions described in (h) above of $558, $0
and $279 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the Common Stock
Offering under the Management Stock Plan and the return of 375 net shares to
the Company in connection with the Recapitalization. Actual weighted average
shares outstanding were 2,414, 2,473 and 2,473 for 1996, the six months
ended June 29, 1997 and the twelve months ended June 29, 1997. See
"Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial
Statements.
(l) Effective December 30, 1996, the Company changed the salary and expense
actuarial assumptions used to calculate pension expense. Had such changes
been effective as of July 1, 1996, pro forma EBITDA, the Ratio of EBITDA to
interest expense, net and the Ratio of total long-term debt to EBITDA would
have been $71,934, 2.5x and 4.0x, respectively for the twelve months ended
June 29, 1997.
(m) The number at June 29, 1997 includes the 34 restaurants acquired by DavCo
pursuant to the DavCo Agreement. See "Recent Developments."
(n) Average revenue per restaurant represents restaurant revenues divided by the
weighted average number of restaurants open during such period. Fiscal 1993
has been adjusted to conform to a 52-week year. The Company does not
consider six-month results meaningful for this data.
(o) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.
(p) Adjusted to give effect to the Recapitalization and the Related
Transactions.
12
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT
The Company is highly leveraged. At June 29, 1997, on a pro forma basis
after giving effect to the Recapitalization and the Related Transactions, the
Company's total consolidated long-term debt and capital lease obligations
(including current maturities) would have been $293.3 million and the Company's
total consolidated stockholders' deficit would have been $76.8 million. Upon
completion of the Recapitalization, the Company's total available borrowings
under the New Credit Facility are estimated to be $55.0 million, excluding $3.1
million of availability under the Letter of Credit Facility (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability). Additional borrowings may, subject to
certain limitations, be used for capital expenditures and general corporate
purposes, thereby increasing the Company's leverage. The Company's ability to
pay principal on the Senior Notes when due or to repurchase the Senior Notes
upon a Change of Control will be dependent upon the Company's ability to
generate cash from operations sufficient for such purposes or its ability to
refinance the Senior Notes. In addition, under the New Credit Facility, in the
event of circumstances which are similar to a Change of Control, repayment of
borrowings under the New Credit Facility will be subject to acceleration. See
"Description of New Credit Facility."
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and, because borrowings under the New Credit Facility in part will bear interest
at floating rates, the Company could be adversely affected by any increase in
prevailing rates, (iii) the New Credit Facility and the Indenture relating to
the Senior Notes will impose significant financial and operating restrictions on
the Company and its subsidiaries which, if violated, could permit the Company's
creditors to accelerate payments thereunder or foreclose upon the collateral
securing the New Credit Facility, (iv) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (v) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions. See "Use of
Proceeds," "Business--Competition," "Description of New Credit Facility" and
"Description of Senior Notes."
HISTORY OF LOSSES
The Company has reported net losses of $13.3 million, $61.4 million, $3.9
million, $58.7 million, $7.8 million and $2.4 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company will be profitable in the future, or that,
if profitability is achieved, it will be sustained. The Company's earnings were
insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8
million, $25.3 million, $13.7 million and $7.9 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company's earnings will be sufficient to cover
fixed charges in the future. See "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto.
13
<PAGE>
RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST
The New Credit Facility will impose significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial ratios. These
requirements may limit the ability of the Company to meet its obligations,
including its obligations with respect to the Senior Notes. The ability of the
Company to comply with the covenants in the New Credit Facility and the Senior
Notes may be affected by events beyond the control of the Company. Failure to
comply with any of these covenants could result in a default under the New
Credit Facility and the Senior Notes, and such default could result in
acceleration thereof. The New Credit Facility will restrict the Company's
ability to repurchase, directly or indirectly, the Senior Notes. In addition,
under the New Credit Facility, in the event of circumstances which are similar
to a Change of Control, repayment of borrowings under the New Credit Facility
will be subject to acceleration, which could further restrict the Company's
ability to repurchase the Senior Notes. There can be no assurance that the
Company will be permitted or have funds sufficient to repurchase the Senior
Notes when it would otherwise be required to offer to do so. It is expected that
the obligations of the Company under the New Credit Facility will be (i) secured
by a first priority security interest in substantially all material assets of
the Company and all other assets owned or hereafter acquired and (ii)
guaranteed, on a senior secured basis, by the Friendly's Restaurants Franchise,
Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or
acquired after consummation of the Recapitalization. The Senior Notes will be
effectively subordinated to all existing and certain future secured indebtedness
of the Company, including indebtedness under the New Credit Facility, to the
extent of the value of the assets securing such secured indebtedness. The Senior
Notes will rank PARI PASSU to any future senior indebtedness of the Company and
be structurally subordinated to all existing and future indebtedness of any
subsidiary of the Company that is not a guarantor of the Senior Notes. Lenders
under the New Credit Facility will also have a prior claim on the assets of
subsidiaries of the Company that are guarantors under the New Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of New Credit
Facility" and "Description of Senior Notes."
RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES
The Company has recently initiated several new business concepts and
strategies, including the remodeling and re-imaging of selected restaurants, the
upgrading of its menu and the development of modified restaurant formats in
non-traditional locations. There can be no assurance that the Company will
continue to develop such concepts and strategies, that such concepts and
strategies will be successful or profitable or that such concepts and strategies
will fill the strategic roles intended for them by the Company. See
"Business--Business Strategies."
RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM
The success of the Company's business strategy will also depend, in part, on
the development and implementation of a franchising program. The Company does
not have significant experience in franchising restaurants and there can be no
assurance that the Company will continue to successfully locate and attract
suitable franchisees or that such franchisees will have the business abilities
or sufficient access to capital to open restaurants or will operate restaurants
in a manner consistent with the Company's concept and standards or in compliance
with franchise agreements. The success of the Company's franchising program will
also be dependent upon certain other factors, certain of which are not within
the control of the Company or its franchisees, including the availability of
suitable sites on acceptable lease or purchase terms, permitting and regulatory
compliance and general economic and business conditions. See "Prospectus
Summary--Recent Developments" and "Business--Restaurant Operations--Franchising
Program."
14
<PAGE>
RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS
The Company has operations in the United Kingdom, South Korea and the
People's Republic of China ("China"). These international operations are subject
to various risks, including changing political and economic conditions, currency
fluctuations, trade barriers, trademark rights, adverse tax consequences, import
tariffs, customs and duties and government regulations. Government regulations,
relating to, among other things, the preparation and sale of food, building and
zoning requirements, wages, working conditions and the Company's relationship
with its employees, may vary widely from those in the United States. There can
be no assurance that the Company will be successful in maintaining or expanding
its international operations.
GEOGRAPHIC CONCENTRATION
Approximately 80% of the Company's restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors unique to this geographic region may adversely affect the Company
more than certain of its competitors which are more geographically diverse.
RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST
After giving effect to the Recapitalization and the Related Transactions,
approximately 10.3% and 2.1% of the Company's Common Stock would have been
owned, as of June 29, 1997, by Donald N. Smith and The Equitable Life Assurance
Society of the United States (the "Equitable"), respectively. These stockholders
indirectly own 33.2% and 28.1%, respectively, of the general partner of Perkins
Family Restaurants, L.P. ("PFR"), which, through Perkins Restaurants Operating
Company, L.P. ("Perkins"), owns and franchises family-style restaurants. Mr.
Smith, the Company's Chairman, Chief Executive Officer and President, is an
officer of the general partner of PFR. In addition, three of the directors of
the general partner of PFR serve as directors of the Company. In the ordinary
course of business, the Company enters into transactions with Perkins. See
"Certain Transactions."
After giving effect to the Recapitalization and the Related Transactions,
the directors and executive officers of the Company would have owned
approximately 13.1% of the Common Stock as of June 29, 1997. Circumstances could
arise in which the interests of such stockholders could be in conflict with the
interests of the other stockholders of the Company and the holders of the Senior
Notes. In addition, Mr. Smith serves as Chairman, Chief Executive Officer and
President of the Company and as Chairman and Chief Executive Officer of Perkins
and, consequently, devotes a portion of his time to the affairs of each Company
and may be required to limit his involvement in those areas, if any, where the
interests of the Company conflict with those of Perkins. Mr. Smith does not have
an employment agreement with the Company nor is he contractually prohibited from
engaging in other business ventures in the future, any of which could compete
with the Company or its subsidiaries. See "Ownership of Common Stock."
DEPENDENCE ON SENIOR MANAGEMENT
The Company's business is managed, and its business strategies formulated,
by a relatively small number of key executive officers and other personnel,
certain of whom have joined the Company since Mr. Smith's arrival. The loss of
these key management persons, including Mr. Smith, could have a material adverse
effect on the Company. See "Management."
HIGHLY COMPETITIVE BUSINESS ENVIRONMENT
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic
15
<PAGE>
conditions affecting consumer spending habits, many of which are beyond the
Company's control. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service, attractiveness
of facilities, advertising, name brand awareness and image and restaurant
location. Each of the Company's restaurants competes directly or indirectly with
locally-owned restaurants as well as restaurants with national or regional
images, and to a limited extent, restaurants operated by its franchisees. A
number of the Company's significant competitors are larger or more diversified
and have substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company does not hedge its
positions in any of these commodities as a matter of policy, it may
opportunistically purchase some of these items in advance of a specific need. As
a result, the Company is subject to the risk of substantial and sudden price
increases, shortages or interruptions in supply of such items, which could have
a material adverse effect on the Company.
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased costs of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
food service industry in general and the results of operations and financial
condition of the Company.
REGULATION
The restaurant and food distribution industries are subject to numerous
Federal, state and local government regulations, including those relating to the
preparation and sale of food and building and zoning requirements. Also, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees could adversely affect the Company. In September 1997, the second
phase of an increase in the minimum wage was implemented in accordance with the
Federal Fair Labor Standards Act of 1996, which could adversely affect the
Company. See "Business--Government Regulation."
FRAUDULENT CONVEYANCE
The incurrence of indebtedness and other obligations in connection with the
Recapitalization, including the issuance of the Senior Notes, may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Generally, if a court or other trier of fact were to
find that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent
by reason of such incurrence, (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small capital
or
16
<PAGE>
(iv) intended to incur or believed it would incur debts beyond its ability to
pay such debts as they mature, such court, subject to applicable statutes of
limitations, could determine to invalidate, in whole or in part, such
indebtedness and obligations as fraudulent conveyances or subordinate such
indebtedness and obligations to existing or future creditors of the Company. The
definition or measure of such matters as fair consideration, reasonably
equivalent value, insolvency or unreasonably small capital for purposes of the
foregoing will vary depending on the law of the jurisdiction which is being
applied. Generally, however, the Company would be considered insolvent if, at
the time it incurred indebtedness, either the fair market value (or fair
saleable value) of its assets was less than the amount required to pay its total
debts and liabilities (including contingent liabilities) as they became absolute
and matured or it had incurred debt beyond its ability to repay such debt as it
matures.
The proceeds of the Recapitalization will be used primarily to repay debt of
the Company. There can be no assurance as to what standard a court would apply
in making determinations under bankruptcy or fraudulent transfer laws or whether
a court would agree with any Company assessment that the Company is receiving
fair consideration or reasonably equivalent value in return for incurring the
indebtedness and other obligations in connection with the Recapitalization or
that, after giving effect to indebtedness incurred in connection with the
Recapitalization and the use of the proceeds of such indebtedness, it will have
sufficient capital for the businesses in which it is engaged. In addition, as of
June 29, 1997 on a pro forma basis giving effect to the Recapitalization and the
Related Transactions as if they had occurred on such date, the Company would
have had a negative net worth as determined pursuant to generally accepted
accounting principles.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Senior Note Offering, there has been no public market for the
Senior Notes. The Company has no present plans to list the Senior Notes on any
national securities exchange or to apply for quotation thereof on the Nasdaq
National Market. The Company has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Senior Notes as permitted
by applicable laws and regulations. However, the Underwriters are not obligated
to do so, and any such market-making may be discontinued at any time without
notice at the sole discretion of the Underwriters. Accordingly, no assurance can
be given that any market for the Senior Notes will develop, or, if any such
market develops, as to the liquidity of such market.
17
<PAGE>
USE OF PROCEEDS
The Company is implementing the Recapitalization to refinance all of the
indebtedness under the Old Credit Facility and thereby lengthen the average
maturities of the Company's outstanding indebtedness, reduce interest expense
and increase liquidity and operating and financial flexibility. Concurrent with,
and contingent upon, the consummation of the Offerings, the Company will enter
into the New Credit Facility.
As of June 29, 1997, borrowings under the Old Credit Facility accrued
interest at a rate of 11.0% per annum, and such borrowings will become due in
May 1998, unless repaid or previously extended for an additional year pursuant
to the terms of the Old Credit Facility. Borrowings under the New Credit
Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the
Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per
annum for drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46%
or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See
"Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
</TABLE>
- ------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
18
<PAGE>
CAPITALIZATION
The following table sets forth the balance of Cash and cash equivalents,
Current maturities of long-term debt and capital lease obligations and
capitalization of the Company (i) as of June 29, 1997 and (ii) as of June 29,
1997, as adjusted to give effect to the Recapitalization and the Related
Transactions. This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 29, 1997
------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 16,899 $ 7,466(a)
----------- -----------
----------- -----------
Current maturities of long-term debt and capital lease obligations..................... $ 7,956 $ 4,201
----------- -----------
----------- -----------
Long-term debt
Old Credit Facility.................................................................. $ 371,327 $ --(b)
Revolving Credit Facility............................................................ -- --(c)
Term Loan Facility................................................................... -- 105,000
Senior Notes......................................................................... -- 175,000
Capital lease obligations and other.................................................. 14,295 9,050
----------- -----------
Total long-term debt................................................................... 385,622 289,050
----------- -----------
Stockholders' equity (d)
Preferred Stock, $0.01 par value, 1,000,000 shares authorized and none outstanding,
as adjusted........................................................................ -- --
Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding;
50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e)
Paid-in capital...................................................................... 46,905 148,214(e)
Unrealized gain on investment securities............................................. 28 28
Accumulated deficit.................................................................. (222,563) (225,159)(f)
Cumulative translation adjustment.................................................... 71 71
----------- -----------
Total stockholders' equity (deficit)................................................... (175,534) (76,775)
----------- -----------
Total capitalization................................................................... $ 210,088 $ 212,275
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Gives effect to (i) the $9,983 interest payment made on July 1, 1997 under
the Old Credit Facility, (ii) the receipt of $11,889 of previously
restricted cash from the Company's insurance subsidiary released in exchange
for a letter of credit, net of $10,000 applied to the Old Credit Facility
and (iii) $1,339 required as a source of funds for the Recapitalization.
(b) Gives effect to the application of (i) $353,089 of the gross proceeds from
the Recapitalization, (ii) $10,000 of restricted cash released from the
Company's insurance subsidiary and (iii) $8,238 received by the Company
pursuant to the DavCo Agreement on July 15, 1997. See "Use of Proceeds."
(c) As part of the Recapitalization, the Company will have a $55,000 Revolving
Credit Facility which is expected to be undrawn at closing and $3,111
available under the Letter of Credit Facility. These facilities are expected
to be drawn in part, from time to time, to finance the Company's working
capital and other general corporate requirements.
(d) Historical share information includes Class A common shares and Class B
common shares. In connection with the Recapitalization, the Class A common
shares and Class B common shares will be converted into Common Stock.
(e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common
Stock Offering, (ii) $8,427 of expenses associated with the Common Stock
Offering, (iii) the 924-for-1 stock split which will occur prior to the
Common Stock Offering and (iv) $9,782 of stock compensation expense arising
out of the issuance of certain shares to management and the vesting of
certain restricted stock previously issued to certain members of management
in connection with the Recapitalization. See Note 17 of Notes to
Consolidated Financial Statements.
(f) Gives effect to (i) $1,953 of net income associated with the DavCo
Agreement, (ii) $1,677 of net income related to deferred interest no longer
payable under the Old Credit Facility, (iii) $5,771 of stock compensation
expense, net of taxes, related to the issuance and vesting of the shares of
Common Stock discussed in (e) above and (iv) the write-off of $455 of
deferred financing and debt restructuring costs, net of taxes, related to
the Old Credit Facility.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of the Company and its consolidated subsidiaries for each of the
periods presented below. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The selected consolidated historical financial
information for each of 1994, 1995 and 1996, and as of December 31, 1995 and
December 29, 1996, has been derived from the Company's audited Consolidated
Financial Statements which are included elsewhere herein. The selected
consolidated historical financial information as of and for the six months ended
June 30, 1996 and June 29, 1997 and for the latest twelve months ended June 29,
1997 has been derived from the Company's unaudited consolidated financial
statements which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly, in
accordance with GAAP, the information contained therein. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the basis of the
presentation and significant accounting policies of the consolidated historical
financial information set forth below. Results for interim periods are not
necessarily indicative of full fiscal year results. No stock dividends were
declared or paid for any period presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR (A) --------------------
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 284,025 $ 294,518
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 24,759 28,310
--------- --------- --------- --------- --------- --------- ---------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828
--------- --------- --------- --------- --------- --------- ---------
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 89,696 92,186
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 102,674 104,898
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 70,620 71,284
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 21,230 22,595
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- 347
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 16,606 16,401
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 7,958 15,117
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Equity in net loss of joint venture................. -- -- -- -- -- -- 743
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (14,180) (7,864)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 6,154 3,224
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- -- 2,236
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (8,026) $ (2,404)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865
Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 14,896 9,625
Capital expenditures:
Cash.............................................. 33,577 37,361 29,507 19,092 24,217 10,912 8,810
Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057
--------- --------- --------- --------- --------- --------- ---------
Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867
Ratio of earnings to fixed charges (g).............. -- -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)(l).................................... $ 64,653 $ 31,865
Interest expense, net (c)(i)........................ 28,163 14,157
Net income (j)...................................... 2,213 2,364
Net income per share................................ $ 0.31 $ 0.33
Weighted average shares outstanding (k)............. 7,125 7,125
Ratio of EBITDA to interest expense, net (l)........ 2.3x 2.3x
Ratio of earnings to fixed charges (g).............. 1.1x 1.0x
Ratio of total long-term debt to EBITDA (l).........
<CAPTION>
TWELVE
MONTHS
ENDED
---------
JUNE 29,
1997
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
<S> <C>
Revenues:
Restaurant........................................ $ 607,168
Retail, institutional and other................... 57,683
---------
Total revenues...................................... 664,851
---------
Cost of sales..................................... 194,446
Labor and benefits................................ 211,484
Operating expenses................................ 143,827
General and administrative expenses............... 44,086
Non-cash write-downs (b).......................... 574
Depreciation and amortization..................... 32,774
---------
Operating income.................................... 37,660
Interest expense, net (c)........................... 44,241
Equity in net loss of joint venture................. 743
---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (7,324)
(Provision for) benefit from income taxes........... 2,938
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... 2,236
---------
Net income (loss)................................... $ (2,150)
---------
---------
OTHER DATA:
EBITDA (e).......................................... $ 71,008
Net cash provided by operating activities........... 20,892
Capital expenditures:
Cash.............................................. 22,115
Non-cash (f)...................................... 5,197
---------
Total capital expenditures.......................... $ 27,312
Ratio of earnings to fixed charges (g).............. --
PRO FORMA DATA:
EBITDA (e)(h)(l).................................... $ 71,481
Interest expense, net (c)(i)........................ 28,226
Net income (j)...................................... 7,578
Net income per share................................ $ 1.06
Weighted average shares outstanding (k)............. 7,125
Ratio of EBITDA to interest expense, net (l)........ 2.5x
Ratio of earnings to fixed charges (g).............. 1.3x
Ratio of total long-term debt to EBITDA (l)......... 4.0x
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (24,394) $ (19,435)
Total assets............................... 380,087 365,330 374,669 370,292 360,126 371,519 373,142
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 358,102 363,028 369,549 389,144 385,977 390,083 385,622
Total stockholders' equity (deficit)....... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(176,019) $(175,534)
<CAPTION>
AS
ADJUSTED(M)
------------
JUNE 29,
1997
------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (19,130)
Total assets............................... 358,374
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 289,050
Total stockholders' equity (deficit)....... $ (76,775)
</TABLE>
- ------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with GAAP. The Company has included information concerning EBITDA
in this Prospectus because it believes that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional indications
of an issuer's operating performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and the incremental
benefit of $473 for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes of $9,427, $4,768 and
$9,449 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively, as a result of the Recapitalization and
the Related Transactions and (ii) the benefit, net of income taxes, related
to the change in accounting for pensions described in (h) above of $558, $0
and $279 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the Common Stock
Offering under the Management Stock Plan and the return of 375 net shares to
the Company in connection with the Recapitalization. Actual weighted average
shares outstanding were 2,414, 2,473 and 2,473 for 1996, the six months
ended June 29, 1997 and the twelve months ended June 29, 1997. See
"Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial
Statements.
(l) Effective December 30, 1996, the Company changed the salary and expense
actuarial assumptions used to calculate pension expense. Had such changes
been effective as of July 1, 1996, pro forma EBITDA, the Ratio of EBITDA to
interest expense, net and the Ratio of total long-term debt to EBITDA would
have been $71,934, 2.5x and 4.0x, respectively for the twelve months ended
June 29, 1997.
(m) Adjusted to give effect to the Recapitalization and the Related
Transactions.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
Friendly's owns and operates 666 restaurants, franchises 34 restaurants and
distributes a full line of frozen desserts through more than 5,000 supermarkets
and other retail locations in 15 states. The Company was publicly held from 1968
until January 1979 at which time it was acquired by Hershey. Under Hershey's
ownership, the number of Company restaurants increased from 601 to 849. Hershey
subsequently sold the Company in September 1988 to TRC in a highly-leveraged
transaction.
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 22 new
restaurants have been opened while 170 under-performing restaurants have been
closed.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of June 29, 1997, the Company
had a stockholders' deficit of $175.5 million. Cumulative interest expense of
$373.3 million since the TRC Acquisition has significantly contributed to the
deficit. The Company's net loss in 1996 of $7.8 million included $44.1 million
of interest expense.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 148 restaurants
(net of restaurants opened) since the beginning of 1989, Restaurant revenues
have increased 9.0% from $557.3 million in 1989 to $607.2 million in the twelve-
months ended June 29, 1997, while average revenue per restaurant has increased
28.6% from $665,000 to $855,000 during the same period. Retail, institutional
and other revenues have also increased from $1.4 million in 1989 to $57.7
million in the twelve months ended June 29, 1997. In addition, EBITDA has
increased 49.8% from $47.4 million in 1989 to $71.0 million in the twelve-month
period ended June 29, 1997, while operating income has increased from $4.1
million to $37.7 million over the same period. As a result of the positive
impact of the Company's revitalization program, the closing of under-performing
restaurants and the growth of the retail, institutional and other businesses,
period to period comparisons may not be meaningful.
The Company's revenues are derived primarily from the operation of
full-service restaurants and from the distribution and sale of frozen desserts
through retail locations. In addition, the Company derives a small amount of
revenue from the sale of frozen desserts in the United Kingdom and South Korea
under various distribution and licensing arrangements. Furthermore, the Company
is a 50% partner in a joint venture in Shanghai, China which has manufactured
and distributed frozen desserts on a limited basis. The joint venture is
currently seeking to establish additional distribution for its products in
China.
On July 14, 1997, the Company entered into the DavCo Agreement pursuant to
which the Company received $8.2 million in cash for the sale of certain non-real
property assets and in payment of franchise and development fees, and will
receive (i) a royalty based on franchised restaurant revenues and (ii) revenues
and earnings from the sale to DavCo of Friendly's frozen desserts and other
products. The Company anticipates receiving similar fees and royalty streams in
connection with future franchising arrangements. See "Prospectus Summary--Recent
Developments."
Cost of sales includes direct food costs, the Company's costs to manufacture
frozen desserts and the Company's costs to distribute frozen desserts and other
food products to its restaurants and its retail, institutional and other
customers. Retail, institutional and other revenues have higher food costs as a
percentage of sales than Restaurant revenues. Labor and benefits include labor
and related payroll
22
<PAGE>
expenses for restaurant employees. Operating expenses include all other
restaurant-level expenses including supplies, utilities, maintenance, insurance
and occupancy-related expenses, the costs associated with Retail, institutional
and other revenues including salaries for sales personnel and other selling
expenses and advertising costs.
General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Interest expense, net is net of capitalized interest and interest income.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of Total
revenues are set forth below.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
------------------------------ -------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
Revenues:
Restaurant.................. 93.4% 91.4% 91.7% 92.0% 91.2%
Retail, institutional and
other..................... 6.6 8.6 8.3 8.0 8.8
-------- -------- -------- -------- --------
Total revenues................ 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- --------
Less:
Cost of sales............... 28.5 29.7 29.5 29.0 28.5
Labor and benefits.......... 33.6 33.1 32.2 33.3 32.5
Operating expenses.......... 20.9 22.2 22.0 22.9 22.1
General and administrative
expenses.................. 6.1 6.2 6.5 6.9 7.0
Non-cash write-downs........ 0.0 1.1 0.0 0.0 0.1
Depreciation and
amortization.............. 5.1 5.1 5.1 5.3 5.1
-------- -------- -------- -------- --------
Operating income.............. 5.8 2.6 4.7 2.6 4.7
Interest expense, net......... 7.2 6.5 6.8 7.2 6.9
Equity in net loss of joint
venture..................... 0.0 0.0 0.0 0.0 0.2
-------- -------- -------- -------- --------
Loss before benefit from
(provision for) income taxes
and cumulative effect of
change in accounting
principle................... (1.4) (3.9) (2.1) (4.6) (2.4)
Benefit from (provision for)
income taxes................ 0.8 (5.1) 0.9 2.0 1.0
Cumulative effect of change in
accounting principle, net of
income tax expense.......... 0.0 0.0 0.0 0.0 0.7
-------- -------- -------- -------- --------
Net income (loss)............. (0.6)% (9.0)% (1.2)% (2.6)% (0.7)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
SIX MONTHS ENDED JUNE 29, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES--Total revenues increased $14.0 million, or 4.5%, to $322.8 million
for the six months ended June 29, 1997 from $308.8 million for the six months
ended June 30, 1996. Restaurant revenues increased $10.5 million, or 3.7%, to
$294.5 million for the six months ended June 29, 1997 from $284.0 million for
the six months ended June 30, 1996. Comparable restaurant revenues increased
4.7%. The increase in Restaurant revenues and comparable restaurant revenues was
due to the introduction of higher-priced lunch and dinner entrees, selected menu
price increases, a shift in sales mix to higher-priced items, the opening of one
new restaurant, the revitalization of 21 restaurants, building expansions at
four restaurants and a milder winter in the 1997 period, which allowed for
favorable traffic comparisons. The increase was partially offset by the closing
of 22 under-performing restaurants. Retail, institutional and other revenues
increased by $3.5 million, or 14.1%, to $28.3 million for the six months ended
June 29, 1997 from $24.8
23
<PAGE>
million for the six months ended June 30, 1996. The increase was primarily due
to a more effective sales promotion program.
COST OF SALES--Cost of sales increased $2.5 million, or 2.8%, to $92.2
million for the six months ended June 29, 1997 from $89.7 million for the six
months ended June 30, 1996. Cost of sales as a percentage of Total revenues
decreased to 28.5% in the 1997 period from 29.0% in the 1996 period. The
decrease was due to a 0.8% reduction in food costs at the restaurant level
despite higher guest check averages because of reduced promotional discounts.
The decrease was offset by a 0.3% increase in food costs at the retail and
institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.2 million, or 2.1%, to
$104.9 million for the six months ended June 29, 1997 from $102.7 million for
the six months ended June 30, 1996. Labor and benefits as a percentage of Total
revenues decreased to 32.5% in the 1997 period from 33.3% in the 1996 period.
The decrease was due to an increase in Retail, institutional and other revenues
as a percent of Total revenues as these revenues have no associated labor and
benefits costs, and to an improvement in labor utilization and lower workers'
compensation insurance and pension costs.
OPERATING EXPENSES--Operating expenses increased $0.7 million, or 1.0%, to
$71.3 million for the six months ended June 29, 1997 from $70.6 million for the
six months ended June 30, 1996. Operating expenses as a percentage of Total
revenues decreased to 22.1% in the 1997 period from 22.9% in the 1996 period.
The decrease was due to reduced costs for snow removal in the 1997 period and
the allocation of fixed costs over higher Total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $1.4 million, or 6.6%, to $22.6 million for the six months ended June
29, 1997 from $21.2 million for the six months ended June 30, 1996. General and
administrative expenses as a percentage of Total revenues increased to 7.0% in
the 1997 period from 6.9% in the 1996 period. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in pension costs and the elimination of field
management positions associated with the closing of 22 restaurants since the end
of the 1996 period.
EBITDA--As a result of the above, EBITDA increased $7.3 million, or 29.7%,
to $31.9 million for the six months ended June 29, 1997 from $24.6 million for
the six months ended June 30, 1996. EBITDA as a percentage of Total revenues
increased to 9.9% in the 1997 period from 7.9% in the 1996 period.
NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.3 million for the six
months ended June 29, 1997; there were no such write-downs during the six months
ended June 30, 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.2
million, or 1.2%, to $16.4 million for the six months ended June 29, 1997 from
$16.6 million for the six months ended June 30, 1996. Depreciation and
amortization as a percentage of Total revenues decreased to 5.1% in the 1997
period from 5.3% in the 1996 period. The decrease was due to the closing of 22
units since the end of the 1996 period, partially offset by higher amortization
of debt restructuring costs incurred as a result of a debt restructuring which
was effective January 1, 1996.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $0.1 million, or 0.5%, to $22.2 million for the
six months ended June 29, 1997 from $22.1 million for the six months ended June
30, 1996. The increase in interest expense was due to higher average borrowings
under the revolving portion of the Company's Old Credit Facility in the 1997
period.
EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $0.7 million for the six month period ended June 29, 1997
reflected the Company's 50% share of the China joint venture's net loss for such
period. Sales for the joint venture were minimal during the 1997 period.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes
decreased $3.0 million to a benefit of $3.2 million for the six months ended
June 29, 1997 from a benefit of $6.2 million for the six months ended June 30,
1996. The decrease was due to a decrease in the loss before taxes.
24
<PAGE>
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET INCOME (LOSS)--Net loss decreased by $5.6 million, or 70.0%, to a net
loss of $2.4 million for the six months ended June 29, 1997 from a net loss of
$8.0 million for the six months ended June 30, 1996.
1996 COMPARED TO 1995
REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million
in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million,
or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable
restaurant revenues increased by 1.8%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of higher-priced
lunch and dinner entrees in the fourth quarter of 1996, selected menu price
increases, a shift in sales mix to higher priced items, the opening of three new
restaurants, the revitalization of 17 restaurants and building expansions at
four existing locations. The increase was partially offset by the closing of 31
restaurants in 1996. Retail, institutional and other revenues declined by $1.5
million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The
decrease was primarily attributable to the effects of a reduction in promotional
activities.
COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0
million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of
Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was
due to a 0.2% reduction in food costs at the restaurant level as a result of
reduced waste in food preparation.
LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to
$209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a
percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The
decrease was due to a 1.1% reduction in labor and benefits as a percentage of
Restaurant revenues as a result of an improvement in labor utilization and lower
group and workers' compensation insurance costs. The decrease was offset by a
0.3% reduction in Retail, institutional and other revenues as a percentage of
Total revenues as these revenues have no associated labor and benefits.
OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to
$143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a
percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The
decrease was due to the allocation of fixed costs over higher total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.
EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995.
NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition of $0.2 million in 1996
and $4.0 million in 1995. In 1995, the Company also incurred a non-cash
write-down of $3.3 million relating to costs resulting from a postponed debt
refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5
and 6 of Notes to Consolidated Financial Statements.
25
<PAGE>
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of Total revenues was 5.1% for
both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the anticipated deconsolidation from TRC. As a result, the deferred tax
asset of approximately $19 million related to the NOLs utilized by TRC as of
December 31, 1995 was written off in 1995. Additionally, as a result of the
anticipated change in ownership and Section 382 limitation, a valuation
allowance in 1995 was placed on all Federal NOL carryforwards generated through
December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements and
"Net Operating Loss Carryforwards."
NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9
million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of
$58.7 million in 1995.
1995 COMPARED TO 1994
REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price increases, a shift in sales mix to higher-priced items, the
opening of one new restaurant, the revitalization of 13 restaurants and building
expansions at seven existing restaurants. The increase was partially offset by
the closing of 16 restaurants in 1995. Retail, institutional and other revenues
increased $14.0 million, or 33.7%, to $55.6 million in 1995 from $41.6 million
in 1994. This increase was due to a successful promotional campaign in existing
markets and the introduction of frozen yogurt into these markets.
COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6
million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of
Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was
due to a 0.8% rise in food costs at the restaurant level as a result of a sales
mix shift to higher quality items and increased waste in food preparation and to
a 0.4% rise in food costs at the retail and institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to
$214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a
percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994.
Approximately 0.7% of the decrease was due to an increase in Retail,
institutional and other revenues as a percent of Total revenues as these
revenues have no associated labor and benefits. This decrease was partially
offset by a 0.2% rise in labor and benefits as a percentage of Restaurant
revenue due to several large group medical claims and the introduction of a
restaurant leadership team concept which placed more focus on customer service
by increasing the hours of supervisory restaurant employees.
OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to
$143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a
percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The
increase was due to the cost of sponsoring a Ladies Professional Golf
Association golf tournament ("The Friendly's Classic") for the first time, an
increase in restaurant advertising expenses, higher restaurant renovation
expenses, an increase in credit card fees as a result of
26
<PAGE>
greater use of credit cards by consumers and an increase in selling expenses
associated with the growth in the retail and institutional business.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in
1994. General and administrative expenses as a percentage of Total revenues
increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several
large group insurance claims in 1995, the annual merit-based salary increases
and the benefit in 1994 from eliminating a long-term bonus plan.
EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or
16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a
percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994.
NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million
non-cash write-down relating to costs resulting from a postponed debt
refinancing and a $4.0 million write-down of the carrying value of 51 restaurant
properties. For a further explanation of the write-downs, see Notes 3, 5 and 6
of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2
million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The
increase was due to the addition of one new restaurant and the ongoing
implementation of the Company's revitalization program, partially offset by a
decrease in amortization as a result of TRC Acquisition financing costs being
fully amortized. Depreciation and amortization as a percentage of Total revenues
was 5.1% for both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995
from $45.5 million in 1994. The decrease was due to the payment of a $3.6
million fee to the Company's lenders in 1994 to facilitate a refinancing of the
Company's debt which was never consummated.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $33.4 million as compared to the benefit from income taxes of $4.7 million
in 1994. The provision for income taxes of $33.4 million in 1995 was due to the
anticipated deconsolidation from TRC. As a result, the deferred tax asset of
approximately $19 million related to the NOLs utilized by TRC as of December 13,
1995 was written off in 1995. Additionally, as a result of the anticipated
change in ownership and Section 382 limitation, a valuation allowance in 1995
was placed on all Federal NOL carryforwards generated through December 31, 1995.
See Note 9 of Notes to Consolidated Financial Statements. The benefit from
income taxes of $4.7 million in 1994 represented the statutory federal and state
tax benefit of the Company's loss partially offset by the impact of the state
tax valuation allowance.
NET INCOME (LOSS)--As a result of the above, net loss increased by $54.8
million to a net loss of $58.7 million in 1995 from a net loss of $3.9 million
in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have been
cash generated from operations and borrowings under the Old Credit Facility. Net
cash provided by operating activities was $9.6 million for the six months ended
June 29, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4 million in
1994. Available borrowings under the Old Credit Facility were $13.7 million as
of June 29, 1997, excluding $2.4 million of letter of credit availability.
Additional sources of cash consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the Company will be limited by the terms of the New Credit Facility and
the Indenture relating to the Senior Notes. See "Description of New Credit
Facility" and "Description of Senior Notes."
27
<PAGE>
The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition, the Company has spent $264.3 million on
capital expenditures, including $73.5 million on the renovation and re-imaging
of restaurants under its revitalization program.
The following table presents for the periods indicated the number of (i)
restaurants opened and closed during, and the number of restaurants open at the
end of, each period, (ii) the number of restaurants in which (a) seating
capacity was expanded and (b) certain exterior and interior renovation and
re-imaging was completed under the Company's revitalization program and (iii)
the aggregate number of restaurants expanded and revitalized at the end of each
period.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED
------------------------------------------------- JUNE 29,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Restaurants opened............................................ 8 1 3 --
Restaurants closed............................................ 15 16 31 7
Restaurants open (end of period).............................. 750 735 707 700
Restaurants expanded.......................................... 7 5 4 3
Aggregate restaurants expanded................................ 12 17 21 24
Restaurants revitalized....................................... 67 14 16 7
Aggregate restaurants revitalized............................. 594 608 624 631
</TABLE>
Net cash used in investing activities was $8.3 million for the six months
ended June 29, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0
million in 1994. Capital expenditures for restaurant operations, including
capitalized leases, were approximately $8.3 million in the six months ended June
29, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6 million in
1994. Capital expenditures were offset by proceeds from the sale of property and
equipment of $0.9 million, $8.4 million, $0.9 million and $1.5 million in the
six months ended June 29, 1997, and in 1996, 1995 and 1994, respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash used in financing activities to repay
borrowings was $3.1 million for the six months ended June 29, 1997, $11.0
million in 1996 and $7.9 million in 1994 as compared to net cash provided by
financing activities of $0.2 million in 1995.
The Company had a working capital deficit of $19.4 million as of June 29,
1997. The Company is able to operate with a substantial working capital deficit
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 for food, supplies and payroll become due.
It is expected that the full amount of the Term Loan Facility will be drawn
at the closing of the Offerings. Amounts repaid or prepaid under the Term Loan
Facility may not be reborrowed. The Company's primary sources of liquidity and
capital resources in the future will be cash generated from operations and
borrowings under the Revolving Credit Facility and the Letter of Credit
Facility. The Revolving Credit Facility will be a five-year facility providing
for revolving loans to the Company in a principal amount not to exceed $55
million, including a $5 million sublimit for each of trade and standby letters
of credit. The Letter of Credit Facility will mature contemporaneously with the
Revolving Credit Facility and will provide for up to $15 million of standby
letters of credit. It is expected that no amounts will initially be drawn under
the Revolving Credit Facility and $3.1 million will be available under the
Letter of Credit Facility at the consummation of the Recapitalization. These
facilities are expected to be drawn in part, from time to time, to finance the
Company's working capital and other general corporate requirements. See
"Description of New Credit Facility."
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<PAGE>
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization amounts
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the
aggregate net proceeds from asset sales not in the ordinary course of business
and not re-employed within a specified period in the Company's business,
exclusive of up to $7.5 million of aggregate net proceeds received from asset
sales subsequent to the closing relating to the New Credit Facility. Such
applicable proceeds shall be applied to the Term Loan Facility in inverse order
of maturity. At the Company's option, loans may be prepaid at any time with
certain notice and breakage cost provisions.
It is expected that the obligations of the Company under the New Credit
Facility will (i) be secured by a first priority security interest in
substantially all material assets of the Company and its subsidiaries and all
other assets owned or hereafter acquired and (ii) be guaranteed, on a senior
secured basis, by the Company's Friendly's Restaurants Franchise, Inc.
subsidiary and may also be so guaranteed by certain subsidiaries created or
acquired after consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for the second half of 1997 and for 1998 are
anticipated to be $66.5 million in the aggregate, of which $56.4 million will be
spent on restaurant operations. See "Business--Restaurant Operations--Capital
Investment Program" for a further description of the Company's estimated 1997
and 1998 capital expenditures. The Company's actual 1997 and 1998 capital
expenditures may vary from the estimated amounts set forth herein. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" for
a discussion of certain factors, many of which are beyond the Company's control,
that could affect the Company's ability to make its planned capital
expenditures.
In addition, the Company may need capital in connection with (i) commitments
as of June 29, 1997 to purchase $53.1 million of raw materials, food products
and supplies used in the normal course of business and (ii) its self-insurance
through retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves. See Notes 12 and 15 of Notes
to Consolidated Financial Statements.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" and
"--Restrictions Imposed Under New Credit Facility."
OLD CREDIT FACILITY
In January 1995, the Company and its lenders amended the Old Credit Facility
as a result of certain covenant violations and, in connection therewith, the
lenders were granted the right to receive a contingent payment in certain
circumstances. In January 1996, the Old Credit Facility was amended and restated
pursuant to which revolving credit and term loans totaling $373.6 million were
converted to revolving credit loans of $38.5 million and term loans of $335.1
million. In connection therewith, the lenders received Class B common shares
which increased their interests in the Company to an aggregate of 50% of the
then-issued and outstanding common shares. As a result of the issuance of
certain stock to management
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<PAGE>
and the exercise of certain warrants, additional shares were issued to the
lenders in 1996 to maintain their minimum equity interest at 48.0%. As a result
of their ownership of Class B common shares, the lenders obtained the right to
elect two of the five members of the Company's Board of Directors. The lenders
were given the right to increased board representation and voting rights and the
right to receive additional shares upon certain events. As part of the
Recapitalization, the Old Credit Facility will be replaced by the New Credit
Facility, and as the result of the Recapitalization, the outstanding Class B
common shares will be converted into shares of Common Stock and the ownership of
such lenders will decrease to approximately 9.8% of the outstanding Common Stock
(4.5% if the Underwriters' over-allotment option in the Common Stock Offering is
exercised in full). See "Ownership of Common Stock," and Note 7 of Notes to
Consolidated Financial Statements.
NET OPERATING LOSS CARRYFORWARDS
As of December 29, 1996, the Company and its subsidiaries had a federal net
operating loss ("NOL") carryforward of $40.1 million. Because of a change of
ownership of the Company under Section 382 of the Internal Revenue Code on March
26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $29.7
million of the NOL carryforward can be used only to offset current or future
taxable income to the extent that net unrealized built-in gains which existed at
March 26, 1996 are recognized by March 26, 2001. Accordingly, a valuation
allowance has been recorded to offset the $29.7 million of the NOL carryforward.
The consolidated balance sheet of the Company as of December 29, 1996 includes
the tax effect of the remaining federal and state NOLs ("New NOLs") of $4.6
million for the periods prior to March 26, 1996 and $5.8 million for the period
from March 27, 1996 to December 29, 1996. It is expected that the Common Stock
Offering will result in the Company having another change of ownership under
Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after
the Common Stock Offering, the Company will be limited in how much of its New
NOLs it can utilize. The amount of New NOLs that can be utilized in any tax year
ending after the date of the Common Stock Offering will be limited to an amount
equal to the equity value of the Company immediately prior to the Common Stock
Offering (without taking into account the proceeds of the Offerings) multiplied
by the long-term tax exempt rate in effect for the month of the Common Stock
Offering (5.6% for August, 1997). While the limitation on the use of the New
NOLs will delay when the New NOLs are utilized, the Company expects all of the
New NOLs to be utilized before they expire. Accordingly, no valuation allowance
is required related to any New NOLs. The NOLs expire, if unused, between 2001
and 2012. In addition, the NOL carryforwards are subject to adjustment upon
review by the Internal Revenue Service. See Note 9 of Notes to Consolidated
Financial Statements.
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in cost of milk, sweeteners, purchased
food, labor and other operating expenses. Approximately 17% of wages paid in the
Company's restaurants are impacted by changes in the federal or state minimum
hourly wage rate. Accordingly, changes in the federal or states minimum hourly
wage rate directly affect the Company's labor cost. The Company is able to
minimize the impact of inflation on occupancy costs by owning the underlying
real estate for approximately 42% of its restaurants. The Company and the
restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage in its restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.
30
<PAGE>
BUSINESS
GENERAL
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein). During the same
period, management estimates that over $225 million of total revenues were from
the sale of approximately 20 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a sandwich and ice cream shoppe to a
full-service, family-oriented restaurant with broader menu and day-part appeal,
(iii) elevated customer service levels by recruiting more qualified managers and
expanding the Company's training program, (iv) disposed of 123 under-performing
restaurants and (v) capitalized upon the Company's strong brand name recognition
by initiating the sale of Friendly's unique line of packaged frozen desserts
through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "Prospectus Summary--Recent Developments."
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<PAGE>
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. However, the high
leverage associated with the TRC Acquisition has severely impacted the liquidity
and profitability of the Company. The Company has reported net losses and had
earnings that were insufficient to cover fixed charges for each fiscal year
since the TRC Acquisition and for the six months ended June 29, 1997. It is
anticipated that upon completion of the Recapitalization and the Related
Transactions, approximately 9.8% of the Company's Common Stock will be owned by
the lenders under the Company's Old Credit Facility (as defined herein) as a
group. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization in
order to continue to grow the Company's revenues and earnings by implementing
the following key business strategies: (i) continuously upgrade the menu and
introduce new products, (ii) revitalize and re-image existing Friendly's
restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining
experience, (v) expand the restaurant base through high-quality franchisees,
(vi) increase market share through additional retail accounts and restaurant
locations, (vii) introduce modified formats of the Friendly's concept into
non-traditional locations and (viii) extend the Friendly's brand into
international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.
BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line
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<PAGE>
including freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.
MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.
STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Nut Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.
VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.
MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.
BUSINESS STRATEGIES
FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:
UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.7% during the first six months of 1997 as compared to the same period of 1996.
REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total
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restaurant revenues through the addition of new restaurants. The Company has
revitalized approximately 631 restaurants since the beginning of 1989,
increasing average restaurant revenues from $665,000 in 1989 to $855,000 in the
twelve months ended June 29, 1997. Further, the Company has initiated its FOCUS
2000 program which includes an advanced re-imaging of restaurants and the
installation of custom designed restaurant automation systems in a majority of
its restaurants. In addition, as part of its ongoing capital spending program,
the Company plans to refurbish substantially all of its restaurants every five
to six years to further enhance customer appeal. The Company also expects to
increase market share in its existing and contiguous markets through the opening
of five new Company owned restaurants in 1997 (one of which has opened to date)
and between 10 and 20 new restaurants per year through 2000.
ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.
EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.
INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 700 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations through new product introductions
and more prominent freezer displays and (iii) increasing consumer and trade
merchandising.
INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These modified
formats include (i) Friendly's Cafe, a quick service concept offering frozen
desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering
freshly-scooped and packaged frozen desserts and (iii) Friendly's branded
display cases and novelty carts with packaged single-serve frozen desserts. The
first Friendly's Cafe is expected to open in early 1998. The Company supplies
frozen desserts to non-traditional locations such as colleges and universities,
sports facilities, amusement parks, secondary school systems and business
cafeterias directly or through selected vendors pursuant to multi-year license
agreements.
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") sells the Company's
frozen desserts in several chain restaurants, theaters and food courts in the
United Kingdom. In South Korea, FII participates in a licensing agreement with a
South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes. As of August 22, 1997, the licensee and its sublicensees were operating
20 ice cream shoppes, and the Company expects such parties to operate 45 ice
cream shoppes by the end of 1997. The Company selects its international markets
based on the high quality of the Company's frozen desserts relative to
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locally-produced frozen desserts and the propensity of consumers in these
regions to purchase American-branded products.
RESTAURANT OPERATIONS
MENU
Friendly's believes it provides significant value to consumers by offering a
wide variety of freshly-prepared, wholesome foods and frozen desserts at a
reasonable price. The menu currently features over 100 items comprised of a
broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Breakfast items include specialty omelettes and breakfast combinations
featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from
$2.00 to $6.00 and account for approximately 12% of average restaurant revenues.
Lunch and dinner items include a new line of wrap sandwiches, entree salads,
soups, super-melts, specialty burgers, appetizers including quesadillas,
mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie,
tenderloin steak and seafood entrees. These lunch and dinner items generally
range from $4.00 to $9.00, and these day-parts account for approximately 53% of
average restaurant revenues. Entree selections are complemented by Friendly's
premium frozen desserts, including the Fribble-Registered Trademark-, the
Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and
fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the success of the Company's snack day-part which accounts for 35%
of average restaurant revenues.
RESTAURANT LOCATIONS AND PROPERTIES
The table below identifies by state the location of the 700 restaurants
operating as of June 29, 1997, after giving effect to the DavCo Agreement as
though it had occurred on June 29, 1997.
<TABLE>
<CAPTION>
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Connecticut.......................................... 50 21 -- 71
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 9(c) -- -- 9
Maryland............................................. 3 9 22 34
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 2 -- -- 2
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 35 -- 165
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 51 13 -- 64
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 7 2 -- 9
Virginia............................................. 10 2 6 18
--- --- --- ---
Total............................................ 517 149 34 700
</TABLE>
- ------------------------
(a) Includes primarily malls and strip centers.
(b) The franchised restaurants (representing 30 freestanding and four other
restaurants) have been leased or subleased to DavCo pursuant to the DavCo
Agreement. See "Prospectus Summary-- Recent Developments."
(c) Excludes the Company's new 156-seat prototype restaurant opened in
Waterville, Maine in July 1997.
The 547 freestanding restaurants, including the 30 franchised to DavCo,
range in size from approximately 2,600 square feet to approximately 5,000 square
feet. The 153 mall and strip center restaurants, including the four franchised
to DavCo, average approximately 3,000 square feet. Of the 700 restaurants
operated by the Company at June 29, 1997, the Company owned the buildings and
the land for 294 restaurants, owned the buildings and leased the land for 161
restaurants, and leased both the buildings and
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land for 245 restaurants. The Company's leases generally provide for the payment
of fixed monthly rentals and related occupancy costs (e.g. property taxes,
common area maintenance and insurance). Additionally, most mall and strip center
leases require the payment of common area maintenance charges and incremental
rent of between 3.0% and 6.0% of the restaurant's sales.
RESTAURANT ECONOMICS
During the twelve-month period ended June 29, 1997, average revenue per
restaurant was $855,000, average restaurant cash flow was $155,000 (after rent
expense of $21,000) and average restaurant operating income was $122,000.
Average cash flow represents operating income before depreciation and
amortization. Average revenue per restaurant for the 243 freestanding
restaurants with more than 100 seats was $1,089,000, average revenue per
restaurant for the 304 freestanding restaurants with less than 100 seats was
$707,000 and average revenue per restaurant for the 153 other restaurants was
$812,000. The Company has opened 12 new restaurants since the beginning of 1994,
ten of which had been operating for at least 12 months as of June 29, 1997. Such
ten restaurants, which had an average of 136 seats, generated average revenue
per restaurant of $1,193,000, average restaurant cash flow of $186,000 (after
rent expense of $82,000) and average restaurant operating income of $139,000.
The average cash investment to open such ten restaurants (all of which were
conversions) was approximately $528,000, excluding pre-opening expenses, or
$1,368,000 including rent expense capitalized at 9.0%. Pre-opening expenses were
approximately $85,000 per restaurant. The Company plans to continue to convert
restaurants and estimates that the three conversions planned for 1997 will cost
approximately $500,000 to $600,000 per restaurant, excluding land and
pre-opening expenses. The Company converted a 180-seat restaurant in Burlington,
Vermont in December 1996 at a total cost including land of $1,562,000, and this
restaurant has achieved average weekly revenues of $35,000 through June 29,
1997. While conversions generally cost less than new construction, the Company
plans to selectively construct new restaurants when the anticipated return is
sufficient to warrant the increased cost of new construction. The Company has
developed two new freestanding restaurant prototypes for construction, including
108-seat and 156-seat prototypes, which are anticipated to cost approximately
$730,000 and $780,000 per restaurant, respectively, excluding pre-opening
expenses. Pre-opening expenses are estimated to be $85,000 per restaurant. The
Company opened its first 156-seat prototype restaurant in Waterville, Maine in
July 1997 at a cost of $778,000, or $1,056,000 including rent expense
capitalized at 9.0%.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalizing and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of New Credit
Facility."
RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70
restaurants in 1997 (two of which have been completed to date) at an estimated
cost of $120,000 per restaurant (not including $850,000 of one time costs
related to development of the prototype). This cost typically includes interior
and exterior redecoration and a new exterior lighting package. The Company
expects to complete the re-imaging of approximately 110 restaurants during 1998.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company expects to convert
three restaurants in 1997 (none of which has been completed to date) at an
estimated cost of $500,000 to $600,000 per restaurant. The Company also expects
to construct two new restaurants in 1997 (one of which has been
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completed to date) at an estimated cost of $785,000, excluding land and
pre-opening expenses. The Company expects to complete the conversion or
construction of approximately ten restaurants during 1998.
SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
June 29, 1997, the Company has expanded seating capacity by an average of 50
seats at 24 restaurants at an average cost of $310,000 per restaurant. Revenue
per restaurant increased approximately 24% in the full year following completion
of this expansion compared to the comparable prior period. The Company expects
to complete the expansion of six restaurants in 1997 (four of which have been
completed to date) at an estimated cost of $250,000 per restaurant. This cost
typically includes adding 50 seats per restaurant, relocating certain equipment
and increasing parking capacity where necessary. The Company expects to complete
the expansion of approximately four restaurants during 1998.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition
and through June 29, 1997, the Company has installed touch-screen point of sale
("POS") register systems in approximately 340 restaurants at an average cost of
$34,000 per restaurant. These POS register systems are designed to improve
revenue realization, food cost management and labor scheduling while increasing
the speed and accuracy of processing customer orders. The Company expects to
install POS register systems in approximately 40 restaurants during 1998.
FRANCHISING PROGRAM
The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company's wholly owned subsidiary,
Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for
the purpose of franchising various restaurant concepts. Since it began
operations, FRFI has developed and now offers a franchise program for both
Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts. On July 14, 1997, the Company entered into the DavCo Agreement
pursuant to which DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in Maryland, Delaware, the District of Columbia and
northern Virginia, committed to open an additional 74 restaurants over the next
six years and, subject to the fulfillment of certain conditions, further agreed
to open 26 additional restaurants, for a total of 100 new restaurants in this
franchising region over the next ten years.
QUALITY CONTROL PROGRAMS
The Company's high quality standards are promoted through strict product
specifications, guest service programs and defined daily operating systems and
procedures for maintenance, cleanliness and safety. Policy and operating manuals
and video support materials for employee training are maintained in all
Friendly's restaurants. The Company uses a variety of guest feedback systems to
measure, monitor and react to service performance including comment cards, "800"
telephone call-in lines, guest commentary follow-up systems, focus groups and an
independent quarterly consumer tracking study conducted by National Purchase
Diary, Inc. The Company's customer service center is implementing a chainwide
program to receive and log customer feedback by restaurant and to report monthly
to field management. All levels of field management are directly responsible for
and evaluated according to guest satisfaction levels.
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CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
free standing restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen
desserts in display cases within its restaurants.
RETAIL AND RELATED OPERATIONS
RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company has profitably grown its
revenue from the sale of such products to retail outlets from $1.4 million in
1989 to $53.9 million in the twelve months ended June 29, 1997. The Company
offers a branded product line that includes approximately 60 half gallon
varieties featuring premium ice cream shoppe flavors and unique sundae
combinations, low and no fat frozen yogurt, low fat ice cream and sherbet.
Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel
Fudge Nut Blast-TM-, and proprietary products include the Jubilee
Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's
branded ice cream cakes and pies. The Company also licenses from Hershey the
right to feature certain candy brands including Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's
Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties on packaged sundae cups and
pints. See "Licenses and Trademarks."
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity, currently with 35, 118
and 95 restaurant locations, respectively. Targeting other markets with high
growth potential and strong Friendly's brand awareness, the Company added the
New York and Philadelphia markets, currently with 135 and 64 restaurants,
respectively, to its retail distribution efforts in 1992 and 1993. According to
recent A.C. Nielsen reports, the Company currently maintains a weighted average
market share of approximately 11% in the Albany, Boston and Hartford/Springfield
markets and 4% in the New York and Philadelphia markets.
The Company expects to continue building its retail distribution business by
increasing market share in its current retail markets. In these markets, the
Company intends to increase shelf space with existing accounts and add new
accounts by (i) capitalizing on its integrated restaurant and retail consumer
advertising and promotion programs, (ii) continuing new product introductions
and (iii) improving trade merchandising initiatives. Additionally, the Company
expects to continue to selectively enter new markets where its brand awareness
is high according to market surveys. In Pittsburgh, where the Company currently
has no restaurants, the Company has a packaged frozen dessert market share of
approximately 4%, according to A.C. Nielsen.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs.
NON-TRADITIONAL LOCATIONS
In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a
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quick service concept offering frozen desserts and a limited menu, (ii)
Friendly's branded ice cream shoppes offering freshly-scooped and packaged
frozen desserts and (iii) Friendly's branded display cases and novelty carts
with packaged single-serve frozen desserts. The first Friendly's Cafe is
expected to open in early 1998. The Company supplies frozen desserts to
non-traditional locations such as colleges and universities, sports facilities,
amusement parks, secondary school systems and business cafeterias directly or
through selected vendors pursuant to multi-year license agreements.
INTERNATIONAL OPERATIONS
The Company, through its FII subsidiary, has a master license agreement with
a South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes offering freshly-scooped and packaged frozen desserts. As of August 22,
1997, the licensee and its sublicensees were operating 20 ice cream shoppes, and
the Company expects such parties to operate 45 ice cream shoppes by the end of
1997. FII also has various licensing arrangements with several companies in the
United Kingdom under which certain of the Company's frozen desserts are
distributed in the United Kingdom. The Company's strategy in the United Kingdom
is to sell Friendly's branded frozen deserts in full and quick-service
restaurants, movie theaters, railway and bus stations, shopping malls and
airport locations pursuant to license agreements. Non-restaurant locations will
vary from full dipping stations to sundae station kiosks or sundae carts. In
addition, the Company's products will be distributed to selected retailers for
resale. In addition, the Company is a 50% partner in a joint venture in
Shanghai, China which has manufactured and distributed frozen desserts on a
limited basis. The joint venture is currently seeking additional distribution
for its products in China. In markets where a capital investment by the Company
is required to introduce its brand, the Company seeks to monetize such
investment by entering into franchising or licensing arrangements, and
subsequently to redeploy its capital, if necessary, into new international
markets. The Company believes that there are significant growth opportunities
within South Korea, the United Kingdom and China, as well as in other countries,
in particular those within the Pacific Rim.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong consumer awareness to
profitably build revenues across all businesses. The primary advertising
message, built around its "Leave room for the ice cream-TM-" slogan, focuses on
introducing new lunch and dinner products or line extensions in combination with
unique frozen desserts. For example, in 1996, Friendly's introduced a new line
of steak dinners and promoted trial of the line with a free Happy
Ending-Registered Trademark- Sundae. Management utilizes this strategy to
encourage consumer trial of new products and increase the average guest check
while reinforcing Friendly's unique "food with ice cream" experience. The
Company's food-with-ice-cream promotions also build sales of packaged frozen
desserts in its restaurants and in retail locations.
The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these markets with radio advertising to target the
breakfast day-part or to increase the frequency of the promotional message. In
addition, the Company supports certain of these highly-penetrated markets
(Albany, Boston, Hartford-Springfield and Providence) during the peak summer
season with additional television media focusing on freshly-scooped and packaged
frozen desserts. In its secondary markets, the Company utilizes more cost
effective local store marketing initiatives such as radio, direct mail and
newspaper advertising. All of the Company's markets are supported with an
extensive promotional coupon program.
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The Company believes that its integrated restaurant and retail marketing
efforts provide a significant competitive advantage supporting development of
its retail business. Specifically, the retail business benefits from the
awareness and trial of Friendly's product offerings generated by 32 weeks of
food-with-ice-cream advertising and couponing efforts. The Company believes that
this approach delivers a significantly higher level of consumer exposure and
usage compared to the Company's packaged frozen dessert competitors which have
only retail distribution. In turn, sales of the Company's products through more
than 5,000 retail locations, supported by trade merchandising efforts, build
incremental awareness and usage of Friendly's which management believes benefits
the restaurants. The Company estimates that advertising and promotion
expenditures will be approximately $20 million for 1997.
MANUFACTURING
The Company produces substantially all of its frozen desserts in two
Company-owned manufacturing plants which employ a total of approximately 300
people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square
feet of manufacturing space while the Troy, Ohio plant utilizes approximately
18,000 square feet. During 1996, the combined plants operated at an average
capacity of 68.0% and produced (i) over 17.0 million gallons of ice cream,
sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae
cups, (iii) 2.5 million frozen dessert rolls, pies and cakes and (iv) more than
1.4 million gallons of fountain syrups and toppings. The Company, through its
Shanghai, China joint venture, also owns a 13,000 square foot ice cream
manufacturing facility. The quality of the Company's products is important, both
to sustain Friendly's image and to enable the Company to satisfy customer
expectations. Wherever possible, the Company "engineers in" quality by
installing modern processes such as computerized mix-making equipment and
monitoring devices to ensure all storage tanks and rooms are kept at proper
temperatures for maximum quality.
PURCHASING AND DISTRIBUTION
In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.
The Company owns two distribution centers and leases a third which allow the
Company to control quality, costs and inventory from the point of purchase
through restaurant delivery. The Company distributes most product lines to its
restaurants, and its packaged frozen desserts to its retail customers, from
warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a
combined non-union workforce of approximately 250 employees. The Company's truck
fleet delivers all but locally-sourced produce, milk and selected bakery
products to its restaurants at least weekly, and during the highest-sales
periods, delivers to over 50% of Friendly's restaurants twice-per-week. The
Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000
square feet and 42,000 square feet, respectively. The Company believes that
these distribution facilities operate at or above industry standards with
respect to timeliness and accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of 56 tractors and 81 trailers which display
large-scale images of the Company's featured products. The entire fleet is
specially built to be compatible with storage access doors, thus protecting
frozen desserts from "temperature shock." Recently acquired trailers have an
innovative design which provides individual temperature control for three
distinct compartments. To provide additional economies to the Company, the truck
fleet
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backhauls on over 50% of its delivery trips, bringing the Company's purchased
raw materials and finished products back to the distribution centers.
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 350 restaurants.
The average Friendly's restaurant is staffed with four to ten employees per
shift, including the salaried restaurant management. Shift staffing levels vary
by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 37,500 hourly-wage labor hours in
1996 in addition to salaried management.
To maintain its high service and quality standards, Friendly's has developed
its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified
management employees, each of whom has received extensive training in Company
policies and procedures, as well as applicable federal, state and local
regulations. This team approach helps to ensure that the Company has the strong
leadership and management staff required to efficiently operate Friendly's
restaurants, provide quality service to customers and develop a pool of
well-qualified management candidates. These management candidates undergo
extensive training at the Company's dedicated training and development center.
Moreover, the Company has significantly improved its human resources training to
include sexual harassment, racial discrimination, diversity, employment
practices, government regulations, selection and assessment and other programs.
The Company also requires its District and Division Managers to participate in
training and development programs, provides courses to improve management skills
and offers development support for its headquarters employees.
EMPLOYEES
The total number of employees at the Company varies between 25,000 and
28,000 depending on the season of the year. As of June 29, 1997, the Company
employed approximately 28,000 employees, of which approximately 27,000 were
employed in Friendly's restaurants (including 130 in field management),
approximately 550 were employed at the Company's two manufacturing and three
distribution facilities and approximately 450 were employed at the Company's
corporate headquarters and other offices. None of the Company's employees is a
party to a collective bargaining agreement.
HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and maintenance service facility
located in Wilbraham, Massachusetts. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, Masschusetts, (ii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its
division and regional offices, its training and development center and other
support facilities.
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LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.
Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that the Company
maintains its current level of market penetration in the sundae cup business.
However, Hershey is not subject to a noncompete provision if it terminates the
Pint License without cause.
The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.
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, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licences and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to Federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationships with its current and potential franchisees is
governed by the laws of its several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
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substantial number of states, and bills have been introduced in Congress (one of
which is now pending) which would provide for Federal regulation of substantive
aspects of the franchisor-franchisee relationship. These current and proposed
franchise relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage was implemented in accordance with the Federal Fair Labor Standards
Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their respective
ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
Donald N. Smith 56 Chairman, Chief Executive Officer and President
Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant
Secretary
Joseph A. O'Shaughnessy 61 Senior Executive Vice President
Larry W. Browne 51 Executive Vice President, Corporate Finance, General Counsel and Secretary
Gerald E. Sinsigalli 58 President, Food Service Division
Dennis J. Roberts 48 Senior Vice President, Restaurant Operations
Scott D. Colwell 39 Vice President, Marketing
Henry V. Pettis III 52 Vice President, Franchising and Operations Services
George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer
Garrett J. Ulrich 46 Vice President, Human Resources
Michael J. Daly* 53 Director
Steven L. Ezzes 50 Director
Barry Krantz* 53 Director
Charles Ledsinger / / Director
Burt Manning* / / Director
Gregory L. Segall* 34 Director
</TABLE>
- ------------------------
* Messrs. Krantz and Segall, currently on the Board of Directors as the
nominees of the lenders under the Old Credit Facility, will be replaced as
directors by Messrs. Daly and Manning upon consummation of the Offerings.
Donald N. Smith has been Chairman, Chief Executive Officer and President of
the Company since September 1988. Mr. Smith has also been Chairman of the Board
and Chief Executive Officer of TRC and Perkins since November 1985. Prior to
joining TRC, Mr. Smith was President and Chief Executive Officer for
Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was
Senior Vice President, PepsiCo., Inc. and was President of its Food Service
Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell
Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc.,
PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith
was President and Chief Executive Officer of Burger King Corporation and Senior
Executive Vice President and Chief Operations Officer for McDonald's
Corporation.
PAUL J. MCDONALD has been Senior Executive Vice President, Chief
Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald
has been employed in various capacities with the Company since 1976. Mr.
McDonald has held the positions of Director of Management Information Systems,
Vice President/Controller and Vice President Corporate Development. Mr. McDonald
is a certified public accountant.
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JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.
LARRY W. BROWNE has been Executive Vice President, Corporate Finance,
General Counsel and Secretary of the Company since September 1988. Mr. Browne
has also been President and Managing Director of Friendly's International, Inc.
since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance,
General Counsel and Secretary of TRC since November 1985 and was with Perkins
from 1985 until 1996, most recently holding the position of Senior Vice
President, Corporate Finance.
GERALD E. SINSIGALLI has been President, Food Service Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of
the Company since January 1996. Mr. Roberts has been employed in various
capacities with the Company since 1969. Mr. Roberts' duties have included
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.
SCOTT D. COLWELL has been Vice President, Marketing of the Company since
January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
HENRY V. PETTIS III has been employed by the Company since 1990 and became
Vice President, Franchising and Operations Services in 1996. Mr. Pettis was
President and Chief Executive Officer of Florida Food Industries from 1988 to
1990.
GEORGE G. ROLLER has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.
GARRETT J. ULRICH has been Vice President, Human Resources since September
1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun &
Bradstreet Information Services, North America from 1988 to 1991. From 1978 to
1988, Mr. Ulrich held various Human Resource executive and managerial positions
at Pepsi Cola Company, a division of PepsiCo.
MICHAEL J. DALY will become a director of the Company upon consummation of
the Common Stock Offering. Mr. Daly has been President and CEO of Baystate
Health System since December 1981.
STEVEN L. EZZES was reelected as a director of the Company in December 1995.
Mr. Ezzes previously served as a director of the Company from January 1991 to
May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets
(USA), an investment banking firm, since November 1996. Prior to that he was a
partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes
has also been a Managing Director of Lehman Brothers, an investment banking
firm.
BARRY KRANTZ has been a director of the Company since April 1996. From
January 1994 to August 1995, Mr. Krantz served as President and Chief Operating
Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises
Group, Inc. from December 1988 until January 1994 where he held the positions of
Chief Operating Officer and President of the Family Restaurant Division.
CHARLES LEDSINGER[Insert bio]
BURT MANNING[Insert bio]
45
<PAGE>
GREGORY L. SEGALL has been a director of the Company since April 1996. Mr.
Segall has served as Chairman, President & CEO of Consolidated Vision Group,
Inc. since April 1997. Since October 1992, Mr. Segall has also been Managing
Director and Principal of Chrysalis Management Group, LLC. Prior to 1992, Mr.
Segall was a Managing Director of Sigoloff & Associates, Inc. Mr. Segall has
also served as Chief Executive Officer of a number of retail, real estate and
technology companies. In connection with his management consulting practice, Mr.
Segall has, over the past ten years, served as an officer and/or director of a
variety of companies which have either filed petitions or had petitions filed
against them under the U.S. Bankruptcy Code. Mr. Segall's involvement in these
companies was required by his employment by Chrysalis Management Group, LLC and
Sigoloff & Associates, Inc., both of which are management consulting groups
which specialize in restructuring and reorganizing businesses. In each case, Mr.
Segall became an officer and/or director only after his employer had been
retained for the purpose of taking a company through the reorganization process.
The executive officers of the Company serve at the discretion of the Board
of Directors.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
CLASSES OF DIRECTORS
Following the closing of the Common Stock Offering, the Board of Directors
will be divided into three classes, each of whose members will serve for a
staggered three-year term. At this time, Messrs. Daly and Manning will join the
Board of Directors, replacing Messrs. Krantz and Segall who currently serve as
directors as the nominees of the lenders under the Old Credit Facility. Messrs.
Daly and Manning will serve in the class whose term expires in 1998; Messrs.
Ezzes and Ledsinger will serve in the class whose term expires in 1999; and Mr.
Smith will serve in the class whose term expires in 2000. Upon the expiration of
the term of a class of directors, directors within such class will be elected
for a three-year term at the annual meeting of stockholders in the year in which
such term expires.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
responsible for nominating the Company's independent accountants for approval by
the Board of Directors, reviewing the scope, results and costs of the audit by
the Company's independent accountants and reviewing the financial statements of
the Company. Messrs. Ledsinger and Segall are currently the members of the Audit
Committee. Mr. Ezzes will replace Mr. Segall on the Audit Committee following
the consummation of the Common Stock Offering. The Compensation Committee is
responsible for recommending compensation and benefits for the executive
officers of the Company to the Board of Directors and for administering the
Company's stock plans. Upon the consummation of the Common Stock Offering, a
Compensation Committee will be installed whose members shall be Messrs.
Ledsinger and Manning. The Nominating Committee is responsible for nominating
individuals to stand for election to the Board of Directors. Messrs. Ledsinger,
Ezzes and Smith are the members of the Nominating Committee.
The Company's Restated Articles empower the Board of Directors to fix the
number of directors and to fill any vacancies on the Board of Directors.
Each Director of the Company who is not an employee of the Company will
receive a fee of $2,500 per month and $1,500 per board and special board meeting
attended, plus expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
After consideration of the recommendations of Mr. Smith, compensation
matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz
and Ledsinger, members of the Company's Board of Directors.
46
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the annual base salary and
other annual compensation paid during the last three fiscal years to the
Company's chief executive officer and each of the other four most highly
compensated executive officers whose cash compensation exceeded $100,000 in a
combination of salary and bonus (the "named executive officers"). During 1994,
1995 and 1996, no long-term compensation was paid to the named executive
officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------
RESTRICTED
STOCK OTHER ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION
- ---------------------------------- ------------- ---------- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0
Chairman, Chief Executive 1995 472,640
Officer and President 1994 450,736
Larry W. Browne................... 1996 265,822 30,000 201 0 0
Executive Vice President, 1995 257,788
Corporate Finance, General 1994 249,619
Counsel and Secretary
Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0
Senior Executive Vice President 1995 253,348
1994 245,720
Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0
President, Food Service Division 1995 239,646
1994 229,582
Paul J. McDonald.................. 1996 246,145 47,000 201 0 0
Senior Executive Vice President, 1995 236,780
Chief Administrative Officer and 1994 213,076
Assistant Secretary
</TABLE>
- ------------------------
(a) Represents the value of restricted stock awarded on March 25, 1996 under the
Company's management stock plan (the "Management Stock Plan"), which was
issued in substitution of stock rights awarded under a subsequently
terminated stock rights plan. As of December 29, 1996, Messrs. Browne,
O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of
$151 as of such date. Twenty-five percent of the shares of restricted stock
vested on December 29, 1996 upon the attainment of a minimum operating cash
flow target. The remaining shares of restricted stock will vest upon
consummation of the Common Stock Offering. No dividends were payable on the
restricted shares.
(b) The Company paid a management fee to TRC in the amount of $800,000, $785,000
and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid
Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as
Chairman, Chief Executive Officer and President of the Company and as
Chairman and Chief Executive Officer of Perkins and, consequently, devotes a
portion of his time to the affairs of each of the Company and Perkins.
47
<PAGE>
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable, based
on the indicated credited years of service and the indicated average annual
remuneration used in calculating benefits, under the Pension Plan (as defined
below).
<TABLE>
<CAPTION>
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
$ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031
150,000 13,405 21,053 29,333 37,770 46,837
175,000 15,639 24,562 34,222 44,065 54,643
200,000 17,873 28,071 39,111 50,360 62,451
300,000 26,809 42,106 58,664 75,539 93,675
400,000 35,746 56,142 78,221 100,720 124,901
500,000 44,682 70,177 97,775 125,899 156,123
600,000 53,619 84,214 117,330 151,078 187,350
700,000 62,555 98,249 136,885 176,259 218,573
</TABLE>
- ------------------------------
(a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan
(the "Pension Plan") are generally determined based on the value of a
participant's cash balance account under the plan. Each year, a percentage
of compensation (limited to $150,000 for 1996 in accordance with rules
promulgated under the Internal Revenue Code of 1986 (the "Code")) is
contributed to an individual's cash balance account under the Pension Plan
based on his years of credited service. Interest credits are also
contributed to each cash balance account annually. The cash balance formula
was implemented effective January 1, 1992, at which time the accrued
benefits of participants were converted to the opening balance in the cash
balance account. The above amounts are annual straight life annuity amounts
(which are not reduced for social security benefits) payable upon retirement
at age 65 and assume salary increases of 5.0% per year, interest credits of
5.0% per year and that the cash balance formula under the Pension Plan has
always been in effect. The foregoing amounts also reflect amounts
attributable to benefits payable under the Friendly Ice Cream Corporation
Supplemental Executive Retirement Plan, (the "SERP"), which provides
benefits to the covered individuals which cannot be provided under the
Pension Plan due to the certain limitations of the Internal Revenue Code,
including the limitation on compensation. The SERP was implemented effective
as of January 1, 1995. Mr. Smith did not become a participant in the SERP
until January 1, 1996. As of January 1, 1997, Messrs. Brown, McDonald and
Smith had 8, 21 and 8 years of credited service, respectively, under the
Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and
Sinsigalli are determined primarily on final compensation and years of
credited service although such individuals would be entitled to a benefit
under the formula described above if such formula resulted in a larger
benefit. As of January 1, 1996, the estimated annual benefit payable upon
retirement at age 65 (expressed in the form of a straight life annuity) for
Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively,
taking into account benefits provided to such individuals under the SERP. As
of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years
of credited service, respectively, under the Pension Plan.
LIMITED STOCK COMPENSATION PROGRAMS
In connection with the Common Stock Offering, the Company established a
program pursuant to which a one-time award of Common Stock will be made to
approximately 70 employees of the Company in recognition of their services to
the Company. Approximately 300,000 shares of Common Stock will be awarded under
the program (after giving effect to the Recapitalization). The Common Stock
awards will vest upon consummation of the Common Stock Offering, however, the
shares will be subject to transfer restrictions for a period of four years. The
shares will become transferable on a pro rata basis on the first through fourth
anniversaries of the Common Stock Offering. Messrs. O'Shaughnessy, Sinsigalli
and McDonald will be awarded 14,011, 17,284 and 17,284 shares respectively under
the program.
Under a separate component of this program, Mr. Smith will be awarded
approximately 100,742 shares of Common Stock which will vest upon consummation
of the Common Stock Offering. This one-time award was made in recognition of his
services to the Company.
48
<PAGE>
RESTRICTED STOCK PLAN
The Company currently maintains a restricted stock plan for the benefit of
eligible employees. All outstanding awards under such restricted stock plan will
vest upon consummation of the Common Stock Offering, and no new awards will be
issued under that plan. Prior to the Common Stock Offering, the Company will
adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to
which 375,000 shares of Common Stock will be reserved for issuance, subject to
adjustment in the case of certain corporate transactions affecting the number or
type of shares of outstanding common stock. The Restricted Stock Plan will
provide for the award of Common Stock, the vesting of which will be subject to
such conditions and limitations as shall be established by the Board of
Directors, which may include conditions relating to continued employment with
the Company or the achievement of performance measures. Unless the Board of
Directors determines otherwise, any shares of restricted stock which are not
vested upon the participant's termination of employment with the Company shall
be forfeited. Upon a change in control of the Company, all restrictions on
outstanding shares of restricted stock shall lapse and such shares shall become
nonforfeitable.
The Restricted Stock Plan shall be administered by the Board of Directors,
which shall have the authority to determine the employees who will receive
awards under the Restricted Stock Plan and the terms and conditions of such
awards. Approximately 70 employees of the Company who are classified as salary
grade 109 and above will initially be eligible for participation in the
Restricted Stock Plan. The Board of Directors, in its sole discretion, may
designate other employees and persons providing material services to the Company
as eligible for participation in the Restricted Stock Plan.
STOCK OPTION PLAN
The Company does not currently maintain a stock option plan, although
certain employees of the Company participated in a previously terminated stock
rights plan. See Note 13 of Notes to Consolidated Financial Statements.
In connection with the Common Stock Offering, the Company will adopt a stock
option plan (the "Stock Option Plan"), pursuant to which approximately 400,000
shares of Common Stock will be reserved for issuance, subject to adjustment in
the case of certain corporate transactions affecting the number or type of
shares of outstanding Common Stock. The Stock Option Plan will provide for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Code and stock
appreciation rights.
The Stock Option Plan will be administered by the Board of Directors. The
Board of Directors will determine the employees who will receive awards under
the Stock Option Plan and the terms of such awards. The award of a stock option
will entitle the recipient thereof to purchase a specified number of shares of
Common Stock at the exercise price specified by the Board of Directors. The
award of a stock appreciation right entitles the recipient thereof to a payment
equal to the excess of the fair market value of a share of Common Stock on the
date of exercise over the exercise price specified by the Board of Directors.
The exercise price of a stock option or stock appreciation right shall not be
less than the fair market value of a share of Common Stock on the date the stock
option or stock appreciation right is granted. The Board of Directors may
delegate its authority under the Stock Option Plan to a committee of the Board
of Directors.
Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering will become
exercisable over a five-year period, subject to the optionee's continued
employment with the Company. All awards under the Stock Option Plan will become
fully vested and exercisable upon a change in control of the Company.
49
<PAGE>
Approximately 120 employees of the Company who are classified as salary
grade 107 or 108 will initially be eligible for participation in the Stock
Option Plan. The Board of Directors, in its sole discretion, may designate other
employees and persons providing material services to the Company as eligible for
participation in the Stock Option Plan.
Generally, a participant who is granted a stock option or stock appreciation
right will not be subject to federal income tax at the time of the grant, and
the Company will not be entitled to a corresponding tax deduction. Upon the
exercise of a nonqualified stock option, generally the difference between the
option price and the fair market value of the Common Stock will be considered
ordinary income to the participant, and generally the Company will be entitled
to a tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant, and the Company will not be entitled to a tax
deduction. However, if the Common Stock purchased upon exercise of the incentive
stock option is sold within two years of the option's grant date or within one
year after the exercise, then the difference, with certain adjustments, between
the fair market value of the Common Stock at the date of exercise and the option
price will be considered ordinary income to the participant, and generally the
Company will be entitled to a tax deduction. If the participant disposes of the
Common Stock after such holding periods, any gain or loss upon such disposition
will be treated as a capital gain or loss and the Company will not be entitled
to a deduction.
Upon exercise of a stock appreciation right, the participant will recognize
ordinary income in an amount equal to the payment received, and generally the
Company will be entitled to a corresponding tax deduction.
50
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of (i) the Class A and Class B common shares of the Company prior to
the Recapitalization, and (ii) the Common Stock, after giving effect to the
Common Stock Offering, by (a) each person who is known by the Company to own
beneficially more than 5% of the outstanding (1) Class A and Class B common
shares as of October , 1997 or (2) shares of the Common Stock after giving
effect to the Common Stock Offering, (b) each director of the Company, (c) each
of the named executives officers and (d) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON SHARES BENEFICIALLY OWNED
PRIOR TO THE RECAPITALIZATION BENEFICIALLY
--------------------------------------- OWNED AFTER THE
RECAPITALIZATION (A)
NUMBER ----------------------
------------------------ PERCENTAGE PERCENTAGE
NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL
- ---------------------------------------------------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Lenders under Old Credit Facility as a
group (c)(d) -- 1,187,503 48.0% 701,036 9.8%
Donald N. Smith..................................... 759,680 -- 30.7 736,164 10.3
Equitable........................................... 256,375 -- 10.3 151,349 2.1
Larry W. Browne..................................... 28,702 -- 1.2 21,130 *
Paul J. McDonald.................................... 7,726 -- * 26,031 *
Joseph A. O'Shaughnessy............................. 7,726 -- * 13,747 *
Gerald E. Sinsigalli................................ 7,726 -- * 26,031 *
Michael J. Daly (e)................................. -- -- * -- *
Steven L. Ezzes..................................... -- -- * -- *
Barry Krantz (e).................................... -- -- * 924 *
Charles L. Ledsinger................................ -- -- * -- *
Burt Manning (e).................................... -- -- * -- *
Gregory L. Segall(e)................................ -- -- * 924 *
All directors and executive officers as a group (14
persons).......................................... 843,012 -- 34.1 934,544 13.1
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding (i) Class A and Class B common
shares prior to the Recapitalization and (ii) Common Stock after the
Recapitalization.
(a) Gives effect to the Common Stock Offering, and the following, which will
occur in connection with the Recapitalization: (i) the return of 124,258,
105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by
Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility
as a group and the other existing non-management shareholders, respectively,
(ii) the issuance of 100,742, and 300,000 of such shares to Mr. Smith and to
certain members of management under the Company's Limited Stock Compensation
Program, respectively and (iii) the issuance of 27,113 shares of Common
Stock under the Management Stock Plan. Of the 300,000 shares issued under
the Company's Limited Stock Compensation Program, 17,284, 5,000, 17,284 and
114,532 shares have been allocated to Messrs. McDonald, O'Shaughnessy,
Sinsigalli and to all directors and executive officers as a group,
respectively. Of the 27,113 shares of Common Stock to be issued under the
Management Stock Plan each of Messrs. Brown, McDonald, O'Shaughnessy and
Sinsigalli is to receive 1,021 shares. Does not reflect 400,000 shares and
375,000 shares reserved for issuance under the Company's Stock Option Plan
and Restricted Stock Plan, respectively. See Note 17 of Notes to
Consolidated Financial Statements.
(b) In connection with the Recapitalization, each outstanding Class A common
share and Class B common share of the Company will be converted into one
share of Common Stock.
(c) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, holds the Class B common shares for the
benefit of the lenders under the Old Credit Facility, having received Class
B common shares of the Company in 1996 in connection with the restructuring
of the Old Credit Facility. In connection with the Recapitalization, these
shares will automatically convert into shares of Common Stock and will be
distributed to the then existing lenders under the Old Credit Facility pro
rata according to the respective amounts of indebtedness thereunder held by
them. See Note 7 of Notes to Consolidated Financial Statements.
(d) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K
Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac
Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl
Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon
Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co.
International Limited, each of which is a lender under the Old Credit
Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr.
Browne and Peter Joost, other stockholders of the Company, have granted to
the Underwriters a 30-day option to purchase 86,788, 11,707, 65,337, 8,973,
23,344, 8,973, 28,532, 57,275, 15,212, 48,442, 12,268, 15,072, 151,349,
46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned
by such lenders and other stockholders, respectively, as part of the
Underwriters' over-allotment option. If such over-allotment option is
exercised in full, the lenders under the Old Credit Facility as a group
would beneficially own 4.5%, and such other stockholders would no longer own
any, of the outstanding Common Stock after the Recapitalization. See
"Underwriting."
(e) Messrs. Krantz and Segall, currently on the Board of Directors as nominees
of the lenders under the Old Credit Facility, will be replaced as directors
by Messrs. Daly and Manning upon consummation of the Offerings. See
"Management."
51
<PAGE>
CERTAIN TRANSACTIONS
The Company's policy is to only enter into a transaction with an affiliate
in the ordinary course of, and pursuant to the reasonable requirements of, its
business and upon terms that are no less favorable to the Company than could be
obtained if the transaction was entered into with an unaffiliated third party.
Set forth below is a description of certain transactions between the Company and
its affiliates during 1994, 1995 and 1996 and ongoing transactions between the
Company and its affiliates. The Company believes that the terms of such
transactions were or are no less favorable to the Company than could have been
obtained if the transaction was entered into with an unaffiliated third party.
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2.0 million and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors. The Company realized a net gain of approximately $675,000 on this
transaction which is being amortized into income over the initial ten-year term
of the lease.
In 1993, the Company subleased certain land, buildings, and equipment from
Perkins Restaurants Operating Company, L.P. ("Perkins"), a subsidiary of TRC.
During 1996, 1995 and 1994, rent expense related to the subleases was
approximately $278,000, $266,000 and $245,000, respectively.
During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance
Corporation ("RIC"), assumed from a third party insurance company reinsurance
premiums related to insurance liabilities of the Company of approximately $4.2
million and $6.4 million, respectively. In addition, RIC had reserves of
approximately $13.0 million and $12.8 million related to Company claims at
December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the
Company acquired all of the outstanding shares of common stock of RIC from TRC
for $1.3 million in cash and a $1.0 million promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC,
which was formed in 1993, reinsures certain of the Company's risks (i.e.
workers' compensation, employer's liability, general liability and product
liability) from a third party insurer.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year
operating lease for an aircraft, for use by both the Company and Perkins. The
Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing,
tax and insurance expenses. In addition, the Company also incurs actual usage
costs. Total expense for 1996, 1995 and 1994 was approximately $590,000,
$620,000 and $336,000, respectively.
The Company purchased certain food products used in the normal course of
business from a division of Perkins. For 1996, 1995 and 1994, purchases were
approximately $1.4 million, $1.9 million and $1.3 million, respectively.
The Company currently pays TRC an annual management fee pursuant to a
management fee letter agreement between the Company and TRC dated March 19, 1996
(the "TRC Management Contract"). The fee serves as compensation for (i) the
services performed by Mr. Smith for the benefit of the Company (ii) office and
secretarial services attributable to the Company and (iii) other related
expenses. TRC was paid $800,000, $785,000 and $773,000 for such management
services in 1996, 1995 and 1994, respectively. See "Management--Executive
Compensation."
During 1996, the Company incurred approximately $69,000 of expense related
to fees and other reimbursements to the two board of directors members who
represented the Company's lenders. In addition, for 1996, 1995 and 1994, the
Company expensed approximately $196,000, $763,000 and $200,000, respectively,
for fees paid to the lenders' agent bank.
52
<PAGE>
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.
The Company also entered into a Tax Responsibility Agreement dated as of
March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax
Responsibility Agreement, the Company must indemnify TRC for any income taxes
that are assessed against TRC as a result of the operations of RIC. The Tax
Responsibility Agreement terminates 90 days after the statute of limitations
expires for each tax covered by the agreement.
53
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The Company expects, contingent upon completion of the Offerings, to enter
into a senior secured credit facility with Societe Generale in an aggregate
principal amount of $175 million (the "New Credit Facility"). The following
description, which sets forth the material terms of the New Credit Facility,
does not purport to be complete and is qualified in its entirety by reference to
the agreements setting forth the principal terms of the New Credit Facility,
which will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
It is expected that the senior, secured New Credit Facility will consist of
(a) the $105 million Term Loan Facility, (b) the five-year Revolving Credit
Facility providing for revolving loans to the Company in a principal amount not
to exceed $55 million (including a $5 million sublimit for each of trade and
standby letters of credit) and (c) the $15 million Letter of Credit Facility
providing for standby letters of credit in the normal course of business and
having a maturity contemporaneous with that of the Revolving Credit Facility.
It is expected that the full amount of the Term Loan Facility will be drawn
on the closing date of the Recapitalization (the "Closing Date"). Amounts repaid
or prepaid under the Term Loan Facility may not be reborrowed. Loans under the
Revolving Credit Facility will be available at any time on and after the Closing
Date and prior to the date which is five years after the Closing Date. Letters
of credit shall expire annually, but shall have a final expiration date no later
than thirty days prior to final maturity, which for the Letter of Credit
Facility will also be five years from the Closing Date.
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization payments
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the
aggregate net proceeds from asset sales not in the ordinary course of business
and not re-employed or committed to be re-employed within a specified period in
the Company's business, exclusive of up to $7.5 million of aggregate net
proceeds received from asset sales subsequent to the closing relating to the New
Credit Facility. Such applicable proceeds shall be applied to the Term Loan
Facility in inverse order of maturity. At the Company's option, loans may be
prepaid at any time with certain notice and breakage cost provisions.
It is expected that the obligations of the Company under the New Credit
Facility will be (i) secured by a first priority security interest in
substantially all material assets of the Company and all other assets owned or
hereafter acquired and (ii) guaranteed, on a senior secured basis, by the
Company's Friendly's Restaurants Franchise, Inc. subsidiary and may also be so
guaranteed by certain subsidiaries of the Company created or acquired after
consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
It is expected that the New Credit Facility will contain a number of
significant covenants that among other things, will operate as limitations on
indebtedness; liens; guarantee obligations; mergers; consolidations, formation
of subsidiaries, liquidations and dissolutions; sales of assets; leases;
payments of dividends; capital expenditures; investments; optional payments and
modifications of subordinated and other debt instruments; transactions with
affiliates; sale and leaseback transactions; changes in fiscal year; negative
pledge clauses; changes in lines of business; and the ability to amend material
agreements. In addition, under the New Credit Facility, the Company will be
required to comply with specified minimum fixed charge coverage ratios, interest
expense coverage ratios, cash flow leverage ratios and minimum net worth
requirements.
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DESCRIPTION OF SENIOR NOTES
GENERAL
The Senior Notes are to be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), between the Company, Friendly's Restaurants
Franchise, Inc. and The Bank of New York, as Trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The following summary of certain provisions of the Indenture and the Senior
Notes does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
TIA. The summary provides an accurate description of all material terms of the
Senior Notes. Capitalized terms used herein and not otherwise defined have the
meanings set forth under "--Certain Definitions."
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, at 101 Barclay
Street, New York, New York 10286), except that, at the option of the Company,
payment of interest may be made by check mailed to the registered holders of the
Senior Notes at their registered addresses.
The Senior Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Senior Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. Each of Friendly's International, Inc. and its United
Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date.
TERMS OF THE SENIOR NOTES
The Senior Notes will be unsecured, senior obligations of the Company,
limited to $175 million aggregate principal amount, and will mature on
, 2007. Each Senior Note will bear interest at the rate per annum shown on
the front cover of this Prospectus from , 1997, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
Holders of record at the close of business on the or immediately
preceding the interest payment date on and of each year, commencing
, 1998. Interest on the Senior Notes will be computed on the basis of a
360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The Senior Notes will be redeemable, at the Company's option, in whole or in
part, at any time on or after , 2002, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. %
2003............................................................................. %
2004............................................................................. %
2005 and thereafter.............................................................. 100.000%
</TABLE>
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In addition, at any time and from time to time prior to , 2000, the
Company may redeem in the aggregate up to $60 million principal amount of the
Senior Notes with the proceeds of one or more Qualified Equity Offerings at a
redemption price (expressed as a percentage of principal amount thereof) of %
plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $115 million
principal amount of the Senior Notes must remain outstanding after each such
redemption.
In the case of any partial redemption, selection of the Senior Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Senior Note of $1,000 in original principal amount will
be redeemed in part. If any Senior Note is to be redeemed in part only, the
notice of redemption relating to such Senior Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior 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 Senior Note.
GUARANTEES
The obligations of the Company pursuant to the Senior Notes, including the
repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, on an unsecured, senior basis, by Friendly's
Restaurant Franchise, Inc. and will also be guaranteed by each new Subsidiary
(other than Unrestricted Subsidiaries and Foreign Subsidiaries) created or
acquired after the Issue Date. Each Subsidiary Guaranty will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty,
as it relates to such Subsidiary Guarantor, void or voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. If a Subsidiary Guaranty were to be
rendered void or voidable, it could be rendered unenforceable or subordinated by
a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--Fraudulent
Conveyance."
The Indenture will provide that, subject to the following paragraph, the
Company will not permit any Subsidiary Guarantor to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless (i)
the resulting, surviving or transferee Person (if not such Subsidiary Guarantor)
shall be a Person organized and existing under the laws of the jurisdiction
under which such Subsidiary Guarantor was organized or under the laws of the
United States of America, or any State thereof or the District of Columbia, and
such Person shall expressly assume, by a supplement to the Indenture, in a form
satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor
under its Subsidiary Guaranty; (ii) immediately after giving effect to such
transaction or transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been incurred by such Person at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer, if any, complies with the Indenture.
However, the Indenture will also provide that upon the sale or other
disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company), such Subsidiary Guarantor will be released and relieved from all
its obligations under its Subsidiary Guaranty; provided that such sale or
disposition shall constitute an Asset Sale under, and the Net Available Cash
from such sale or disposition shall be applied in accordance with, the covenant
described below under "Limitation on Sales of Assets and Subsidiary Stock."
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RANKING
The indebtedness evidenced by the Senior Notes will be unsecured, Senior
Indebtedness of the Company, will rank PARI PASSU in right of payment with all
existing and future Senior Indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Senior Notes will also be effectively subordinated to all existing
and future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Secured Indebtedness and structurally subordinated to all
existing and future Indebtedness of any Subsidiary of the Company that is not a
Subsidiary Guarantor.
As of June 29, 1997, on a pro forma basis after giving effect to the
Recapitalization and the Related Transactions, the Company would have had a
total of $293.3 million of long-term debt and capital lease obligations
outstanding, $91.4 million of which would have been secured, and none of which
would have been subordinated. As of June 29, 1997, after giving effect to the
Recapitalization and the Related Transactions, Subsidiaries of the Company which
are not Subsidiary Guarantors would have had no long-term debt or capital lease
obligations outstanding. Although the Indenture contains limitations on the
amount of additional Indebtedness which the Company or any Restricted Subsidiary
may Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness,
Secured Indebtedness or Indebtedness of Subsidiaries which are not Subsidiary
Guarantors. See "-- Certain Covenants -- Limitation on Indebtedness and
Preferred Stock."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company, each Holder will have the right to
require the Company to repurchase all or any part of such Holder's Senior Notes
at a purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the related interest payment date):
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of Directors of
the Company;
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors of the Company 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;
(iii) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets
of the Company to any Person or group of Persons (other than to any Wholly
Owned Subsidiary of the Company);
(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company and the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the voting power of the Voting
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Stock of the Company are changed into or exchanged for cash, securities or
property, unless pursuant to such transaction such securities are changed
into or exchanged for, in addition to any other consideration, securities of
the surviving corporation that represent immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of the
surviving Person or transferee; or
(v) the adoption of a plan of liquidation of the Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Senior Notes in denominations of $1,000
or any integral multiple thereof at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on a record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts and pro forma financial information regarding
such Change of Control; (3) the repurchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Senior Notes purchased by the Company.
Notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to repurchase the Senior Notes upon a Change of Control if the Company
has irrevocably elected to redeem all of the Senior Notes under the provisions
described under "-- Optional Redemption" above, provided that the Company does
not default in its redemption obligations pursuant to such election.
Neither the Trustee nor the Board of Directors of the Company may waive the
covenant relating to the Holders' right to have its Senior Notes repurchased
upon a Change of Control.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Notes pursuant to this covenant. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company could decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit rating.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the New Credit Facility. Future
Indebtedness of the Company may also contain prohibitions of certain events
which would constitute a Change of Control or require such Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Senior Notes could cause a
default under such Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally,
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the Company's ability to pay cash to the Holders upon a repurchase may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK. (a) (i) The Company will
not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock and
(ii) the Company will not permit any of its Restricted Subsidiaries that are not
Subsidiary Guarantors to issue any shares of Preferred Stock; PROVIDED, HOWEVER,
that the Company and any Subsidiary Guarantor may Incur Indebtedness (including
Acquired Indebtedness) or issue Disqualified Stock if on the date thereof (and
after giving effect to the application of proceeds therefrom) the Consolidated
Coverage Ratio would be greater than 2.50:1 if such Incurrence shall occur prior
to , 1999 or greater than 2.75:1 if such Incurrence shall occur
thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
of the Company or any Restricted Subsidiary (including any Guarantees thereof)
under the New Credit Facility and any Refinancing Indebtedness with respect
thereto in an aggregate principal amount outstanding at any time not to exceed
$140 million, less the aggregate amount of all proceeds from all Asset
Dispositions that have been applied since the Issue Date to permanently reduce
the outstanding amount of such Indebtedness pursuant to the covenant "Limitation
on Sale of Assets and Subsidiary Stock" and less the aggregate amount of all
mandatory repayments of principal of term loans thereunder that have been made
since the Issue Date (other than repayments that are immediately re-borrowed);
(ii) Indebtedness of the Company owing to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the
Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that (a) any such
Indebtedness is made pursuant to an intercompany note and (other than any such
Indebtedness of the Company to RIC or of RIC to the Company) is expressly
subordinated to the Senior Notes or the applicable Subsidiary Guaranty, as the
case may be, and (b) any subsequent issuance or transfer of any Capital Stock or
any other event which results in any such Wholly Owned Subsidiary ceasing to be
a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly Owned Subsidiary) will be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Senior Notes (including Subsidiary
Guarantees), any Indebtedness of the Company or any Restricted Subsidiary (other
than the Indebtedness described in clauses (i)-(ii) above) outstanding on the
Issue Date and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii); (iv) (A) Indebtedness of a
Restricted Subsidiary outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary
(other than Indebtedness Incurred in connection with, or in contemplation of,
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired
by the Company or a Restricted Subsidiary); PROVIDED, HOWEVER, that at the time
such Restricted Subsidiary is acquired by the Company or a Restricted
Subsidiary, the Company would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) of this covenant after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (iv) and such
transaction or series of related transactions and (B) Refinancing Indebtedness
Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (A)
represented by letters of credit (and reimbursement obligations with respect
thereto) to secure the purchase price of inventory and/or equipment in the
ordinary course of business or to secure Indebtedness (including Capitalized
Lease Obligations) otherwise permitted to be incurred under the Indenture, (B)
in respect of performance bonds (and letters of credit in respect thereof),
bankers' acceptances, letters of credit for workers' compensation claims, and
surety or appeal bonds (and letters of credit in respect thereof) provided by
the Company or
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any Restricted Subsidiary in the ordinary course of its business and which do
not secure other Indebtedness and (C) under Currency Agreements, Interest Rate
Agreements and Commodity Agreements Incurred which, at the time of Incurrence,
is in the ordinary course of business; provided that such agreements are entered
into for bona fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates, currency
exchange rates or commodity prices, as the case may be, and, in the case of
Interest Rate Agreements, any such Interest Rate Agreement has a notional amount
corresponding to the Indebtedness being hedged thereby; (vi) Indebtedness
represented by Guarantees by the Company of Indebtedness otherwise permitted to
be Incurred pursuant to this covenant and Indebtedness represented by Guarantees
by a Restricted Subsidiary of Indebtedness of the Company or of another
Restricted Subsidiary otherwise permitted to be Incurred pursuant to this
covenant; (vii) obligations with respect to customary provisions regarding
post-closing purchase price adjustments and indemnification in agreements for
the purchase or sale of a business or assets otherwise permitted by the
Indenture; (viii) Guarantees of Indebtedness of franchisees of the Company or a
Restricted Subsidiary in an aggregate principal amount at any one time
outstanding not to exceed $20 million, provided that any such Guarantees shall
be deemed to be Incurred by the Company or such Restricted Subsidiary at the
time any such franchisee ceases to be a franchisee of the Company or such
Restricted Subsidiary; (ix) Indebtedness Incurred by the Company or any
Restricted Subsidiary to finance the payment of property, casualty and specialty
insurance premiums in the ordinary course of the Company's business which is
repaid within 18 months of its Incurrence, provided that such Indebtedness does
not exceed $7.5 million in the aggregate at any one time outstanding; (x)
Indebtedness of the Company Incurred to finance the acquisition, construction or
improvement of fixed or capital assets, in an aggregate principal amount at any
one time outstanding not to exceed $15 million, provided that such Indebtedness
is incurred within 180 days after the date of such acquisition, construction or
improvement and does not exceed the fair market value of such acquired,
constructed or improved assets as determined in good faith by the Board of
Directors; (xi) Indebtedness represented by Capitalized Lease Obligations in
respect of Sale/Leaseback Transactions involving the sale of restaurants within
24 months of the purchase of the associated real property, in an aggregate
principal amount at any one time outstanding not to exceed $20 million; (xii)
Indebtedness represented by Guarantees of loans to employees of the Company or
its Subsidiaries for the purpose of paying withholding taxes incurred by such
employees in connection with the vesting of stock and/or stock options granted
by the Company, in an aggregate amount at any one time outstanding not to exceed
$3 million; and (xiii) other Indebtedness in an aggregate principal amount at
any one time outstanding not to exceed $20 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such new Indebtedness shall be subordinated to the Senior Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No Subsidiary
Guarantor shall incur any Indebtedness pursuant to the foregoing paragraph (b)
if the proceeds thereof are used, directly or indirectly, to Refinance any
subordinated obligation of such Subsidiary Guarantor unless such Indebtedness
shall be subordinated to the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty to at least the same extent as such Subordinated Obligation
of such Subsidiary Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt, except that an Unrestricted
Subsidiary may incur Indebtedness Guaranteed by the Company or any of its
Restricted Subsidiaries to the extent such Guarantee is permitted by clause (iv)
of paragraph (b) under the covenant "Limitation on Restricted Payments;"
provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such
event shall be deemed to constitute an Incurrence of Indebtedness by the Company
or a Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company will classify, in its
sole discretion, such item of Indebtedness and only be required to include the
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amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and except dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of such purchase,
repurchase or acquisition) or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement, payment or
Investment being herein referred to as a "Restricted Payment") if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default or Event of Default shall have occurred and be continuing (or would
result therefrom); (2) the Company and its Restricted Subsidiaries could not
Incur at least $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "--Limitation on Indebtedness and Preferred Stock;" or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments (the amount so expended, if other than in cash, to be determined in
good faith by the Board of Directors of the Company, whose determination will be
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee) declared or made subsequent to the Issue Date would
exceed the sum of: (A) 50% of the Consolidated Net Income with respect to the
period (treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income is a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of Capital Stock (other than Disqualified Stock
and other than the Common Stock issued in the Common Stock Offering) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary); (C) the
amount by which Indebtedness of the Company is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Restricted Subsidiary)
subsequent to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company upon
such conversion or exchange); and (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) repayments of the
principal of loans or advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was previously included in the calculation of the amount of
Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase, redemption, defeasance or other acquisition of Capital Stock of the
Company or Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary); PROVIDED, HOWEVER, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above and
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(B) the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above; (ii) any purchase, redemption, defeasance or other
acquisition of Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Subordinated Obligations of
the Company; PROVIDED, HOWEVER, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the Subordinated
Obligations being so redeemed, repurchased, acquired or retired for value (plus
the amount of any premium required to be paid under the terms of the instrument
governing the Subordinated Obligations being so redeemed, repurchased, acquired
or retired and related expenses), (B) such new Indebtedness is subordinated to
the Senior Notes at least to the same extent as such Subordinated Obligations so
purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C)
such new Indebtedness has a final scheduled maturity date later than the final
scheduled maturity date of the Senior Notes and (D) such new Indebtedness has an
Average Life equal to or greater than the Average Life of the Senior Notes;
provided further, however, that such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; PROVIDED,
HOWEVER, that the amount of such dividend will be included in the calculation of
the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iv) Investments in the form of Guarantees by the Company or any of its
Restricted Subsidiaries of Indebtedness of an Unrestricted Subsidiary solely to
the extent that the Company or any such Restricted Subsidiary would then be
permitted to make an Investment in such Unrestricted Subsidiary pursuant to
clause (3) of paragraph (a) above; provided that the amount of any such
Investment will be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (v) the repurchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any member of the Company's management pursuant to employee
benefit plans or agreements; provided that the aggregate price paid for all such
Capital Stock shall not exceed $2 million in any 12-month period and $5 million
in the aggregate; provided further that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above; and (vi) other Restricted Payments in an aggregate amount
not to exceed $5 million; provided that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance
or restriction pursuant to an agreement in effect at or entered into on the
Issue Date (including pursuant to the New Credit Facility); (2) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by the Company or a
Restricted Subsidiary and outstanding on such date (other than Indebtedness
Incurred in connection with, or in contemplation of, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or a Restricted
Subsidiary); (3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (1) or (2) of this covenant or contained in any amendment
to an agreement referred to in clause (1) or (2) of this covenant; PROVIDED,
HOWEVER, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not materially less favorable to the
Senior Noteholders than the encumbrances and restrictions contained in any such
agreement as determined in good faith by the Company and evidenced by an
Officers' Certificate; (4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of,
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agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture or (C) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance or restrictions
restrict the transfer of the property subject to such security agreements; (5)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (6) any encumbrance or restriction arising under or by
reason of applicable law; (7) any encumbrance or restriction contained in the
Indenture; (8) customary provisions in joint venture agreements relating solely
to the securities, assets and revenues of such joint venture or other business
venture; (9) any encumbrance or restriction applicable to secured Indebtedness
otherwise permitted to be Incurred under the Indenture that limits the right of
the debtor to dispose of the assets securing such Indebtedness; (10) customary
net worth provisions contained in leases and other agreements entered into by a
Restricted Subsidiary in the ordinary course of business; and (11) customary
restrictions with respect to a Restricted Subsidiary pursuant to an agreement
that has been entered into for the sale or other disposition of all of the
Capital Stock or assets of such Restricted Subsidiary.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by senior management for Asset
Dispositions of less than $5 million and by the Board of Directors of the
Company in good faith for Asset Dispositions of $5 million or more (including in
each case as to the value of all non cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Temporary Cash Investments and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company or such
Restricted Subsidiary, as the case may be, (A) within 270 days from the receipt
of such Net Available Cash to the extent the Company or any Restricted
Subsidiary, as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay, purchase or
otherwise acquire Indebtedness under the New Credit Facility or other Senior
Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly Owned
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company); (B) to the extent of any remaining balance of Net
Available Cash after any election in accordance with clause (A), to the extent
the Company or such Restricted Subsidiary, as the case may be, elects, to the
investment by the Company or any Wholly Owned Subsidiary in Additional Assets
within 360 days from the receipt of such Net Available Cash (except that the
Company shall be deemed to have so invested such Net Available Cash within 360
days if, within such 360 days, it has entered into a binding commitment to
invest such Net Available Cash and such Net Available Cash is actually invested
within 90 days thereafter); (C) to the extent of any remaining balance of such
Net Available Cash after any election in accordance with clauses (A) and (B), to
make an Offer (as defined below) to purchase Senior Notes pursuant to and
subject to the conditions set forth in paragraph (b) of this covenant within 45
days from the application of Net Available Cash in accordance with clauses (A)
and (B); and (D) to the extent of any remaining balance of such Net Available
Cash after election or application in accordance with clauses (A), (B) and (C),
to (x) the acquisition by the Company or any Wholly Owned Subsidiary of
Additional Assets, (y) the prepayment, repayment, purchase or other acquisition
of Indebtedness of the Company (other than Indebtedness owed to an Affiliate of
the Company and other than Disqualified Stock of the Company) or Indebtedness of
any Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company) or (z) general corporate purposes; PROVIDED, HOWEVER
that in connection with any prepayment, repayment, purchase or other acquisition
of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause any related
loan commitment or availability (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid, purchased or acquired, except
that pending the final application of any such Net Available Cash, the Company
or such Restricted Subsidiary may temporarily
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reduce Indebtedness under a revolving credit facility or otherwise invest such
Net Available Cash in Temporary Cash Investments.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant
exceeds $5,000,000. The Company shall not be required to make an Offer for
Senior Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and (B))
is less than $7,500,000 (which lesser amounts shall be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from subsequent Asset Dispositions).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness that is subordinated to the
Senior Notes or the Subsidiary Guarantees) and the release of the Company or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash and (z) Additional Assets
received in an exchange of assets transaction; provided that (i) in the event
such exchange of assets transaction or series of related exchange of assets
transactions (each an "Exchange Transaction") involves an aggregate value in
excess of $2,500,000, the terms of such Exchange Transaction shall have been
approved by a majority of the disinterested members of the Board of Directors,
(ii) in the event such Exchange Transaction involves an aggregate value in
excess of $5,000,000, the Company shall have received a written opinion from a
nationally recognized independent investment banking firm that the Company has
received consideration equal to the fair market value of the assets disposed of
and (iii) any assets to be received shall be comparable to those being exchanged
as determined in good faith by the Board of Directors, except that up to
$1,000,000 of consideration in any Exchange Transaction may consist of marketing
and similar credits in lieu of comparable assets.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will
be required to purchase Senior Notes tendered pursuant to an offer by the
Company for the Senior Notes (the "Offer") at a purchase price of 100% of their
principal amount plus accrued interest to the date of purchase in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Indenture. If the aggregate purchase price of Senior Notes tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Senior Notes, the Company will apply the remaining Net Available
Cash in accordance with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Senior Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (i) the terms of
such transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $2,500,000, the terms of such transaction shall have been
approved by a majority of the disinterested members of the Board of Directors
(and such majority determines that such Affiliate Transaction satisfies the
criteria in clause
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(i) above) and (iii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $5,000,000, the Company has received a written
opinion from a nationally recognized independent investment banking firm that
such Affiliate Transaction is fair to the Company from a financial point of
view.
(b) The foregoing shall not apply to (i) any Restricted Payment permitted to
be made pursuant to "Limitation on Restricted Payments," (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) any fees, indemnities,
loans or advances to employees in the ordinary course of business, (iv) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (v) transactions with suppliers or other purchasers of
goods and services (including, without limitation, pursuant to joint venture
agreements and franchise agreements) and (vi) any agreement in effect on the
Issue Date or any amendment thereto or transaction contemplated thereby (and any
replacement or amendment of any such agreement so long as any such amendment or
replacement thereof is not materially less favorable to the Holders than the
original agreement in effect on the Issue Date).
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the Issue Date or thereafter acquired, securing any obligation, other than
Permitted Liens, unless contemporaneously therewith effective provision is made
to secure the Senior Notes equally and ratably with (or on a senior basis to, in
the case of Subordinated Obligations) such obligation for so long as such
obligation is so secured by a Lien on property or assets of the Company or a
Restricted Subsidiary.
LIMITATION ON SALES OF SUBSIDIARY CAPITAL STOCK. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Subsidiary, unless (a) after any such transfer,
conveyance, sale, lease, disposition or issuance, such Subsidiary constitutes a
Restricted Subsidiary and (b) the net cash proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under "Limitation on Sales of Assets and Subsidiary
Stock."
SEC REPORTS. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the SEC and provide the Trustee and Senior
Noteholders with the annual reports and such information, documents and other
reports which are specified in Sections 13 and 15(d) of the Exchange Act. The
Company also will comply with the other provisions of TIA Section 314(a).
FUTURE GUARANTORS. The Company shall cause each new Subsidiary (other than
(i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Senior Notes on the terms and conditions set forth in the
Indenture.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company)
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will expressly assume, by supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company
under the Senior Notes and the Indenture; (ii) immediately after giving pro
forma effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default or Event of
Default will have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, the Successor Company would be able to Incur
an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Limitation on Indebtedness and Preferred Stock;" (iv)
immediately after giving effect to such transaction, the Successor Company will
have a Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) the Company will have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture, as set forth
in the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Senior Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Senior Note when due, continued for 30 days, (ii) a
default in the payment of principal of any Senior Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "-- Merger and Consolidation," (iv) the failure by the Company to comply
for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "-- Certain Covenants" (in each case,
other than a failure to purchase Senior Notes), (v) the failure by the Company
to comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) the failure by the Company or any Significant Subsidiary of the
Company to pay any Indebtedness within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or any Significant Subsidiary of the Company (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million is rendered against the Company or any Significant
Subsidiary of the Company and such judgment or decree remains outstanding for a
period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision") or (ix) a Subsidiary Guaranty ceases
to be in full force and effect (other than in accordance with the terms thereof)
or a Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guaranty.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in aggregate principal amount of
the outstanding Senior Notes notify the Company as provided in the Indenture of
the default and the Company does not cure such default within the time specified
in clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Senior Notes by
notice to the Company may declare the
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principal of and accrued but unpaid interest on all the Senior Notes to be due
and payable. Upon such a declaration, such principal and interest will be due
and payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued interest on all the Senior Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in aggregate principal amount of the outstanding Senior Notes may
rescind any such acceleration with respect to the Senior Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Senior Notes unless (i) such Holder
shall have previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes shall have requested the Trustee to pursue the remedy,
(iii) such Holders shall have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee shall not
have complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the Holders of a majority in
principal amount of the outstanding Senior Notes shall not have given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Senior Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Senior Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers in good faith determines that withholding notice
is in the interests of the Senior Noteholders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Senior Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount of the Senior
Notes then outstanding. However, without the consent of each Holder of an
outstanding Senior Note affected, no amendment may, among other things, (i)
reduce the amount of Senior Notes whose Holders must consent to an amendment,
(ii) reduce the rate of or extend the time for payment of interest on any Senior
Note, (iii) reduce the principal of or extend the Stated Maturity of any Senior
Note, (iv) reduce the premium payable upon the redemption of any Senior Note or
change the time at which any Senior Note may be redeemed as described under "--
Optional Redemption," (v) make any Senior Note
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payable in money other than that stated in the Senior Note, (vi) impair the
right of any Holder to receive payment of principal of and interest on such
Holder's Senior Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such Holder's Senior
Notes or (vii) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations the Company
under the Indenture, to provide for uncertificated Senior Notes in addition to
or in place of certificated Senior Notes (provided that the uncertificated
Senior Notes are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Senior Notes are as described
in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect
to the Senior Notes, to secure the Senior Notes, to add to the covenants of the
Company for the benefit of the Senior Noteholders or to surrender any right or
power conferred upon the Company, to make any change that does not adversely
affect the rights of any Holder and to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the TIA.
The consent of the Senior Noteholders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Senior Noteholders a notice briefly describing such
amendment. However, the failure to give such notice to all Senior Noteholders,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Senior Noteholder may transfer or exchange Senior Notes in accordance with
the Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Senior Noteholder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a Senior
Noteholder to pay any taxes required by law or permitted by the Indenture,
including any transfer tax or other similar governmental charge payable in
connection therewith. The Company is not required to transfer or exchange any
Senior Note selected for redemption or to transfer or exchange any Senior Note
for a period of 15 days prior to a selection of Senior Notes to be redeemed. The
Senior Notes will be issued in registered form and the registered holder of a
Senior Note will be treated as the owner of such Senior Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Senior
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Senior Notes, to replace mutilated, destroyed,
lost or stolen Senior Notes and to maintain a registrar and paying agent in
respect of the Senior Notes. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants," the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under "-- Defaults" and the limitations contained in clauses (iii) and (iv)
under "-- Merger and Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Notes may not be
accelerated because of an Event of Default specified in clause (iv), (v), (vi),
(vii) (with respect only to Significant Subsidiaries) or
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(viii) under "-- Defaults" above or because of the failure of the Company to
comply with clause (iii) or (iv) under "-- Merger and Consolidation."
In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Senior Notes (except lost, stolen or
destroyed Senior Notes which have been replaced or repaid) to maturity or
redemption, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
holders of the Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Senior
Notes.
GOVERNING LAW
The Indenture provides that it and the Senior Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants in the Indenture, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof; provided that Donald N. Smith shall be deemed to
be an "Affiliate" so long as he is the beneficial owner of shares representing
5% or more of the total voting power of the Voting Stock (on a
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fully diluted basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable).
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares),
property or other assets (including sales and other dispositions of tangible
assets to franchisees and licensees and tangible assets at underperforming
restaurants, but excluding sales, dispositions or licenses of trademarks,
service marks, tradenames and other intangibles), including by way of a
Sale/Leaseback Transaction (each referred to for the purposes of this definition
as a "disposition"), by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, (iii) dispositions of inventory in the ordinary course of business,
(iv) for purposes of the "Limitation on Sales of Assets and Subsidiary Stock"
covenant only, a disposition that constitutes a Restricted Payment permitted by
the "Limitation on Restricted Payments" covenant, (v) the sale, lease, transfer
or other disposition of all or substantially all the assets of the Company as
permitted under the covenant "Merger and Consolidation", (vi) the grant of Liens
permitted by the covenant "Limitation on Liens" and (vii) sales of obsolete or
worn-out equipment.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board or
equivalent governing body.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity swap agreement, commodity future
agreement, commodity hedge agreement or other similar agreement relating to
commodities, in each case relating to those commodities used in the ordinary
course of business of the Company and its Subsidiaries.
"Common Stock Offering" means the offering to the public by the Company of
5,000,000 shares of its Common Stock concurrently with the offering of the
Senior Notes, including any offering of shares pursuant to over-allotment
options.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial information is
available ending at least 45 days prior to the date of such determination to
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(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence or retirement of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment occurred on the first day of
such period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) Preferred Stock dividends in respect
of all Preferred Stock of the Company and its Subsidiaries held by Persons other
than the Company or a Wholly Owned Subsidiary and (viii) the cash contributions
to any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company)
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in connection with Indebtedness Incurred by such plan or trust; PROVIDED,
HOWEVER, that there shall be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed
or paid by the Company or any Restricted Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in
a net loss of any such Person (other than an Unrestricted Subsidiary) for
such period shall be included in determining such Consolidated Net Income,
(ii) any net income (but not loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition,
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A), subject
to the exclusion contained in clause (iv) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend paid to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) the Company's equity in
a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses, and
(xiii) any income (loss) from discontinued operations.
Notwithstanding the foregoing, for the purpose of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such
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Capital Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the Stated Maturity of the Senior Notes.
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense and (v) non-cash charges, in
each case for such period. Notwithstanding the foregoing, the income tax
expense, depreciation expense and amortization expense of a Restricted
Subsidiary of the Company shall be included in EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be distributable to the Company by
such Subsidiary as a dividend.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any Subsidiary which is incorporated or otherwise
organized under the laws of any jurisdiction other than the United States of
America, any state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those 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. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person to
a counterparty (net of amounts receivable from such counterparty) pursuant to
any Interest Rate Agreement, or Currency Agreement or Commodity Agreement.
"Holder" or "Senior Noteholder" means the Person in whose name a Senior Note
is registered on the Registrar's books.
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"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money,
(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, Senior Notes or other similar
instruments,
(iii) all obligations of such Person in respect of unreimbursed drawings
under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables and accrued
expenses), which purchase price is due more that six months after the date
of placing such property in service or taking delivery and title thereto or
the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all non-contingent obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, any Preferred Stock (but excluding, in each case, any accrued
dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED, HOWEVER, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person,
(ix) to the extent not otherwise included in this definition, Hedging
Obligations and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted
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Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so re-designated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee. For the purposes of calculating the amount of other
"Investments," including Permitted Investments, the amount of any Investment
shall be the original cost of such Investment plus the cost of all additional
Investments by the Company or any of its Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment, reduced by the payment of dividends
or distributions in connection with such Investment or any other amounts
received in respect of such Investment; provided that no such payment of
dividends or distributions or receipt of any such other amounts shall reduce the
amount of any Investment if such payment of dividends or distributions or
receipt of any such amounts would be included in Consolidated Net Income.
"Issue Date" means the date on which the Senior Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Senior Note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Credit Facility" means that certain credit facility to be entered into
on the Issue Date among the Company, Societe Generale, and the lenders from time
to time party thereto, including any collateral documents, instruments and
agreements executed in connection therewith, and the term New Credit Facility
shall also include any amendments, supplements, modifications, extensions,
renewals, restatements or refundings thereof and any credit facilities that
replace, refund or refinance any part of the loans, other credit facilities or
commitments thereunder, including any such replacement, refunding or refinancing
facility that increases the amount borrowable thereunder or alters the maturity
thereof.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Permitted Holders" means Donald N. Smith, The Equitable Life Assurance
Society of the U.S., the Company's existing senior management and their
respective Affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, or a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) accounts and receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments and which
are readily convertible into cash in U.S. dollars in an amount equal to the fair
market value thereof as determined in good faith by the Board of Directors;
(viii) franchisees of the Company in an amount at any one time outstanding not
to exceed $10 million; (ix) Unrestricted Subsidiaries in an aggregate amount at
any one time outstanding not to exceed $10 million; (x) Guarantees permitted to
be made pursuant to the covenant "Limitation on Indebtedness and Preferred
Stock"; (xi) Investments in securities of trade creditors received in settlement
of obligations or pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy of insolvency of any trade creditors of customers, (xii)
Currency Agreements, Interest Rate Agreements and Commodity Agreements entered
into in the ordinary course of business; provided that such agreements are
entered into for bona fide hedging purposes, are not for speculation or trading
purposes and are designed to protect against fluctuations in interest rates,
currency exchange rates or commodity prices, as the case may be, and, in the
case of Interest Rate Agreements, any such Interest Rate Agreement has a
notional amount corresponding to the Indebtedness being hedged thereby, (xiii)
Investments in accounts and notes receivable from franchisees, customers,
suppliers and others in the ordinary course of business and (xiv) Investments
made by the Company or a Restricted Subsidiary in connection with an Asset
Disposition made in compliance with the covenant "Limitation on Sales of Assets
and Subsidiary Stock".
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate
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proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for taxes, assessments, governmental
charges or claims not yet subject to penalties for non-payment or which are
being contested in good faith by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person, and Liens to secure bankers' acceptances, in
each case in the ordinary course of its business; (e) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens (A) securing obligations under Interest Rate
Agreements so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such obligations
and (B) securing obligations under Currency Agreements and Commodity Agreements,
provided that such Liens shall not encumber any assets or property of the
Company other than the underlying contracts and the rights thereunder; (g) Liens
existing as of the date on which the Senior Notes are originally issued and
Liens created by the Indenture; (h) Liens created solely for the purpose of
securing the payment of all or a part of the purchase price of assets or
property acquired or constructed in the ordinary course of business after the
date on which the Senior Notes are originally issued; PROVIDED, HOWEVER, that
(A) the aggregate principal amount of Indebtedness secured by such Liens shall
not exceed the cost of the assets or property so acquired or constructed, (B)
the Indebtedness secured by such Liens shall have otherwise been permitted to be
issued under the Indenture and (C) such Liens shall not encumber any other
assets or property of the Company or any of its Restricted Subsidiaries and
shall attach to such assets or property within 90 days of the construction or
acquisition of such assets or property; (i) Liens on the assets or property of a
Restricted Subsidiary of the Company existing at the time such Restricted
Subsidiary became a Subsidiary of the Company and not incurred as a result of
(or in connection with or in anticipation of) such Restricted Subsidiary
becoming a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) any such Lien
does not by its terms cover any categories of property or assets after the time
such Restricted Subsidiary becomes a Subsidiary which were not covered
immediately prior to such transaction, (B) the incurrence of the Indebtedness
secured by such Lien shall have otherwise been permitted to be issued under the
Indenture, and (C) such Liens do not extend to or cover any other categories of
property or assets of the Company or any of its Restricted Subsidiaries; (j)
Liens to secure Capitalized Lease Obligations permitted to be Incurred under the
Indenture; (k) Liens securing Indebtedness outstanding under the New Credit
Facility (including, without limitation, any Refinancing Indebtedness in respect
thereof to the extent permitted under the covenant "Limitation on Indebtedness
and Preferred Stock"); (l) any interest or title of a lessor under any lease,
whether or not characterized as an operating or capital lease; (m) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or any
Restricted Subsidiary, including rights of set-off; (n) leases or subleases
granted in the ordinary course of business; (o) Liens arising out of consignment
or similar arrangements for the sale of goods; (p) rights of set-off arising
under law by banks; (q) Liens in addition to the foregoing incurred in the
ordinary course of business which are not incurred in connection with the
borrowing of money or the obtaining of advances of credit; provided that the
amount of the obligations of the Company and its Restricted Subsidiaries secured
by such Liens does not exceed in the aggregate $2 million at any one time
outstanding; and (r) Liens extending, renewing or replacing in whole or in part
a Lien permitted by the Indenture; provided, however, that (A) such Liens do not
extend beyond the property subject to the existing Lien and improvements and
construction on such property and (B) the Indebtedness secured by the Lien may
not exceed the Indebtedness secured at the time by the existing Lien.
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"Person" means any individual, corporation, partnership joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Qualified Equity Offering" means (i) an underwritten primary public
offering (other than the Common Stock Offering) of common stock of the Company
pursuant to an effective registration statement under the Securities Act or (ii)
a private offering of common stock other than issuances of common stock pursuant
to employee benefit plans or as compensation to employees.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances other Refinancing
Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the Indebtedness
being refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Restricted Subsidiary that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary (unless
such Unrestricted Subsidiary is concurrently redesignated a Restricted
Subsidiary).
"Related Business" means the businesses of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, in each case as determined by the Company in good faith.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"RIC" means Restaurant Insurance Corporation, the Company's insurance
Subsidiary, and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means all Indebtedness of the Company including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Senior Notes; PROVIDED, HOWEVER, that Senior
Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities),
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(4) any Indebtedness, Guarantee or obligation of the Company which is
subordinate or junior in any respect to any other Indebtedness, Guarantee or
obligation of the Company, including any Subordinated Obligations, (5) any
obligations with respect to any Capital Stock, (6) Indebtedness which, when
Incurred and without respect to any election under Section 1111(b) of Title II,
United States Code, is without recourse to the Company, or (7) any Indebtedness
Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
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 (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Subsidiary Guarantor" means Friendly's Restaurants Franchise, Inc. and each
new Subsidiary (other than Foreign Subsidiaries and Unrestricted Subsidiaries)
that guarantees the Company's obligations with respect to the Senior Notes.
"Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor of the
Company's obligations with respect to the Senior Notes.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 360 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 60 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's
Ratings Group, (v) investments in securities with maturities of 12 months or
less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi)
investments in shares of money market funds registered under the Investment
Company Act of 1940, as amended.
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"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection
77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under clause (a) of "Limitation on Indebtedness and Preferred
Stock" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares and, in the
case of Foreign Subsidiaries, shares required to be held by foreign nationals
representing not more than 2% of such Capital Stock) is owned by the Company or
another Wholly Owned Subsidiary.
BOOK-ENTRY SYSTEM
The Senior Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
DTC or its nominee will initially be the sole registered holder of the Senior
Notes for all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Senior Notes represented by such Global Security purchased by such persons
in the Offering. Such accounts shall be designated by the Underwriters with
respect to Senior Notes placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such
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securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Security.
Payment of principal and interest on Senior Notes represented by any such
Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sold holder of the Senior Notes represented
thereby for all purposes under the Indenture. None of the Company, the Trustee,
any agent of the Company, or the Underwriters will have any responsibility or
liability for any aspect of DTC's records relating to or payments made on
account of beneficial ownership interests in a Global Security representing any
Senior Notes or for maintaining, supervising, or reviewing any of DTC's records
relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately credit,
on its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC. A Global Security is exchangeable
for certificated Senior Notes only if (i) DTC notifies the Issuers that it is
unwilling or unable to continue as a Depositary (as defined in the Indenture)
for such Global Security or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act, (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable, and exchangeable, and such transfers shall be registrable, or (iii)
there shall have occurred and be continuing an Event of Default or an event
which, with the giving of notice or lapse of time or both, would constitute an
Event of Default with respect to the Senior Notes represented by such Global
Security. Any Global Security that is exchangeable for certificated Senior Notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated Senior Notes in authorized denominations and
registered in such names as the Depositary holding such Global Security may
direct. Subject to the foregoing, a Global Security is not exchangeable, except
for a Global Security of like denomination to be registered in the name of the
Depositary or its nominee. In the event that a Global Security becomes
exchangeable for certificated Senior Notes, (i) certificated Senior Notes will
be issued only in fully registered form in denominations of $1,000 or integral
multiples thereof, (ii) payment of principal, any repurchase price, and interest
on the certificated Senior Notes will be payable, and the transfer of the
certificated Senior Notes will be registerable, at the office or agency of the
Company maintained for such purposes, and (iii) no service charge will be made
for any registration of transfer or exchange of the certificated Senior Notes,
although the Company may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Senior Notes
represented by such Global Security for the purposes of receiving payment on the
Senior Notes, receiving notices, and for all other purposes under the Indenture
and the Senior Notes. Beneficial interests in Senior Notes will be evidenced
only by, and transfers thereof will be effected only through, records maintained
by the Depositary and its participants. Cede & Co. has been appointed as the
nominee of DTC. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the holders
thereon for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depositary, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Company understands that under existing
industry practices, in the event that the Company requests any action of holders
or that an owner of a beneficial interest in a Global Security desires to give
or take any action
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which a holder is entitled to give or take under the Indenture, the Depositary
would authorize the participants holding the relevant beneficial interest to
give or take such action and such participants would authorize beneficial owners
owning through such participants to give or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either direct or
indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Notes will be made in immediately available funds.
All payments of principal and interest will be made by the Company in
immediately available funds. The Senior Notes will trade in the Same-Day Funds
Settlement System of DTC until maturity, and secondary market trading activity
for the Senior Notes will therefore settle in immediately available funds.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and Societe Generale Securities
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc
Montgomery Securities, Inc. (the "Underwriters"), the Company has agreed to sell
to the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective amounts of the Senior Notes:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER SENIOR NOTES
- ---------------------------------------------------------------------------------------- --------------
<S> <C>
Societe Generale Securities Corporation................................................. $
Donaldson, Lufkin & Jenrette Securities Corporation.....................................
NationsBanc Montgomery Securities, Inc..................................................
--------------
Total............................................................................. $ 175,000,000
--------------
--------------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Notes
offered hereby if any of the Senior Notes are purchased. The Company has been
advised by the Underwriters that the Underwriters propose to offer the Senior
Notes to the public initially at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers initially at such price
less a discount not in excess of % of the principal amount of the Senior
Notes. The Underwriters may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of % of the principal amount of the
Senior Notes. After the initial offering of the Senior Notes to the public, the
Underwriters may change the public offering price, the discount and the
concession.
The Senior Notes are a new issue of securities with no established trading
market. The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Senior Notes, as permitted by applicable laws and
regulations. No assurance can be given, however, that the Underwriters will make
a market in the Senior Notes, or as to the liquidity of, or the trading market
for, the Senior Notes.
The Company and the initial Subsidiary Guarantor have agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act, and to contribute to payments which the Underwriters might
be required to make in respect thereof.
In connection with the offering, Societe Generale Securities Corporation, on
behalf of the Underwriters, may engage in overallotment, stabilizing and
syndicate covering transactions. Overallotment involves sales in excess of the
offering size, which create a short position for the Underwriters. Stabilizing
transactions involve bids to purchase the Senior Notes in the open market for
the purpose of pegging, fixing or maintaining the price of the Senior Notes.
Syndicate covering transactions involve purchases of the Senior Notes in the
open market after the distribution has been completed in order to cover short
positions. Such stabilizing transactions and syndicate covering transactions may
cause the price of the Senior Notes to be higher than it would otherwise be in
the absence of such transactions. Such activities, if commenced, may be
discontinued at any time.
Societe Generale, an affiliate of Societe Generale Securities Corporation,
is expected to be a lender under the New Credit Facility and to act as arranger
and administrative agent thereunder. Societe Generale Securities Corporation is
providing certain advisory services in connection with the Recapitalization, for
which it is receiving a fee. See "Description of New Credit Facility."
The Equitable, which currently beneficially owns 10.4% of the outstanding
common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, a member of the National Association of Securities Dealers, Inc.
(the "NASD") and an underwriter in the Senior Note Offering. As a result of the
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foregoing, the Senior Note Offering is subject to the provisions of Section 2720
of the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the NASD)
("Section 2720"). Accordingly, the underwriting terms for the Senior Note
Offering will conform with the requirements set forth in Section 2720. In
particular, the price at which the Senior Notes are to be distributed to the
public must be at a yield no lower than that recommended by a "qualified
independent underwriter" who has also participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus is a part and
who meets certain standards. In accordance with this requirement, Societe
Generale Securities Corporation will serve in such role and will recommend the
public offering price in compliance with the requirements of Section 2720.
Societe Generale Securities Corporation, in its role as qualified independent
underwriter, has performed the due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus is a part.
The Underwriters have informed the Company that they do not intend to make
sales of Senior Notes offered by this Prospectus to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters with
respect to the securities offered hereby will be passed upon for the
Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendment
thereto) on Form S-1 under the Securities Act, for the registration of the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Senior Notes, reference is hereby made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such document, filed as an exhibit to the Registration Statement,
for a more complete description of the matter involved and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules thereto filed by the Company with the
Commission may be inspected, without charge, at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, New York, New York 10048 and 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of
the Registration Statement may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of prescribed fees.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offerings, the Company will become subject
to the informational requirements of the Exchange Act.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and June 29, 1997
(unaudited)......................................................................................... F-3
Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1,
1995, December 31, 1995 and December 29, 1996 and for the Six Months Ended June 29, 1997
(unaudited)......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 14, 1997 (except with respect to the matter
discussed in Note 16, as to which
the date is July 14, 1997)
F-2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
JUNE 29,
1997
DECEMBER 31, DECEMBER 29, -----------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 23,690 $ 18,626 $ 16,899
Restricted cash and investments...................................................... -- -- 4,000
Trade accounts receivable............................................................ 5,233 4,992 7,056
Inventories.......................................................................... 15,079 15,145 17,490
Deferred income taxes................................................................ 9,885 12,375 12,381
Prepaid expenses and other current assets............................................ 3,985 1,658 7,308
------------ ------------ -----------
TOTAL CURRENT ASSETS................................................................... 57,872 52,796 65,134
RESTRICTED CASH AND INVESTMENTS........................................................ -- -- 7,889
INVESTMENT IN JOINT VENTURE............................................................ -- 4,500 3,757
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............... 295,448 286,161 279,265
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790 and
$5,510 (unaudited) at December 31, 1995, December 29, 1996 and June 29, 1997,
respectively......................................................................... 16,607 16,019 15,375
OTHER ASSETS........................................................................... 365 650 1,722
------------ ------------ -----------
TOTAL ASSETS........................................................................... $ 370,292 $ 360,126 $ 373,142
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt................................................. $ 3,204 $ 1,289 $ 2,953
Current maturities of capital lease obligations...................................... 6,466 6,353 5,003
Accounts payable..................................................................... 20,972 20,773 26,272
Accrued salaries and benefits........................................................ 13,525 13,855 15,971
Accrued interest payable............................................................. 5,940 9,838 10,007
Insurance reserves................................................................... 6,605 3,973 6,927
Other accrued expenses............................................................... 15,838 17,415 17,436
------------ ------------ -----------
TOTAL CURRENT LIABILITIES.............................................................. 72,550 73,496 84,569
------------ ------------ -----------
DEFERRED INCOME TAXES.................................................................. 51,908 48,472 46,802
CAPITAL LEASE OBLIGATIONS, less current maturities..................................... 15,375 14,182 14,193
LONG-TERM DEBT, less current maturities................................................ 373,769 371,795 371,429
OTHER LONG-TERM LIABILITIES............................................................ 22,224 25,337 31,683
COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A, authorized 150,000, 150,000 and 4,000 shares at December 31, 1995,
December 29, 1996 and June 29, 1997, respectively; 1,090,969, 1,285,384 and
1,285,384 (unaudited) shares issued and outstanding at December 31, 1995, December
29, 1996 and June 29, 1997, respectively.......................................... 11 13 13
Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29,
1996 and June 29, 1997, respectively; -0-, 1,187,503 and 1,187,503 (unaudited)
shares issued and outstanding at December 31, 1995, December 29, 1996 and June 29,
1997, respectively................................................................ -- 12 12
Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29,
1996 and June 29, 1997, respectively; -0- shares issued and outstanding at
December 31, 1995, December 29, 1996 and June 29, 1997............................ -- -- --
Additional paid-in capital........................................................... 46,842 46,905 46,905
Unrealized gain on investment securities, net of taxes............................... -- -- 28
Accumulated deficit.................................................................. (212,387) (220,159) (222,563)
Cumulative translation adjustment.................................................... -- 73 71
------------ ------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................... (165,534) (173,156) (175,534)
------------ ------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................... $ 370,292 $ 360,126 $ 373,142
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES.......................................................... $ 631,014 $ 649,149 $ 650,807 $ 308,784
COSTS AND EXPENSES:
Cost of sales................................................. 179,793 192,600 191,956 89,696
Labor and benefits............................................ 211,838 214,625 209,260 102,674
Operating expenses............................................ 132,010 143,854 143,163 70,620
General and administrative expenses........................... 38,434 40,705 42,721 21,230
Debt restructuring expenses (Note 5).......................... -- 3,346 -- --
Write-down of property and equipment (Note 6)................. -- 4,006 227 --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
----------- ------------- ------------- -----------
OPERATING INCOME.................................................. 36,870 16,670 30,501 7,958
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 45,467 41,904 44,141 22,138
Equity in net loss of joint venture............................... -- -- -- --
----------- ------------- ------------- -----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (8,597) (25,234) (13,640) (14,180)
Benefit from (provision for) income taxes......................... 4,661 (33,419) 5,868 6,154
----------- ------------- ------------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (3,936) (58,653) (7,772) (8,026)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. -- -- -- --
----------- ------------- ------------- -----------
NET LOSS.......................................................... $ (3,936) $ (58,653) $ (7,772) $ (8,026)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (1.09) $ (1.13)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... -- --
------------- -----------
Net loss...................................................... $ (1.09) $ (1.13)
------------- -----------
------------- -----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY
APPLIED:
Net loss (Note 10)............................................ $ (3,506) $ (58,134) $ (7,214) $ (7,747)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Net loss per share (unaudited)................................ $ (1.01) $ (1.09)
------------- -----------
------------- -----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,125 7,125
------------- -----------
------------- -----------
<CAPTION>
JUNE 29,
1997
-----------
<S> <C>
(UNAUDITED)
REVENUES.......................................................... $ 322,828
COSTS AND EXPENSES:
Cost of sales................................................. 92,186
Labor and benefits............................................ 104,898
Operating expenses............................................ 71,284
General and administrative expenses........................... 22,595
Debt restructuring expenses (Note 5).......................... --
Write-down of property and equipment (Note 6)................. 347
Depreciation and amortization................................. 16,401
-----------
OPERATING INCOME.................................................. 15,117
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 22,238
Equity in net loss of joint venture............................... 743
-----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (7,864)
Benefit from (provision for) income taxes......................... 3,224
-----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (4,640)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. 2,236
-----------
NET LOSS.......................................................... $ (2,404)
-----------
-----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (0.65)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... 0.31
-----------
Net loss...................................................... $ (0.34)
-----------
-----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY
APPLIED:
Net loss (Note 10)............................................ $ (4,640)
-----------
-----------
Net loss per share (unaudited)................................ $ (0.65)
-----------
-----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,125
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822
Net loss.................... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822
Net loss.................... -- -- -- -- -- -- --
Contribution of capital..... -- -- -- -- -- -- 20
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842
Net loss.................... -- -- -- -- -- -- --
Issuance of common stock to
lenders................... -- -- 1,187,503 12 -- -- 38
Proceeds from exercise of
warrants.................. 71,527 1 -- -- -- -- 21
Compensation expense
associated with management
stock plan................ 122,888 1 -- -- -- -- 4
Translation adjustment...... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905
Net loss (unaudited)........ -- -- -- -- -- -- --
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ -- -- -- -- -- -- --
Translation adjustment
(unaudited)............... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JUNE 29, 1997
(unaudited)................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------
<CAPTION>
UNREALIZED
GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965)
Net loss.................... -- (3,936) -- (3,936)
--- ----------------- --- ---------
BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901)
Net loss.................... -- (58,653) -- (58,653)
Contribution of capital..... -- -- -- 20
--- ----------------- --- ---------
BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534)
Net loss.................... -- (7,772) -- (7,772)
Issuance of common stock to
lenders................... -- -- -- 50
Proceeds from exercise of
warrants.................. -- -- -- 22
Compensation expense
associated with management
stock plan................ -- -- -- 5
Translation adjustment...... -- -- 73 73
--- ----------------- --- ---------
BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156)
Net loss (unaudited)........ -- (2,404) -- (2,404)
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ 28 -- -- 28
Translation adjustment
(unaudited)............... -- -- (2) (2)
--- ----------------- --- ---------
BALANCE, JUNE 29, 1997
(unaudited)................. $ 28 $ (222,563) $ 71 $(175,534)
--- ----------------- --- ---------
--- ----------------- --- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (3,936) $ (58,653) $ (7,772) $ (8,026)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... -- -- -- --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
Write-down of property and equipment.......................... -- 4,006 227 --
Deferred income tax (benefit) expense......................... (4,207) 33,419 (5,926) (6,154)
(Gain) loss on asset retirements.............................. (259) 595 (916) (264)
Equity in net loss of joint venture........................... -- -- -- --
Changes in operating assets and liabilities:
Receivables................................................. (2,071) 679 241 (960)
Inventories................................................. 1,635 (1,044) (66) (2,302)
Other assets................................................ (1,603) 587 1,309 373
Accounts payable............................................ 2,333 (1,714) (199) 8,166
Accrued expenses and other long-term liabilities............ 14,420 16,572 6,286 7,457
----------- ------------- ------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 38,381 27,790 26,163 14,896
----------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (29,507) (19,092) (24,217) (10,912)
Proceeds from sales of property and equipment................... 1,475 926 8,409 3,481
Proceeds from sales and maturities of investment securities..... -- -- -- --
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... -- -- -- --
Advances to or investments in joint venture..................... -- -- (4,500) (4,500)
----------- ------------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES........................... (28,032) (18,166) (20,308) (11,931)
----------- ------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... -- 20 -- --
Proceeds from exercise of stock purchase warrants............... -- -- 22 22
Proceeds from borrowings........................................ 67,629 80,162 48,196 19,674
Repayments of debt.............................................. (69,338) (72,713) (52,084) (18,799)
Repayments of capital lease obligations......................... (6,190) (7,293) (7,131) (3,797)
----------- ------------- ------------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (7,899) 176 (10,997) (2,900)
----------- ------------- ------------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... -- -- 78 --
----------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 2,450 9,800 (5,064) 65
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 11,440 13,890 23,690 23,690
----------- ------------- ------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 13,890 $ 23,690 $ 18,626 $ 23,755
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 29,430 $ 25,881 $ 36,000 $ 16,029
Capital lease obligations incurred.............................. 7,767 3,305 5,951 2,811
Capital lease obligations terminated............................ 391 288 128 126
Conversion of accrued interest payable to debt.................. 11,217 14,503 -- --
Issuance of common stock to lenders............................. -- -- 50 --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. -- -- -- --
<CAPTION>
JUNE 29,
1997
-----------
<S> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (2,404)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... (2,236)
Depreciation and amortization................................. 16,401
Write-down of property and equipment.......................... 347
Deferred income tax (benefit) expense......................... (3,224)
(Gain) loss on asset retirements.............................. 778
Equity in net loss of joint venture........................... 743
Changes in operating assets and liabilities:
Receivables................................................. (1,015)
Inventories................................................. (2,345)
Other assets................................................ (3,199)
Accounts payable............................................ 5,499
Accrued expenses and other long-term liabilities............ 280
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 9,625
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (8,810)
Proceeds from sales of property and equipment................... 919
Proceeds from sales and maturities of investment securities..... 73
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... 965
Advances to or investments in joint venture..................... (1,400)
-----------
NET CASH USED IN INVESTING ACTIVITIES........................... (8,253)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... --
Proceeds from exercise of stock purchase warrants............... --
Proceeds from borrowings........................................ 29,191
Repayments of debt.............................................. (28,893)
Repayments of capital lease obligations......................... (3,395)
-----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (3,097)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... (2)
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (1,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 18,626
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 16,899
-----------
-----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 20,063
Capital lease obligations incurred.............................. 2,057
Capital lease obligations terminated............................ --
Conversion of accrued interest payable to debt.................. --
Issuance of common stock to lenders............................. --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. 1,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 29, 1997
IS UNAUDITED)
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to
the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the
outstanding common stock of FICC and in March 1996, FHC was merged into FICC.
The accompanying consolidated financial statements include the accounts of FICC
and its wholly-owned subsidiaries (collectively, "FICC").
Under the terms of the TRC acquisition financing agreements, warrants to
purchase shares of FICC's common stock were issued to the lenders. These
warrants were exercisable on or before September 2, 1998. In connection with
FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled
and one of the lenders was issued new warrants for 13,836 shares of FICC's
(formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price
of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As
of December 29, 1996 and June 29, 1997, none of these warrants had been
exercised.
As of December 29, 1996 and June 29, 1997, three classes of common stock
were authorized: Class A ("voting"), Class B ("limited voting") and Class C
("non-voting"). Prior to the occurrence of a Special Rights Default (see Note
7), lenders with limited voting common stock have voting rights only for certain
transactions as defined in the loan documents. Common stock held by the lenders
will automatically convert to voting common stock upon an underwritten public
offering by FICC of at least $30,000,000 (see Note 17).
As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting
common stock. In March 1996, TRC distributed its shares of FICC's voting common
stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29,
1996 and June 29, 1997, TRC's shareholders and FICC's lenders (see Note 7) owned
36.95% and 48.03%, respectively, of FICC's outstanding common stock.
As part of the debt restructuring in 1991 (see Note 7), certain officers of
FICC purchased 97,906 shares of Class A Common Stock and warrants convertible
into an additional 71,527 shares of voting common stock for an aggregate
purchase price of $55,550. These warrants were exercised on April 19, 1996 at an
aggregate exercise price of $22,000.
2. NATURE OF OPERATIONS
FICC owns and operates full-service restaurants in fifteen states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. FICC manufactures
substantially all of the frozen dessert products it sells, which are also
distributed to supermarkets and other retail locations. For the years ended
January 1, 1995, December 31, 1995 and December 29, 1996 and the six months
ended June 30, 1996 and June 29, 1997, restaurant sales were approximately 93%,
91%, 92%, 92% and 91%, respectively, of FICC's revenues. As of January 1, 1995,
December 31, 1995, December 29, 1996 and June 29, 1997, approximately 80% of
FICC's restaurants were located in the Northeast United States. As a result, a
severe or prolonged economic recession in this geographic area may adversely
affect FICC more than certain of its competitors which are more geographically
diverse. Commencing in 1997, FICC has franchised restaurants (see Note 16).
F-7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR --
FICC's fiscal year ends on the last Sunday in December, unless that day is
earlier than December 27 in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.
REVENUE RECOGNITION --
FICC recognizes restaurant revenue upon receipt of payment from the customer
and retail revenue upon shipment of product. Franchise royalty income, based on
gross sales of franchisees, is payable monthly and is recorded on the accrual
method as earned. Initial franchise fees are recorded upon completion of all
significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS --
FICC considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
INVENTORIES --
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 31, 1995, December 29, 1996 and June 29, 1997 were (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Raw Materials......................................... $ 2,129 $ 1,436 $ 2,135
Goods In Process...................................... 114 58 324
Finished Goods........................................ 12,836 13,651 15,031
------------ ------------ ---------
Total........................................... $ 15,079 $ 15,145 $ 17,490
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
INVESTMENT IN JOINT VENTURE --
In February 1996, FICC and another entity entered into a joint venture,
Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50%
ownership interest in the venture. Operations commenced in April 1997. FICC
accounts for the investment using the equity method. As of June 29, 1997, FICC
had a
F-8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
receivable for approximately $1.4 million from the joint venture related to
advances made to the venture in 1997 and net accounts receivable of
approximately $650,000.
INVESTMENTS --
FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation
("RIC") (see Note 4), has invested in a diversified fixed income portfolio of
federal agency issues and United States Treasury issues ($11,461,000 fair market
value at June 29, 1997). FICC classifies all of these investments as available
for sale. Accordingly, these investments are reported at estimated fair market
value with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of related income taxes.
RESTRICTED CASH AND INVESTMENTS --
RIC is required by the third party insurer of FICC to hold assets in trust
whose value is at least equal to certain of RIC's outstanding estimated
insurance claim liabilities. As of June 29, 1997, cash of $428,000 and
investments of $11,461,000 were restricted.
PROPERTY AND EQUIPMENT --
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--20 years
Equipment--3 to 10 years
At December 31, 1995, December 29, 1996 and June 29, 1997, property and
equipment included (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Land................................................ $ 77,765 $ 75,004 $ 74,446
Buildings and Improvements.......................... 110,231 112,359 112,966
Leasehold Improvements.............................. 37,703 39,120 38,964
Assets Under Capital Leases......................... 37,307 42,893 42,728
Equipment........................................... 206,266 216,536 217,106
Construction In Progress............................ 6,147 6,424 11,224
------------ ------------ -----------
Property and Equipment.............................. 475,419 492,336 497,434
Less: Accumulated Depreciation and Amortization..... (179,971) (206,175) (218,169)
------------ ------------ -----------
Property and Equipment--Net......................... $ 295,448 $ 286,161 $ 279,265
------------ ------------ -----------
</TABLE>
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
F-9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS --
Effective January 2, 1995, FICC adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which had no impact.
FICC reviews the license agreement for the right to use various trademarks
and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes
an impairment has occurred when the carrying value of the license agreement
exceeds the estimated future cash flows of the trademarked products.
FICC reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. FICC
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on FICC's experience
with similar properties and local market conditions, less costs to sell. (see
Note 6).
RESTAURANT CLOSURE COSTS--
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include the cost of writing down the
carrying amount of a restaurant's assets to estimate fair market value, less
costs of disposal, and the net present value of any remaining operating lease
payments after the expected closure date.
INSURANCE RESERVES --
FICC is self-insured through retentions or deductibles for the majority of
its workers' compensation, automobile, general liability, product liability and
group health insurance programs. Self-insurance amounts vary up to $500,000 per
occurrence. Insurance with third parties, some of which is then reinsured
through RIC (see Note 4), is in place for claims in excess of these self-insured
amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence
for FICC's worker's compensation, general liability and product liability
insurance. FICC and RIC's liability for estimated incurred losses are
actuarially determined and recorded on an undiscounted basis.
INCOME TAXES --
FICC accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. A valuation allowance is recorded for deferred tax assets whose
realization is not likely.
ADVERTISING --
FICC expenses production and other advertising costs the first time the
advertising takes place. For the years ended January 1, 1995, December 31, 1995
and December 29, 1996 and the six months ended June 30, 1996 and June 29, 1997,
advertising expense was approximately $15,430,000, $17,459,000, $18,231,000,
$9,168,000 and $9,008,000, respectively.
F-10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS --
Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which had no effect. This statement requires that after a transfer of financial
assets, an entity should recognize all financial assets and servicing assets it
controls and liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
This statement also provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. Upon adoption, all prior period earnings
per share data presented will be restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is permitted. Comprehensive income is
not materially different than net income (loss) for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, FICC will report
segment information for restaurant and retail operations when material.
RECLASSIFICATIONS --
Certain prior year amounts have been reclassified to conform with current
year presentation.
INTERIM FINANCIAL INFORMATION --
The accompanying financial statements as of June 29, 1997 and for the six
months ended June 30, 1996 and June 29, 1997 are unaudited, but, in the opinion
of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations and cash
flows of FICC. Such adjustments consist solely of normal recurring accruals.
Operating results for the six months ended June 30, 1996 and June 29, 1997 are
not necessarily indicative of the results that may be expected for the entire
year due to the seasonality of the business. Historically, higher revenues and
profits are experienced during the second and third fiscal quarters.
F-11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain FICC risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and Cash Equivalents......................................... $ 2,265
Restricted Cash and Investments................................... 12,061
Receivables and Other Assets...................................... 3,090
Loss Reserves..................................................... (13,231)
Other Liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
</TABLE>
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 31, 1995, December 29, 1996 and June 29, 1997 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
License agreement for the right to use
various trademarks and tradenames amortized over a
40 year life on a straight line basis............... $ 15,231 $ 14,764 $ 14,531
Deferred financing costs amortized over
the terms of the loans on an effective yield
basis............................................... 1,376 1,255 771
Deferred financing costs related to pending
registration statement (see Note 17)................ -- -- 73
------------ ------------ ---------
$ 16,607 $ 16,019 $ 15,375
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT
At December 31, 1995, December 29, 1996 and June 29, 1997, there were 81, 50
and 49 restaurant properties held for disposition, respectively. The restaurants
held for disposition generally have poor operating results, deteriorating
property values or other adverse factors. FICC determined that the
F-12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED)
carrying values of certain of these properties exceeded their estimated fair
values less costs to sell. Accordingly, during the year ended December 31, 1995,
the carrying values of 51 properties were reduced by an aggregate of $4,006,000;
during the year ended December 29, 1996, the carrying values of 6 properties
were reduced by an aggregate of $227,000 and during the six months ended June
29, 1997, the carrying values of 6 properties were reduced by an aggregate of
$347,000. FICC plans to dispose of the 49 properties by December 31, 1998. The
operating loss, prior to depreciation expense which is not reported at the
restaurant level, for the properties held for disposition was $1,972,000,
$1,129,000 and $673,000 for the years ended December 31, 1995 and December 29,
1996 and the six months ended June 29, 1997, respectively. The carrying value of
the properties held for disposition at December 31, 1995, December 29, 1996 and
June 29, 1997 was approximately $7,491,000, $4,642,000 and $3,876,000,
respectively.
7. DEBT
Effective January 1, 1991, FICC and its lenders entered into an Amended and
Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and
effective January 1, 1996, the Credit Agreement was again amended and restated.
In connection with the January 1, 1996 amendment (the "Amendment"), revolving
credit loans and term loans totaling $373,622,000 at December 31, 1995 were
converted to revolving credit loans of $38,549,000 and term loans of
$335,073,000. For the year ended December 29, 1996 and the six months ended June
29, 1997, interest was accrued on the revolving credit and term loans at an
annual rate of 11%, with .5% of the accrued interest which is not currently
payable being accrued and classified as other long-term liabilities in the
accompanying consolidated balance sheet. The deferred interest will be waived if
the revolving credit and term loans are repaid in full in cash on or before the
due date. The deferred interest as of June 29, 1997 was approximately
$2,842,000.
Under the terms of the Amendment, as of December 29, 1996, principal of
$371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999
by paying a fee equal to 1% of the aggregate of the revolver commitment of
$50,000,000, the letters of credit commitment (see below) and the principal
amount of the term loan. FICC does not expect to generate sufficient cash flow
to make all of the principal payments required by May 1, 1998; therefore, FICC
will exercise its option to extend the due date to May 1, 1999 if the pending
recapitalization is not consummated (see Note 17). Accordingly, these loans are
classified as long-term in the accompanying consolidated financial statements.
In connection with the Amendment, in March 1996 the lenders received
1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the
issued and outstanding equity of FICC. As a result of the issuance of stock
under the Management Stock Plan (see Note 13) and the exercise of certain
warrants (see Note 1), additional shares of FICC's Class B Common Stock were
issued to the lenders in 1996 to maintain their minimum equity interest in FICC
of 47.50% on a fully diluted basis in accordance with the Amendment. Total
shares issued to the lenders as of December 29, 1996 were 1,187,503. The
estimated fair market value of the shares issued of $50,000 was recorded as a
deferred financing cost during the year ended December 29, 1996. Prior to the
occurrence of a Special Rights Default (see below), lenders with limited voting
stock may elect two of the five members to FICC's board of directors. In the
event of a Special Rights Default, lenders with limited voting stock may appoint
two additional directors to FICC's board. Additionally, in the event of a
Special Rights Default, the lenders are entitled to receive additional shares of
FICC's limited voting common stock thereby increasing their equity interest in
FICC by 5% initially, with additional shares of limited voting common stock
issued quarterly thereafter for a maximum of eight quarters. Each quarterly
issuance of limited voting common stock would increase the
F-13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
lenders' equity interest in FICC by 2.5%. A Special Rights Default occurs if (i)
FICC files for bankruptcy or enters into any insolvency proceeding, (ii) FICC
fails to pay principal or interest on the revolving credit and term loans when
due, (iii) FICC fails to comply with financial covenants for two consecutive
quarters, or (iv) certain other conditions relating to ownership of FICC's
subsidiaries and ownership of FICC are not met. As of June 29, 1997, a Special
Rights Default had not occurred.
Covenant violations prior to December 31, 1995 were waived by the lenders.
The Amendment provided for new covenant requirements effective December 31, 1995
(see below). Under the terms of the Amendment, covenants require attainment of
minimum earnings, as defined, debt service coverage ratios, as defined, and
minimum net worth, as defined. Restrictions also have been placed on capital
expenditures, asset dispositions, proceeds from asset dispositions, investments,
pledging of assets, sale and leasebacks and the incurrence of additional
indebtedness. The covenant requirements, as defined under the Amendment, and
actual ratios/amounts as of and for the twelve months ended December 31, 1995
and December 29, 1996 and as of and for the twelve months ended June 29, 1997
were:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 JUNE 29, 1997
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------ ------------ -------------
Consolidated Earnings Before
Interest, Taxes, Depreciation
and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 58,000,000 $ 71,921,000
Ratio of Consolidated Adjusted
EBITDA to Consolidated Debt
Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .72 to 1 1.12 to 1
Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(196,000,000) $(175,534,000)
</TABLE>
FICC has a commitment from a bank to issue letters of credit totaling
$5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement
is extended. As of December 31, 1995, December 29, 1996 and June 29, 1997, total
letters of credit issued were $5,815,000, $4,390,000 and $3,445,000,
respectively. An annual fee of 2% is charged on the maximum drawing amount of
each letter of credit issued. During the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the six months ended June 30, 1996 and June
29, 1997, there were no drawings against the letters of credit. Under the terms
of the Amendment, interest will be charged at 13.5%, compounded monthly, on
drawings against letters of credit issued.
F-14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Debt at December 31, 1995, December 29, 1996 and June 29, 1997 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revolving Credit Loan, 12% through December 31, 1995
and 11% thereafter; due May 1, 1998 unless FICC
extends to May 1, 1999............................ $ 210,984 $ 36,605 $ 36,254
Term Loan, 8.5% compounded monthly through December
31, 1995 and 11% thereafter; due May 1, 1998
unless FICC extends to May 1, 1999................ 162,638 335,073 335,073
Insurance Premium Finance Loans, 5.55%-8.35%; due
August 15, 1997-July 10, 1998..................... 3,177 1,259 1,923
Other............................................... 174 147 1,132
------------ ------------ ----------
376,973 373,084 374,382
Less: Current Portion............................... 3,204 1,289 2,953
------------ ------------ ----------
Total Long-Term Debt................................ $ 373,769 $ 371,795 $ 371,429
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The revolving credit and term loans are collateralized by a lien on
substantially all of FICC's assets and by a pledge of FICC's shares of its
subsidiaries' stock.
At December 29, 1996, aggregate future annual principal payments of debt,
exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998,
$33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving
credit and term loans are reflected in 1999, since, as discussed above, FICC
will not repay the loans in 1998.
At December 31, 1995, December 29, 1996 and June 29, 1997, the unused
portion of the revolving credit loan was $11,451,000, $13,395,000 and
$13,746,000, respectively. A 0.5% annual commitment fee was charged on the
unused portions of the revolver and letters of credit commitments. The total
average unused portions of the revolver and letters of credit commitments was
$10,685,000, $12,796,000 and $8,471,000 for the years ended December 31, 1995
and December 29, 1996 and the six months ended June 29, 1997, respectively.
In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders
to facilitate a refinancing of the obligations under the Credit Agreement. This
amount was included in interest expense for the year ended January 1, 1995
since, under the proposed refinancing, the Credit Agreement would have been
repaid.
FICC's revolving credit and term loans are not publicly traded and prices
and terms of the few transactions which were completed are not available to
FICC. Since no information is available on prices of completed transactions, the
terms of the loans are complex and the relative risk involved is difficult to
evaluate, management believes it is not practicable to estimate the fair value
of the revolving credit and term loans without incurring excessive costs.
Additionally, since the letters of credit are associated with the
F-15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
revolving credit and term loan agreement, management believes it is also not
practicable to estimate the fair value of the letters of credit without
incurring excessive costs.
8. LEASES
As of December 31, 1995, December 29, 1996 and June 29, 1997, FICC operated
735, 707 and 700 restaurants, respectively. These operations were conducted in
premises owned or leased as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
----------------- ----------------- -----------
<S> <C> <C> <C>
Land and Building Owned................................ 313 296 294
Land Leased and Building Owned......................... 164 161 161
Land Leased and Building Leased........................ 258 250 245
--- --- ---
735 707 700
--- --- ---
--- --- ---
</TABLE>
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, FICC leases certain restaurant equipment over
lease terms from three to seven years.
Future minimum lease payments under non-cancellable leases with an original
term in excess of one year as of December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1997.................................................................... $ 13,366 $ 8,446
1998.................................................................... 12,524 6,445
1999.................................................................... 11,635 3,429
2000.................................................................... 10,277 2,354
2001.................................................................... 8,401 1,815
2002 and thereafter..................................................... 26,096 7,163
----------- ---------
Total Minimum Lease Payments............................................ $ 82,299 29,652
-----------
Less: Amounts Representing Interest..................................... 9,117
---------
Present Value of Minimum Lease Payments................................. $ 20,535
---------
---------
</TABLE>
F-16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 29, 1996
were (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------- ---------
<S> <C>
1997........................................................... $ 6,353
1998........................................................... 4,967
1999........................................................... 2,371
2000........................................................... 1,539
2001........................................................... 1,187
2002 and thereafter............................................ 4,118
---------
Total.................................................... $ 20,535
---------
---------
</TABLE>
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Minimum Rentals................. $ 14,767 $ 15,175 $ 16,051 $ 8,037 $ 8,102
Contingent Rentals.............. 2,003 2,012 1,918 735 710
----------- ------------ ------------ ----------- -----------
Total..................... $ 16,770 $ 17,187 $ 17,969 $ 8,772 $ 8,812
----------- ------------ ------------ ----------- -----------
----------- ------------ ------------ ----------- -----------
</TABLE>
9. INCOME TAXES
Prior to March 23, 1996 (see below), FICC and its subsidiaries were included
in the consolidated Federal income tax return of TRC. Under a tax sharing
agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC
and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable
share of the TRC group tax liability, determined as if the FICC Group were
filing a separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders which resulted in an
ownership change pursuant to Internal Revenue Code Section 382.
As a result of the deconsolidation from TRC, the FICC Group is required to
file two short year Federal income tax returns for 1996. For the period from
January 1, 1996 through March 23, 1996, the FICC Group was included in the
consolidated Federal income tax return of TRC and for the period from March 24,
1996 through December 29, 1996, the FICC Group will file a consolidated return
for its group only.
Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset of approximately $23 million
related to the $65,034,000
F-17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
of NOLs utilized by TRC was written off. Approximately $19.0 million of the
write-off was recorded in fiscal 1995, which amount approximated the benefit of
NOLs utilized by TRC as of December 31, 1995, and the balance was recorded in
fiscal 1996, which amount approximated the benefit of the NOLs utilized by TRC
for the period from January 1, 1996 to the deconsolidation. Additionally, as a
result of the change in ownership and Section 382 limitation, a valuation
allowance of approximately $10 million has been placed on $29,686,000 of the
$34,287,000 remaining Federal NOL carryforwards generated for the period prior
to March 23, 1996. The amount of pre-change NOLs not reserved for represents the
amount of NOLs which have become available as a result of FICC realizing gains
which were unrealized as of the date of the ownership change. FICC will reduce
the valuation allowance on pre-change NOLs if they become available to FICC via
realization of additional unrealized gains. FICC does not believe that it is
more likely than not that such NOLs will become available, and therefore the
valuation allowance is appropriate. For the period from March 23, 1996 to
December 29, 1996, FICC generated a net operating loss carryforward of
$5,765,000. Due to restrictions similar to Section 382 in most of the states
FICC operates in and short carryforward periods, FICC has fully reserved for all
state NOL carryforwards generated through March 26, 1996 as of December 29,
1996.
The benefit from (provision for) income taxes for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Benefit (Provision)
Federal................................. $ 454 $ -- $ -- $ -- $ --
State................................... -- -- -- -- --
Foreign................................. -- -- (58) -- --
----------- ------------ ------ ----------- -----------
Total Current Benefit (Provision)......... 454 -- (58) -- --
----------- ------------ ------ ----------- -----------
Deferred Benefit (Provision)
Federal................................. 3,608 (27,465) 5,126 5,332 3,224
State................................... 599 (5,954) 800 822 --
Foreign................................. -- -- -- -- --
----------- ------------ ------ ----------- -----------
Total Deferred Benefit (Provision)........ 4,207 (33,419) 5,926 6,154 3,224
----------- ------------ ------ ----------- -----------
Total Benefit From (Provision
For) Income Taxes....................... $ 4,661 $ (33,419) $ 5,868 $ 6,154 $ 3,224
----------- ------------ ------ ----------- -----------
----------- ------------ ------ ----------- -----------
</TABLE>
F-18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the differences between the statutory Federal income tax
rate and the effective income tax rates follows:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- -----------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate.................... 35% 35 % 35 %
State Income Taxes Net of Federal Benefit............ 17 11 14
Write-off of Intercompany NOL Carryforwards and Tax
Credits............................................ -- (85 ) (13 )
Increase (Decrease) in Federal NOL Valuation
Allowance.......................................... -- (57 ) 10
Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 )
Tax Credits.......................................... 8 3 3
Nondeductible Expenses............................... (2 ) (1 ) (1 )
Other................................................ -- (8 ) 3
-- --
---
Effective Tax Rate................................... 54 % (132 )% 43%
-- --
-- --
---
---
</TABLE>
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
31, 1995 and December 29, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Property and Equipment........................................... $ (51,903) $ (50,866)
Federal and State NOL Carryforwards (net of valuation allowance
of $23,026 and $21,220 at December 31, 1995 and December 29,
1996, respectively)............................................ -- 4,355
Insurance Reserves............................................... 6,311 5,788
Inventories...................................................... 2,450 1,862
Accrued Pension.................................................. 3,272 4,388
Intangible Assets................................................ (3,600) (6,037)
Tax Credit Carryforwards......................................... -- 1,001
Other............................................................ 1,447 3,412
------------ ------------
Net Deferred Tax Liability....................................... $ (42,023) $ (36,097)
------------ ------------
------------ ------------
</TABLE>
At December 31, 1995, December 29, 1996 and June 29, 1997, the
classification of deferred taxes was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Current Asset........................................ $ 9,885 $ 12,375 $ 12,381
Long-term Liability.................................. (51,908) (48,472) (44,997)
------------ ------------ ----------
$ (42,023) $ (36,097) $ (32,616)
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
F-19
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of FICC are covered by a non-contributory
defined benefit pension plan. Effective January 1, 1992, the plan was changed to
a defined benefit cash balance plan. Plan benefits are based on years of service
and participant compensation during their years of employment. FICC accrues the
cost of its pension plan over its employees' service lives.
Under the cash balance plan, a nominal account for each participant is
established. The plan administrator makes an annual contribution to each account
based on current wages and years of service. Each account earns a specified rate
of interest which is adjusted annually.
FICC's policy is to make contributions to the plan which provide for
benefits and pay plan expenses. Contributions are intended to provide not only
for benefits attributable to service to date, but also for those benefits
expected to be earned in the future.
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, net pension expense was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Service Cost......................................... $ 4,011 $ 3,877 $ 4,202
Interest Cost........................................ 5,106 5,420 5,781
Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428)
Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377
Net Amortization of Deferral of Asset Gain........... (548) (770) (651)
----------- ------------ ------------
Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The funded status of the plan as of December 31, 1995 and December 29, 1996
was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 49,581 $ 56,752
Non-vested..................................................... 1,081 1,316
------------ ------------
Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068
------------ ------------
------------ ------------
Projected Benefit Obligations.................................... $ 69,188 $ 76,768
Plan Assets at Market Value...................................... 86,477 90,626
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858
Unrecognized Prior Service Costs................................. (3,486) (3,077)
Unrecognized Net Gain............................................ (21,785) (21,044)
------------ ------------
Accrued Pension Liability........................................ $ (7,982) $ (10,263)
------------ ------------
------------ ------------
</TABLE>
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%,
respectively. The rate of annual increase in future compensation levels used
ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0%
for the year ended
F-20
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996,
depending on the employee group. The expected long-term rate of return on plan
assets was 9.5% for each of the three years.
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
FICC and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. FICC believes the new method is widely used in practice and preferable
because it results in calculated plan asset values that more closely approximate
fair value, while still mitigating the effect of annual market-value
fluctuations. Under both methods, only the cumulative net unrecognized gain or
loss which exceeds 10% of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. This change
resulted in a noncash benefit for the six months ended June 29, 1997 of
$2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect
of the change related to years prior to fiscal 1997 and $303,000 (net of taxes
of $211,000) in lower pension expense related to the six months ended June 29,
1997 as compared to the previous accounting method. Had this change been applied
retroactively, pension expense would have been reduced by $729,000, $879,000 and
$946,000 for the years ended January 1, 1995, December 31, 1995 and December 29,
1996, respectively.
FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible
employees and is qualified under Section 401(k) of the Internal Revenue Code.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
FICC made discretionary matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully vested.
Employer contributions are vested at the completion of five years of service or
at retirement, death, disability or termination at age 65 or over, as defined by
the Plan. Contribution and administrative expenses for the Plan were
approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January
1, 1995, December 31, 1995 and December 29, 1996, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FICC provides health care and life insurance benefits to certain groups of
employees upon retirement. Eligible employees may continue their coverages if
they are receiving a pension benefit, are 55 years of age, and have completed 10
years of service. The plan requires contributions for health care coverage from
participants who retired after September 1, 1989. Life insurance benefits are
non-contributory. The plan is not funded.
F-21
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
FICC accrues the cost of postretirement benefits over the years employees
provide services to the date of their full eligibility for such benefits. The
components of the net postretirement benefit cost for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125
Interest Cost on Accumulated Postretirement Benefit
Obligation, net of Amortization.................... 405 478 374
----- ----- -----
Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499
----- ----- -----
----- ----- -----
</TABLE>
The postretirement benefit liability as of December 31, 1995 and December
29, 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
<S> <C> <C>
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees..................................................... $ 4,267 $ 3,837
Other fully eligible plan participants....................... 428 358
Other active plan participants............................... 1,480 1,514
------ ------
Accumulated Postretirement Benefit Obligation.................... 6,175 5,709
Plan Changes..................................................... 1,175 1,113
Unrecognized Net (Loss) Gain..................................... (293) 328
------ ------
Postretirement Benefit Liability................................. $ 7,057 $ 7,150
------ ------
------ ------
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 14% gradually declining to 6% in 2000 and thereafter for the year
ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter
for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in
2000 and thereafter for the year ended December 29, 1996. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
postretirement benefit expense by approximately $56,000, $55,000 and $49,000,
and would have increased the accumulated postretirement benefit obligation by
approximately $484,000, $478,000 and $411,000 for the years ended January 1,
1995, December 31, 1995 and December 29, 1996, respectively.
FICC increased the required contributions from participants who retired
after July 31, 1994, for health coverage. This and other plan changes are being
amortized over the expected remaining employee service period of active plan
participants.
12. INSURANCE RESERVES
At December 31, 1995, December 29, 1996 and June 29, 1997, insurance
reserves of approximately $20,847,000, $16,940,000 and $28,937,000,
respectively, had been recorded. Insurance reserves at June 29,
F-22
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
1997 included RIC's reserve for FICC's insurance liabilities of approximately
$13,044,000. Reserves at December 31, 1995, December 29, 1996 and June 29, 1997
also included accruals related to postemployment benefits and postretirement
benefits other than pensions. While management believes these reserves are
adequate, it is reasonably possible that the ultimate liabilities will exceed
such estimates.
Classification of the reserves was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Current............................................... $ 6,605 $ 3,973 $ 6,927
Long-term............................................. 14,242 12,967 22,010
------------ ------------ ---------
Total............................................. $ 20,847 $ 16,940 $ 28,937
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
Following is a summary of the activity in the insurance reserves for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the six
months ended June 29, 1997 (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1995 1996 1997
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Beginning balance......................... $ 24,977 $ 23,216 $ 20,847 $ 16,940
Provision................................. 11,727 11,336 8,363 4,872
Payments.................................. (13,488) (13,705) (12,270) (6,106)
Acquisition of RIC........................ -- -- -- 13,231
----------- ------------ ------------ ---------
Ending balance........................ $ 23,216 $ 20,847 $ 16,940 $ 28,937
----------- ------------ ------------ ---------
----------- ------------ ------------ ---------
</TABLE>
13. STOCK PLANS
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded. On March 25,
1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for
persons with rights granted under the SRP to waive their rights under such plan
and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996,
all of the participants in the SRP made this election and the SRP rights then
outstanding were cancelled and 122,888 shares of Class A Common Stock were
issued, of which 61,650 were vested as of December 29, 1996. The estimated fair
value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as
compensation expense in the year ended December 29, 1996. The remaining issued,
non-vested shares of 61,238 will vest based on the Company achieving certain
performance measurements. As of June 29, 1997, 27,113 additional shares are
available for grant under the MSP (see Note 17).
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which was adopted by FICC effective January 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro forma
information related to the fair value be disclosed in the notes to financial
statements. FICC has determined that it will continue to
F-23
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK PLANS (CONTINUED)
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No.
123. Since no options were granted since January 2, 1995, the pro forma
disclosures required by SFAS No. 123 are not applicable.
14. RELATED PARTY TRANSACTIONS
In March 1996, the FICC pension plan acquired three restaurant properties
from FICC. The land, buildings and improvements were purchased by the plan at
their appraised value of $2,043,000 and are located in Connecticut, Vermont and
Virginia. Simultaneous with the purchase, the pension plan leased back the three
properties to FICC at an aggregate annual base rent of $214,000 for the first
five years and $236,000 for the following five years. The pension plan was
represented by independent legal and financial advisors. FICC realized a net
gain of approximately $675,000 on this transaction which is being amortized into
income over the initial ten year term of the lease.
FICC's Chairman and President is an officer of the general partner of
Perkins Family Restaurant L.P. ("PFR"), a subsidiary of TRC (formerly FICC's
majority shareholder). Three of FICC's directors are also directors of PFR. FICC
entered into subleases for certain land, buildings, and equipment with Perkins
Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC. During the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the six
months ended June 30, 1996 and June 29, 1997, rent expense related to the
subleases was approximately $245,000, $266,000, $278,000, $138,000 and $139,000,
respectively. Additionally, during the year ended January 1, 1995, FICC
purchased leasehold improvements and personal property at one of the locations
for approximately $303,000 from Perkins.
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of FICC of approximately
$7,046,000, $6,409,000 and $4,198,000 during the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. In addition, RIC had
reserves of approximately $10,456,000, $12,830,000 and $13,038,000 related to
FICC claims at January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a ten year
operating lease for an aircraft, for use by both FICC and Perkins. FICC shares
equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and
insurance expenses. In addition, FICC also incurs actual usage costs. Total
expense for the years ended January 1, 1995, December 31, 1995 and December 29,
1996 and the six months ended June 30, 1996 and June 29, 1997 was approximately
$336,000, $620,000, $590,000, $276,000 and $316,000, respectively.
FICC purchased certain food products used in the normal course of business
from a division of Perkins. For the years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the six months ended June 30, 1996 and June 29,
1997, purchases were approximately $1,335,000, $1,909,000, $1,425,000, $719,000
and $475,000, respectively.
TRC provided FICC with certain management services for which TRC was
reimbursed approximately $773,000, $785,000, $800,000, $400,000 and $412,000 for
the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
six months ended June 30, 1996 and June 29, 1997, respectively. Expenses were
charged to FICC on a specific identification basis. FICC believes the allocation
method
F-24
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
used was reasonable and approximates the amount that would have been incurred on
a stand alone basis had FICC been operated as an unaffiliated entity.
During the year ended December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997, FICC paid approximately $69,000, $25,000 and $93,000,
respectively, for fees and other reimbursements to four of FICC's board of
directors members, two of whom represented FICC's lenders.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997, FICC expensed
approximately $200,000, $763,000, $196,000, $96,000 and $100,000, respectively,
for fees paid to the lenders' agent bank. The expense for the year ended
December 31, 1995 included approximately $563,000 related to the filing of a
Form S-1 Registration Statement (see Note 5).
15. COMMITMENTS AND CONTINGENCIES
FICC is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on FICC's financial position or future
operating results.
As of December 29, 1996, FICC had commitments to purchase approximately
$50,587,000 of raw materials, food products and supplies used in the normal
course of business that cover periods of one to twelve months. Most of these
commitments are non-cancellable.
16. FRANCHISE AGREEMENT
On July 14, 1997, FICC entered into an agreement which granted a franchisee
exclusive rights to operate, manage and develop Friendly's full-service
restaurants in the franchising region of Maryland, Delaware, the District of
Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the
franchisee purchased certain assets and rights in 34 existing Friendly's
restaurants in this franchising region, has committed to open an additional 74
restaurants over the next six years and, subject to the fulfillment of certain
conditions, has further agreed to open 26 additional restaurants, for a total of
100 new restaurants in this franchising region over the next ten years. Proceeds
from the sale were approximately $8,238,000, of which $3,310,000 was recorded as
income in July 1997 (860,000 represents initial franchise fees for the 34
initial restaurants), $500,000 relates to development rights and $930,000
represents franchise fees for certain of the additional restaurants described
above. The development and franchise fees received will be amortized into income
over the initial ten-year term of the Agreement and as additional restaurants
are opened, respectively. The proceeds were allocated between the assets sold
and the development rights by FICC and the franchisee based on the estimated
fair market values. As part of the Agreement, the franchisee will also manage 14
other Friendly's restaurants located in the same area with an option to acquire
these restaurants in the future. The franchisee is required by the terms of the
Agreement to purchase from FICC all of the frozen dessert products it sells in
the franchised restaurants.
17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)
The Company has filed Registration Statements with the Securities and
Exchange Commission related to an initial public offering of 5,000,000 shares of
the Company's Common Stock (the "Common Stock Offering") and $175 million of
Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon
consummation of the offerings, enter into a new credit facility consisting of a
$105 million term loan
F-25
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)
(CONTINUED)
facility, a $55 million revolving credit facility and a $15 million letter of
credit facility (the "New Credit Facility").
The Company will amend its articles of organization in connection with the
Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and
Class B Common Stock and increase the number of authorized shares. The
accompanying consolidated financial statements have been restated to reflect the
anticipated share split.
Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"),
prior to the consummation of the Common Stock Offering, the Board will declare a
dividend distribution of one purchase right (a "Right") for each outstanding
share of Common Stock. The Plan provides, in substance, that should any person
or group (other than Mr. Smith, Equitable, senior management and their
respective affiliates) acquire 15% or more of FICC's Common Stock, each Right,
other than Rights held by the acquiring person or group, would entitle its
holder to purchase a specified number of shares of Common Stock for 50% of their
then current market value. Unless a 15% acquisition has occurred, the Rights may
be redeemed by FICC at any time prior to the termination date of the Plan.
In connection with the offerings, the 27,113 shares in the MSP not
previously allocated will be allocated and immediately vested and the 61,238
shares previously issued but not vested will become vested (see Note 13).
Additionally, 775,742 shares of Class A Common Stock will be returned to FICC
from certain shareholders for no consideration. The shares are being returned in
accordance with an agreement with FICC's existing lenders as a condition to the
offerings. Of such shares, 100,742 shares will be issued to FICC's Chief
Executive Officer and vest immediately, 375,000 shares will be reserved for
issuance under a restricted stock option plan (the "Restricted Stock Plan") to
be adopted by FICC in connection with the offerings and 300,000 shares will be
issued to certain employees. The 300,000 shares issued under the Restricted
Stock Plan will vest immediately. In connection with the offerings, FICC also
plans to adopt a stock option plan.
Pro forma net loss per share amounts assume the issuance of 5,000,000
additional shares of Common Stock in connection with the Common Stock Offering
and the return of 375,000 net shares to FICC in connection with the offerings.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock to be issued at prices below the anticipated public
offering price during the twelve months immediately preceding the initial public
offering are to be included in the calculation of weighted average number of
common shares outstanding. Therefore, the 27,113 incremental shares issued to
management in connection with the offerings have been included in the pro forma
shares used in computing net loss per share. Historical net loss per share is
not presented in the accompanying consolidated financial statements, as such
amounts are not meaningful.
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $175,000,000 of Senior Notes (see Note 17)
are guaranteed fully and unconditionally by one of FICC's subsidiaries. There
are no restrictions on FICC's ability to obtain dividends or other distributions
of funds from this subsidiary, except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, statements of operations, balance sheets and statements of
cash flows for Friendly Ice Cream Corporation ("the Parent
F-26
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Company"), Friendly's Restaurants Franchise, Inc. ("the Guarantor Subsidiary")
and Friendly's International, Inc. (FII), Friendly Holding (UK) Limited,
Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation
(collectively "the Non-guarantor Subsidiaries"). Prior to the consummation of
the offerings (see Note 17), the investment in joint venture will be transferred
to FII, therefore, the equity in net loss of joint venture and investment in
joint venture are included in Non-guarantor Subsidiaries in the accompanying
consolidating financial statements. Stockholders' equity (deficit), total assets
and net income (loss) of the Non-guarantor Subsidiaries are insignificant to
consolidated amounts for prior periods. Accordingly, supplemental condensed
consolidating financial information is not presented for prior periods. Separate
complete financial statements and other disclosures of the respective Guarantor
Subsidiary as of December 29, 1996 and June 29, 1997 and for the year and six
months then ended are not presented because management has determined that such
information is not material to investors.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales............................. 191,578 51 327 -- 191,956
Labor and benefits........................ 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment.................. 143,046 -- 344 -- 143,390
General and administrative expenses....... 41,061 106 1,554 -- 42,721
Depreciation and amortization............. 32,953 6 20 -- 32,979
Interest expense.......................... 44,141 -- -- -- 44,141
---------- ----------- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868
---------- ----------- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries.............................. (1,466) -- -- 1,466 --
---------- ----------- ------------- ------ ------------
Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
</TABLE>
F-27
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
Assets
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable.................. 4,765 -- 227 -- 4,992
Inventories................................ 14,796 24 325 -- 15,145
Deferred income taxes...................... 12,366 9 -- -- 12,375
Prepaid expenses and other current
assets................................... 4,805 -- 517 (3,664) 1,658
---------- ----- ------ ------------ ------------
Total current assets......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture.................. -- -- 4,500 -- 4,500
Property and equipment, net.................. 285,460 522 179 -- 286,161
Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019
Investments in subsidiaries.................. 3,531 -- -- (3,531) --
Other assets................................. 650 -- -- -- 650
---------- ----- ------ ------------ ------------
Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
<CAPTION>
Liabilities and Stockholders' Equity
(Deficit)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Current maturities of long-term
obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable........................... 20,773 -- -- -- 20,773
Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081
---------- ----- ------ ------------ ------------
Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes........................ 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities................................. 385,977 -- -- -- 385,977
Other liabilities............................ 25,337 -- -- -- 25,337
Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------ ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
</TABLE>
F-28
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----------- ------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................. 8,409 -- -- -- 8,409
Investments in joint venture................ (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries.... (306) -- -- 306 --
---------- ----------- ------ ------------ ------------
Net cash used in investing activities......... (20,440) -- (174) 306 (20,308)
---------- ----------- ------ ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants.................................. 22 -- -- -- 22
Proceeds from borrowings.................... 48,196 -- -- -- 48,196
Repayments of long-term obligations......... (59,215) -- -- -- (59,215)
---------- ----------- ------ ------------ ------------
Net cash (used in) provided by financing
activities.................................. (10,997) 306 -- (306) (10,997)
---------- ----------- ------ ------------ ------------
Effect of exchange rate changes on cash....... 5 -- 73 -- 78
---------- ----------- ------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period...................................... 23,667 -- 23 -- 23,690
---------- ----------- ------ ------------ ------------
Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----------- ------ ------------ ------------
---------- ----------- ------ ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred.......... 5,923 28 -- -- 5,951
Capital lease obligations terminated........ 128 -- -- -- 128
Issuance of common stock to lenders......... 50 -- -- -- 50
</TABLE>
F-29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 322,530 $ -- $ 298 $ -- $ 322,828
Costs and expenses:
Cost of sales.............................. 91,971 -- 215 -- 92,186
Labor and benefits......................... 104,898 -- -- -- 104,898
Operating expenses and write-down of
property and equipment................... 71,863 -- (232) -- 71,631
General and administrative expenses........ 21,961 142 492 -- 22,595
Depreciation and amortization.............. 16,401 -- -- -- 16,401
Interest expense (income).................. 22,268 -- (30) -- 22,238
Equity in net loss of joint venture........ -- -- 743 -- 743
---------- ----- ------------- ------------ ------------
(Loss) income before benefit from (provision
for) income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... (6,832) (142) (890) -- (7,864)
Benefit from (provision for) income taxes.... 3,343 -- (119) -- 3,224
---------- ----- ------------- ------------ ------------
(Loss) income before cumulative
effect of change in accounting
principle and equity in net loss of
consolidated subsidiaries.................. (3,489) (142) (1,009) -- (4,640)
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----- ------------- ------------ ------------
Loss before equity in net loss of
consolidated subsidiaries.................. (1,253) (142) (1,009) -- (2,404)
Equity in net loss of consolidated
subsidiaries............................... (1,151) -- -- 1,151 --
---------- ----- ------------- ------------ ------------
Net loss..................................... $ (2,404) $ (142) $ (1,009) $ 1,151 $ (2,404)
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
</TABLE>
F-30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
Restricted cash and investments........... -- -- 4,000 -- 4,000
Trade accounts receivable................. 6,659 -- 397 -- 7,056
Inventories............................... 16,996 -- 494 -- 17,490
Deferred income taxes..................... 12,375 -- 6 -- 12,381
Prepaid expenses and other current
assets.................................. 10,053 -- 1,311 (4,056) 7,308
----------- ----------- ------------- ------------ ------------
Total current assets........................ 61,633 202 7,355 (4,056) 65,134
Restricted cash and investments............. -- -- 7,889 -- 7,889
Investment in joint venture................. -- -- 3,757 -- 3,757
Property and equipment, net................. 279,043 -- 222 -- 279,265
Intangibles and deferred costs, net......... 15,375 -- -- -- 15,375
Investments in subsidiaries................. 4,275 -- -- (4,275) --
Other assets................................ 475 -- 2,147 (900) 1,722
----------- ----------- ------------- ------------ ------------
Total assets................................ $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations............................. $ 8,356 $ -- $ -- $ (400) $ 7,956
Accounts payable.......................... 26,272 -- -- -- 26,272
Accrued expenses.......................... 45,531 2 8,464 (3,656) 50,341
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 80,159 2 8,464 (4,056) 84,569
Deferred income taxes....................... 47,015 -- (213) -- 46,802
Long-term obligations, less current
maturities................................ 386,522 -- -- (900) 385,622
Other liabilities........................... 22,639 -- 9,044 -- 31,683
Stockholders' equity (deficit).............. (175,534) 200 4,075 (4,275) (175,534)
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................. $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
F-31
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 10,283 $ (208) $ (450) $ -- $ 9,625
---------- ----------- ------------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment......... (8,767) -- (43) -- (8,810)
Proceeds from sales of property and
equipment................................. 919 -- -- -- 919
Proceeds from sales and maturities of
investment securities..................... -- -- 73 -- 73
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (1,300) -- 2,265 -- 965
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----------- ------------- ----- ------------
Net cash used in investing activities......... (10,690) -- 2,295 142 (8,253)
---------- ----------- ------------- ----- ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from borrowings (advances to
parent)................................... 30,491 -- (1,300) -- 29,191
Repayments of long-term obligations......... (32,288) -- -- -- (32,288)
---------- ----------- ------------- ----- ------------
Net cash used in financing activities......... (1,797) 142 (1,300) (142) (3,097)
---------- ----------- ------------- ----- ------------
Effect of exchange rate changes on cash....... -- -- (2) -- (2)
---------- ----------- ------------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................. (2,204) (66) 543 -- (1,727)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----------- ------------- ----- ------------
Cash and cash equivalents, end of period...... $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
---------- ----------- ------------- ----- ------------
---------- ----------- ------------- ----- ------------
Supplemental disclosures:
Interest paid............................... $ 20,063 $ -- $ -- $ -- $ 20,063
Capital lease obligations incurred.......... 2,057 -- -- -- 2,057
Issuance of note payable in connection with
the acquisition of Restaurant Insurance
Corporation............................... 1,000 -- -- -- 1,000
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 13
Use of Proceeds................................ 18
Capitalization................................. 19
Selected Consolidated Financial Information.... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 31
Management..................................... 44
Ownership of Common Stock...................... 51
Certain Transactions........................... 52
Description of New Credit Facility............. 54
Description of Senior Notes.................... 55
Underwriting................................... 83
Legal Matters.................................. 84
Experts........................................ 84
Available Information.......................... 84
Index to Consolidated Financial Statements..... F-1
</TABLE>
---------------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SENIOR NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. 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.
-------------------
PROSPECTUS
-------------------
$175,000,000
FRIENDLY ICE CREAM
CORPORATION
% SENIOR NOTES DUE 2007
[LOGO]
SOCIETE GENERALE
SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC
MONTGOMERY
SECURITIES, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses payable by the Company in
connection with issuance and distribution of the securities being registered
hereby. All amounts shown are estimates, except the SEC registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 60,607
NASD filing fee................................................. 20,500
Printing and engraving.......................................... 110,500
Legal fees and expenses......................................... 552,600
Accounting fees and expenses.................................... 110,500
Trustee fees and expenses....................................... 15,000
Blue sky fees and expenses...................................... 7,500
Miscellaneous................................................... 520,793
---------
Total....................................................... $1,398,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
stockholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization,
the Registrant has elected to commit to provide indemnification to its directors
and officers in specified circumstances. Generally, the Restated Articles of
Organization provide that the Registrant shall indemnify directors, officers,
employee or agents of the Registrant against liabilities and expenses arising
out of legal proceedings brought against them by reason of their status as
directors, officers, employees or agents of the Registrant or by reason of their
agreeing to serve, at the request of the Registrant, as a director, officer,
employee or agent of another organization. Under this provision, a director,
officer, employee or agent of the Registrant shall be indemnified by the
Registrant for all costs and expenses (including attorneys' fees), judgments,
liabilities and amounts paid in settlement of such proceedings, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Any indemnification shall be made by the Registrant only upon a determination
that indemnification is proper in the specific case as made (i) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, (ii) if such quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. The Board of Directors may authorize advancing litigation expenses
to a director, officer, employee or agent at his request upon receipt of an
undertaking by any such director, officer, employee or agent to repay such
expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Article VI of the Registrant's Restated Articles of Organization eliminates
the personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's fiduciary duty,
except that such Article VI does not eliminate or limit any liability of a
director (i) for any breach of a director's duty of loyalty to the Registrant or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or
II-1
<PAGE>
62 of Chapter 156B of the Massachusetts General Laws, or (iv) with respect to
any transaction from which the directors derived an improper personal benefit.
Section 10 of the Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify the Company, directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the beginning of 1994, the Company sold the following securities
without registration under the Securities Act of 1933, as amended (the "Act").
No underwriter was involved in such sales and no underwriting commissions or
discounts were paid with respect to any of such sales.
1. In connection with a restructuring of the Company's old credit agreement
in March 1996, the Company issued 1,187,503 shares of its Class B Common Stock
to the Bank of Boston, as agent for the other lenders under such credit
agreement, in reliance upon the exemption from the registration requirements of
the Securities Act contained in Section 4(2) of the Securities Act.
2. In April 1996, two officers of the Company exercised warrants held by
them for an aggregate of 71,527 shares of the Company's Class A Common Shares
for an aggregate consideration of approximately $21,000. Such shares were issued
in reliance upon the exemption from the registration requirements of the
Securities Act contained in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the
"Company"). (Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
3.2 Amended and Restated By-laws of the Company. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1, No.
333-34633.)
4.1 Form of Senior Note Indenture between Friendly Ice Cream Corporation,
Friendly's Restaurants Franchise, Inc. and The Bank of New York, as
Trustee.
*4.2 Stockholder and Registration Rights Agreement of the Company, as amended.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
*4.3 Registration Rights Agreement between the Company and Donald N. Smith
(Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
*4.4 Rights Agreement between the Company and the Bank of New York as Rights
Agent. (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
*5.1 Opinion and consent of Mayer, Brown & Platt, counsel for the Company
regarding the validity of the offered securities.
*10.1 Form of Credit Agreement to be entered into among the Company, Societe
Generale, New York Branch, and certain other banks and financial
institutions.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
*10.2 The Company's Stock Option Plan. (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, No. 333-34633.)
*10.3 The Company's Restricted Stock Plan. (Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1, No. 333-34633.)
10.4 Form of Agreement relating to the Company's Limited Stock Compensation
Program. (Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 333-34633.)
*10.5 Development Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1, No. 333-34633.)
*10.6 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.7 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
*10.7 Management Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc. (Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form S-1, No. 333-34633.)
*10.8 Purchase and Sale Agreement between Friendly Ice Cream Corporation and
FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.9 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
*10.9 Software License Agreement between Friendly's Restaurants Franchise, Inc.
and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1, No. 333-34633.)
(Exhibits 10.5 through 10.9, collectively, the "DavCo Agreement")
*10.10 Sublease between SSP Company, Inc. and the Company, as amended, for the
Chicopee, Massachusetts Distribution Center. (Incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form S-1, No.
333-34633.)
10.11 Master License and Distribution Agreement for the Territory of Korea between
Friendly's International, Inc. and Hansung Enterprise Co., Ltd.
(Incorporated by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
*10.12 TRC Management Contract between the Company and The Restaurant Company.
(Incorporated by reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1, No. 333-34633.)
*10.13 License Agreement between the Company and Hershey Foods Corporation for the
1988 Non-Friendly marks. (Incorporated by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1, No. 333-34633.)
12.1 Schedule of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
*23.1 Consent of Mayer, Brown & Platt (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
**24.1 Power of attorney (included on Registration Statement signature page).
25.1 Form T-1 Statement of Eligibility of The Bank of New York, as Trustee for
the Senior Notes.
99.1 Consent of Michael J. Daly, as a person about to become a director.
*99.2 Consent of Burt Manning, as a person about to become a director.
</TABLE>
------------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules.
II-3
<PAGE>
All schedules are omitted because they are not applicable, or not required,
or because the required information is included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each 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) At the closing specified in the underwriting agreement, it will
provide to the underwriter certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(4) 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. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants 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, the Registrants will, unless in the opinion of their 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 3rd day of October, 1997.
<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION
By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title: Vice President, Finance, Chief
Financial Officer and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and President (Principal October 3, 1997
Donald N. Smith Executive Officer and
Director)
Vice President, Finance,
/s/ GEORGE G. ROLLER Chief Financial Officer
- ------------------------------ and Treasurer October 3, 1997
George G. Roller (Principal Financial and
Accounting Officer)
/s/ CHARLES LEDSINGER
- ------------------------------ Director October 3, 1997
Charles Ledsinger
*
- ------------------------------ Director October 3, 1997
Steven L. Ezzes
- ------------------------------ Director , 1997
Barry Krantz
- ------------------------------ Director , 1997
Gregory L. Segall
/s/ GEORGE G. ROLLER
- ------------------------------
George G. Roller
Attorney-in-Fact
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 3rd day of October, 1997.
FRIENDLY'S RESTAURANTS FRANCHISE, INC.
By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title: Vice President, Finance
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
* Chief Executive Officer
- ------------------------------ (Principal Executive October 3, 1997
Donald N. Smith Officer and Director)
Vice President, Chief
/s/ GEORGE G. ROLLER Financial Officer and
- ------------------------------ Treasurer (Principal October 3, 1997
George G. Roller Financial and Accounting
Officer)
*
- ------------------------------ Director October 3, 1997
Joseph A. O'Shaughnessy
* /s/ GEORGE G. ROLLER
- ------------------------------
George G. Roller
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 1.1
FRIENDLY ICE CREAM CORPORATION
$175,000,000
__% Senior Notes due 2007
UNDERWRITING AGREEMENT
October __, 1997
SOCIETE GENERALE SECURITIES CORPORATION,
As Representative of the several
Underwriters named in Schedule 1,
1221 Avenue of the Americas
New York, New York 10020
Dear Sirs:
Friendly Ice Cream Corporation, a Massachusetts corporation (the
"Company"), proposes to issue and sell $175,000,000 principal amount of its __%
Senior Notes due 2007 (the "Securities"). The Securities are to be issued
pursuant to an Indenture dated as of October __, 1997 (the "Indenture") to be
entered into between the Company, the Subsidiary Guarantor (as defined in the
Indenture) and The Bank of New York as trustee (the "Trustee"), the form of
which has been filed as an exhibit to the Registration Statement (as defined
below). This is to confirm the agreement concerning the purchase of the
Securities from the Company by the several Underwriters named in Schedule 1
hereto (the "Underwriters"). Societe Generale Securities Corporation has agreed
to act as representative of the several Underwriters (in such capacity, the
"Representative") in connection with the offering and sale of the Securities.
Concurrently with the issuance of the Securities, the Company is offering to the
public up to 5,750,000 shares of Common Stock (the "Common Shares") (the "Common
Stock Offering") and will enter into a new $175 million senior secured credit
facility (the "New Credit Facility").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company and the Subsidiary Guarantor represent and warrant to and agree with the
several Underwriters that:
(a) Filing of Registration Statement. A registration statement on
Form S-1 (No. 333-34635), including a form of prospectus, relating to the
Securities has been prepared by the Company in all material respects in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
and has been filed by the Company with the Commission. The Company may
have filed one or more amendments
<PAGE>
2
thereto, including the related preliminary prospectus, each of which has
previously been furnished to you. The Company will next file with the
Commission either (i) prior to effectiveness of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (ii) after effectiveness of such
registration statement, a final prospectus in accordance with Rules 430A
and 424(b)(1) or (4). In the case of clause (ii), the Company has included
in such registration statement, as amended at the Effective Time (as
defined below), all information (other than information permitted to be
omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A ("Rule 430A Information")) required by the Securities Act and
the Rules and Regulations to be included in the final prospectus with
respect to the Securities and the offering thereof. As filed, such
amendment and form of final prospectus, or such final prospectus, shall
contain all Rule 430A Information, together with all other such required
information, with respect to the Securities and the offering thereof and,
except to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form furnished
to you prior to the execution of this Agreement or, to the extent not
completed at such time, shall contain only such specific additional
information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company has advised you, prior to the
execution of this Agreement, will be included or made therein. For
purposes of this Agreement, "Effective Time" means the date and time as of
which such registration statement, or the most recent post-effective
amendment thereto, if any, was or is declared effective by the Commission.
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it becomes effective
under the Securities Act, any prospectus filed with the Commission by the
Company pursuant to Rule 424(a) and the prospectus included in the
Registration Statement at the Effective Time that omits Rule 430A
Information. Such registration statement, as amended at the Effective
Time, including all Rule 430A Information, if any, is hereinafter referred
to as the "Registration Statement," and the form of prospectus relating to
the Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) or, if no such filing is required, as included
in the Registration Statement is hereinafter referred to as the
"Prospectus."
(b) Compliance with Registration Requirements. At the Effective
Time, the Registration Statement did or will, and when the Prospectus is
first filed (if required) in accordance with Rule 424(b) and on the
Closing Date, the Prospectus (and any supplements thereto) will, comply in
all material respects with the applicable requirements of the Securities
Act and the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), and the respective rules thereunder; at the Effective Time, the
Registration Statement did not or will not include any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, at the Effective Time, the Prospectus, if not filed
pursuant to Rule 424(b), did not or will not, and on the date of any
filing pursuant to Rule
<PAGE>
3
424(b) and on the Closing Date, the Prospectus (together with any
supplement thereto) will not, include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The preceding sentence does not apply to (i)
that part of the Registration Statement which shall constitute the
Statement of Eligibility and Qualification (Form T-1) of the Trustee under
the Trust Indenture Act or (ii) information contained in or omitted from
the Registration Statement or the Prospectus (or any supplement thereto)
in reliance upon and in conformity with written information furnished to
the Company through the Representative by or on behalf of any Underwriter
specifically for use therein (the "Underwriters' Information"). The
parties acknowledge and agree that the Underwriters' Information consists
solely of the material included in the last paragraph on the cover page of
the Prospectus, in the paragraph on the inside front cover page of the
Prospectus concerning stabilization by the Underwriters and in the second,
third and fifth paragraphs under the caption "Underwriting" in the
Registration Statement, the Preliminary Prospectus and the Prospectus. The
Indenture conforms in all respects to the requirements of the Trust
Indenture Act and the rules and regulations of the Commission thereunder.
(c) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representative one complete manually signed copy of the
Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration
Statement (without exhibits) and preliminary prospectuses and the
Prospectus, as amended or supplemented, in such quantities and at such
places as the Representative has reasonably requested for each of the
Underwriters.
(d) Distribution of Offering Material By the Company. The Company
has not distributed and will not distribute, prior to the Closing Date (as
defined below) and the completion of the Underwriters' distribution of the
Securities, any offering material in connection with the offering and sale
of the Securities other than a preliminary prospectus, the Prospectus or
the Registration Statement.
(e) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company and the Subsidiary Guarantor, enforceable in
accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law or public policy and except as the
enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(f) Enforceable Obligations. The Indenture, when duly executed by
the proper officers of the Company and the Subsidiary Guarantor and
delivered by the Company and the Subsidiary Guarantor, assuming due
authorization, execution and delivery thereof by the Trustee, will
constitute a valid and binding
<PAGE>
4
agreement of the Company and the Subsidiary Guarantor enforceable against
the Company and the Subsidiary Guarantor in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing; and the Securities, when duly executed,
authenticated, issued and delivered as provided in the Indenture and upon
payment and delivery in accordance with the Underwriting Agreement, will
be duly and validly issued and outstanding and will constitute valid and
binding obligations of the Company entitled to the benefits of the
Indenture and enforceable in accordance with their terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally, by general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good faith and
fair dealing; and the Indenture and the Securities conform to the
descriptions thereof contained in the Prospectus.
(g) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and, in the case of
the Company, to enter into and perform its obligations under this
Agreement, the Indenture and the New Credit Facility. Each of the Company
and each subsidiary is duly qualified as a foreign corporation to transact
business and is in good standing in the Commonwealth of Massachusetts and
each other jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions (other than the Commonwealth of
Massachusetts) where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change (as defined below). All of the issued and outstanding capital stock
of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or claim, except as described or contemplated in the
Prospectus. The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than the subsidiaries
listed in Exhibit 21 to the Registration Statement.
(h) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described
in the Prospectus). All of the issued and outstanding shares of Common
Stock have been duly authorized and validly
<PAGE>
5
issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company.
(i) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived or for which the period of notice to
require such securities to be registered has expired.
(j) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, stockholders' equity, business, management, operations or
prospects, whether or not arising from transactions in the ordinary course
of business, of the Company and its subsidiaries, considered as one entity
(any such change is called a "Material Adverse Change"); (ii) the Company
and its subsidiaries, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in
the ordinary course of business nor entered into any material transaction
or agreement not in the ordinary course of business; and (iii) except as
disclosed in the Prospectus, there has been no dividend or distribution of
any kind declared, paid or made by the Company or, except for dividends
paid to the Company or other subsidiaries, any of its subsidiaries on any
class of capital stock or repurchase or redemption by the Company or any
of its subsidiaries of any class of capital stock.
(k) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used
in this Agreement includes the related notes thereto) and supporting
schedules filed with the Commission as a part of the Registration
Statement and included in the Prospectus, are independent public or
certified public accountants as required by the Securities Act.
(l) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company and its subsidiaries as of and at the
dates indicated and the results of their operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
Such financial statements and supporting schedules have been prepared in
conformity with generally accepted accounting principles, as applied in
the United States, applied on a consistent basis throughout the periods
involved,
<PAGE>
6
except as may be expressly stated in the related notes thereto. No other
financial statements or supporting schedules are required to be included
in the Registration Statement. The financial information set forth in the
Prospectus under the captions "Prospectus Summary--Summary Consolidated
Financial Information", "Selected Consolidated Financial Information" and
"Capitalization" fairly present the information set forth therein on a
basis consistent with that of the audited financial statements contained
in the Registration Statement. The pro forma financial information of the
Company and its subsidiaries included under the caption "Prospectus
Summary--Summary Consolidated Financial Information", and elsewhere in the
Prospectus and in the Registration Statement present fairly the
information contained therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly presented on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. The Company's
ratios of earnings to fixed charges set forth in the Prospectus under the
captions "Prospectus Summary--Summary Consolidated Financial Information"
and in "Selected Consolidated Financial Information" have been calculated
in compliance with Item 503(d) of Regulation S-K under the Securities Act.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound,
or to which any of the property or assets of the Company or any of its
subsidiaries is subject (each, an "Existing Instrument"), except for such
Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and performance
of this Agreement, the Indenture and the New Credit Facility and
consummation of the transactions contemplated hereby and thereby and by
the Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary, (ii) will not
conflict with or constitute a breach of, or Default or a Debt Repayment
Triggering Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to, or require the
consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would
not, individually or in the aggregate, result in a Material Adverse Change
and (iii) will not result in any violation of any law, administrative
regulation or administrative or court decree applicable to the Company or
any subsidiary, except for such violations as would not, individually or
in the aggregate, result in a Material Adverse Change. No consent,
approval, authorization or other order of, or registration or filing with,
<PAGE>
7
any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement, the Indenture and the New Credit Facility and consummation of
the transactions contemplated hereby and thereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full
force and effect under the Securities Act, applicable state securities or
blue sky laws and from the National Association of Securities Dealers,
Inc. (the "NASD"). As used herein, a "Debt Repayment Triggering Event"
means any event or condition which gives, or with the giving of notice or
lapse of time would give, the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf)
the right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any of its subsidiaries.
(n) Accuracy of Exhibits. There are no contracts or other documents
which are required to be described in the Prospectus or filed as exhibits
to the Registration Statement by the Securities Act or by the Rules and
Regulations and which have not been so described or filed.
(o) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened (i) against or affecting the Company or any of its
subsidiaries, (ii) which has as the subject thereof any officer or
director of, or property owned or leased by, the Company or any of its
subsidiaries or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company or
such subsidiary and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement.
(p) Possession of Intellectual Property. Other than as set forth in
the Prospectus, the Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights, licenses and know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) necessary for the conduct
of their respective businesses and have no reason to believe that the
conduct of their respective businesses will conflict with, and have not
received any notice of any claim of conflict with, any such rights of
others.
(q) Possession of Licenses and Permits. The Company and each of its
subsidiaries possess all material licenses, certificates, authorizations
and permits issued by, and have made all declarations and filings with,
the appropriate state, federal or foreign regulatory agencies or bodies
which are necessary or desirable for the ownership of their respective
properties or the conduct of their respective businesses as described in
the Prospectus, except where any failures to possess
<PAGE>
8
or make the same, singularly or in the aggregate, would not result in a
Material Adverse Change, and the Company has not received notification of
any revocation or modification of any such license, authorization or
permit and has no reason to believe that any such license, certificate,
authorization or permit will not be renewed, except such revocations,
modifications or non-renewals as would not result in a Material Adverse
Change.
(r) Title to Properties. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets reflected
as owned in the financial statements referred to in Section 1(l) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other
defects, except as described in the Prospectus and such as do not
materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such
property by the Company or such subsidiary. The real property,
improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases,
with such exceptions as are not material and do not materially interfere
with the use made or proposed to be made of such real property,
improvements, equipment or personal property by the Company or such
subsidiary.
(s) Taxes. The Company and its subsidiaries each (i) have filed all
necessary federal, state and foreign income and franchise tax returns,
(ii) have paid all federal, state, local and foreign taxes due and payable
for which it is liable, including, but not limited to, withholding taxes
and amounts payable under the Internal Revenue Code of 1986, as amended
(the "Code"), and has furnished all information returns it is required to
furnish pursuant to the Code, (iii) have established adequate reserves for
all such taxes which are not yet due and payable and (iv) do not have any
tax deficiency or claims outstanding or assessed or, to the Company's
knowledge, proposed against it which could reasonably be expected to
result in a Material Adverse Change.
(t) No Labor Dispute. No labor disturbance by the employees of the
Company or any of its subsidiaries exists or, to the Company's knowledge,
is imminent which might be expected to result in a Material Adverse
Change.
(u) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Securities in the offering thereof or for
the Common Shares in the Common Stock Offering will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
<PAGE>
9
(v) No Lending Relationships. Attached hereto as Exhibit B is, to
the Company's knowledge, a complete and accurate list of the lenders under
the Old Credit Facility (as defined in the Prospectus) as of the date of
this Agreement, which constitutes all of the Company's lenders who would
have received any of the proceeds from the sale of the Securities
hereunder to repay outstanding debt had such repayment occurred on the
date of this Agreement.
(w) No Stabilization. Neither the Company, nor to the Company's
knowledge, any of its affiliates, has taken or may take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Securities to facilitate
the sale or resale of the Securities.
(x) Insurance. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
(y) Transactions with Management and Others. No relationship, direct
or indirect, exists between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company
on the other hand, which is required to be described in the Prospectus and
which is not so described.
(z) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its subsidiaries nor, to the Company's knowledge, any employee
or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(aa) Accounting Controls. The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific
<PAGE>
10
authorization; and (iv) the recorded accountability for assets is computed
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(ab) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution
or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under applicable Environmental Laws, or noncompliance with
the terms and conditions thereof, nor has the Company or any of its
subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that
alleges that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority with respect to which the Company
has received notice, no investigation with respect to which the Company
has received written notice, and no written notice by any person or entity
alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorneys' fees or penalties arising out of, based on
or resulting from the presence, or release into the environment, of any
Material of Environmental Concern at any location owned, leased or
operated by the Company or any of its subsidiaries, now or in the past
(collectively, "Environmental Claims"), pending or, to the best of the
Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed
either contractually or by operation of law; and (iii) to the Company's
knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law.
<PAGE>
11
(ac) Employee Benefit Plans. No "prohibited transaction" (as defined
in Section 406 of the Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published interpretations
thereunder ("ERISA"), or Section 4975 of the Code), or "accumulated
funding deficiency" (as defined in Section 302 of ERISA) or any of the
events set forth in Section 4043(b) of ERISA (other than events with
respect to which the 30-day notice requirement under Section 4043 of ERISA
has been waived) has occurred with respect to any employee benefit plan
which could result in a Material Adverse Change; each employee benefit
plan is in compliance in all material respects with applicable law,
including ERISA and the Code; the Company has not incurred and does not
expect to incur liability under Title IV of ERISA with respect to the
termination of, or withdrawal from, any "pension plan"; and each "pension
plan" (as defined in ERISA) for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which could cause the loss of such
qualification with respect to such plan which could result in a Material
Adverse Change.
(ad) Minute Books. The minute books of the Company and each of its
subsidiaries have been made available to the Underwriters and counsel for
the Underwriters, and such books (i) contain a complete summary of all
meetings and actions of the directors and stockholders of the Company and
each of its subsidiaries since January 1992 through the date of the latest
meeting and action, and (ii) accurately in all material respects reflect
all transactions referred to in such minutes.
Any certificate signed by an officer of the Company and delivered to
the Representative or to counsel for the Underwriters on the Closing Date
shall be deemed to be a representation and warranty by the Company to each
Underwriter as to the matters set forth therein.
2. PURCHASE BY THE UNDERWRITERS. On the basis of the
representations, warranties and agreements contained herein, and subject to the
terms and conditions set forth herein, the Company agrees to issue and sell to
each of the Underwriters, severally and not jointly, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company,
the principal amount of Securities set forth opposite the name of such
Underwriter in Schedule 1 hereto at a purchase price equal to _____% of the
principal amount thereof plus accrued interest, if any, from October __, 1997 to
the Closing Date (as hereinafter defined).
The Company shall not be obligated to deliver any of the Securities
except upon payment for all the Securities to be purchased as provided herein.
3. QUALIFIED INDEPENDENT UNDERWRITER. The Company hereby confirms
its engagement of Societe Generale Securities Corporation as, and Societe
Generale Securities Corporation hereby confirms its agreement with the Company
to
<PAGE>
12
render services as a "qualified independent underwriter" within the meaning of
Section 2(o) of Schedule E to the By-Laws of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of
the Securities. Societe Generale Securities Corporation, in its capacity as
qualified independent underwriter and not otherwise, is referred to herein as
the "QIU".
4. DELIVERY OF AND PAYMENT FOR THE SECURITIES. Delivery of and
payment for the Securities shall be made at the offices of Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York, NY, or at such other place as shall be
agreed upon by the Representative and the Company, at 10:00 A.M., New York City
time, on October __, 1997, or at such other date or time, not later than seven
full business days thereafter, as shall be agreed upon by the Representative and
the Company (such date and time being referred to herein as the "Closing Date").
The Securities to be purchased by each Underwriter hereunder shall
be represented by one or more global securities in book-entry form which will be
deposited by or on behalf of the Company with The Depository Trust Company or
its designated custodian. On the Closing Date, the Company shall deliver or
cause to be delivered the Securities to the Representative for the account of
each Underwriter against payment to or upon the order of the Company of the
purchase price by wire transfer payable in Federal (same day) funds by causing
The Depository Trust Company to credit the Securities to the account of the
Representative at The Depository Trust Company.
Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. The Company shall make the certificates representing
the Securities available for inspection by the Representative and for delivery
to The Depository Trust Company or its designated custodian in New York, New
York, not later than two full business days prior to the Closing Date.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with each
of the several Underwriters:
(a) Filing of Prospectus. That, if the Effective Time is prior to
the execution and delivery of this Agreement, to file the Prospectus with
the Commission pursuant to and in accordance with subparagraph (1) (or, if
applicable and if consented to by the Representative, subparagraph (4)) of
Rule 424(b) within the time period prescribed by such rule and will
provide evidence satisfactory to the Representative of such timely filing;
(b) Notice of Amendments, etc. To advise the Representative promptly
of any proposal to amend or supplement the registration statement as filed
or the related prospectus or the Registration Statement or the Prospectus
and not to effect such amendment or supplementation without the consent of
the Representative, which consent shall not be unreasonably withheld; to
advise the Representative promptly of the receipt of any comments from the
Commission
<PAGE>
13
and of the effectiveness of the Registration Statement (in each case if
the Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of the Registration
Statement or the Prospectus, or of any request by the Commission therefor,
and of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; to advise the Representative promptly of any
order preventing or suspending the use of any prospectus relating to the
Securities, of the suspension of the qualification of such Securities for
offering or sale in any jurisdiction and of the initiation or threatening
of any proceeding for any such purpose; and to use reasonable best efforts
to prevent the issuance of any stop order or of any such order preventing
or suspending the use of any prospectus relating to the Securities or
suspending any such qualification and, if any such stop order or order or
suspension is issued, to obtain the lifting thereof at the earliest
possible time;
(c) Delivery of Registration Statement and Prospectus. To furnish
promptly to each of the Representative and counsel for the Underwriters a
signed copy of the Registration Statement as originally filed with the
Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith; and to deliver
promptly without charge to the Representative such number of the following
documents as the Representative may from time to time reasonably request:
(i) conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement, the Indenture and the computation of
the ratio of earnings to fixed charges) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus;
provided that in the case of a delivery made pursuant to this clause (ii)
such delivery shall be made not later than 10 A.M. New York City time on
the day following the date of such amendment or supplement;
(d) Continued Compliance with Securities Laws. If the delivery of a
prospectus is required at any time in connection with the sale of the
Securities and if at such time any events shall have occurred as a result
of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or if for any other reason it shall be
necessary at such time to amend or supplement the Prospectus in order to
comply with the Securities Act, to notify the Representative immediately
thereof, and to promptly prepare and file with the Commission an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance;
(e) Filing of Amendments. To file promptly with the Commission any
amendment to the Registration Statement or the Prospectus or any
supplement to the Prospectus that may, in the reasonable judgment of the
Company or the
<PAGE>
14
Representative, be required by the Securities Act or requested by the
Commission or advisable in connection with the distribution of the
Securities;
(f) Earning Statement. As soon as practicable to make generally
available to the Company's security holders and to deliver to the
Representative an earning statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Securities
Act and the Rules and Regulations (including, at the option of the
Company, Rule 158);
(g) Delivery of Reports. During a period of five years from the
Effective Time of the Registration Statement, to furnish to the
Representative copies of all materials furnished by the Company to its
shareholders and all public reports and all reports and financial
statements publicly furnished by the Company to the Commission pursuant to
the Exchange Act or any rule or regulation of the Commission thereunder;
(h) Qualification of Securities. Promptly from time to time to take
such action as the Representative may reasonably request to qualify the
Securities for offering and sale under the securities laws of such
jurisdictions as the Representative may reasonably request and to comply
with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to complete
the distribution of the Securities; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(i) Use of Proceeds. The Company shall use the net proceeds of its
sale of the Securities as set forth in the "Use of Proceeds" section of
the Prospectus and shall file such reports with the Commission with
respect to the sale of the Securities and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the
Securities Act ("Rule 463"). The Company shall promptly deliver to the
Representative a signed copy of each report on Form SR filed with the
Commission pursuant to Rule 463;
(j) Stabilization. Not to take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company; and
(k) Restriction on Sale of Securities. During the period beginning
from the date hereof and continuing to, and including, the Closing Date or
such earlier time as the Representative may notify the Company, not to
offer for sale, sell, contract to sell or otherwise dispose of, directly
or indirectly, or file a registration statement for, or announce any
offering of, any securities of the Company that are substantially similar
to the Securities.
<PAGE>
15
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective
obligations of the several Underwriters hereunder are subject to the accuracy,
when made and on the Closing Date, of the representations and warranties of the
Company contained herein, to the accuracy of the statements of the Company made
in any certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to each of the following additional
terms and conditions:
(a) Accountant's Comfort Letter. On the date hereof, the
Representative shall have received from Arthur Andersen LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representative, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No.
72 (or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representative shall
have received an additional [___] conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under
the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration
Statement containing the information required by such Rule 430A, and
such post-effective amendment shall have become effective; or, if
the Company elected to rely upon Rule 434 under the Securities Act
and obtained the Representative's consent thereto, the Company shall
have filed a Term Sheet with the Commission in the manner and within
the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall be
in effect and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change. (i) Neither the Company nor any of
its subsidiaries shall have sustained since the date of the latest audited
financial
<PAGE>
16
statements included in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus or (ii) since such date there shall not have been any
Material Adverse Change or any change in the capital stock or long-term
debt of the Company or any of its subsidiaries, otherwise than as set
forth in the Prospectus, the effect of which, in any such case described
in clause (i) or (ii), is, in the judgment of the Representative, so
material and adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Securities on the terms
and in the manner contemplated in the Prospectus exclusive of any
supplement.
(d) No Downgrading. Subsequent to the execution and delivery of this
Agreement (i) no downgrading shall have occurred in the rating accorded
the Securities or any of the Company's or any of its subsidiaries' other
debt securities by any "nationally recognized statistical rating
organization," as that term is defined by the Commission for purposes of
Rule 436(g)(2) of the Rules and Regulations and (ii) no such organization
shall have publicly announced that it has under surveillance or review
(other than an announcement with positive implications of a possible
upgrading), its rating of the Securities or any of the Company's other
debt securities.
(e) No Suspension in Trading; Other Events. Subsequent to the
execution and delivery of this Agreement there shall not have occurred any
of the following: (i) trading or quotation in any of the Company's
securities shall have been suspended or limited, or trading in securities
generally on any of the Nasdaq Stock Market, the New York Stock Exchange,
the American Stock Exchange or in the over-the-counter market shall have
been suspended or limited, or minimum or maximum prices shall have been
generally established on any such stock exchange or market by the
Commission, by any such exchange, by the NASD or by any other regulatory
body or governmental authority having jurisdiction; (ii) a general banking
moratorium shall have been declared by any of federal or state
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or a
declaration of a national emergency or war by the United States; or (iv)
there shall have occurred any change in the United States or international
financial markets, or any substantial change or development involving a
prospective substantial change in United States' or international
political, financial or economic conditions (or the effect of
international conditions on the financial markets in the United States
shall be such), in each case as in the judgment of the Representative is
material and adverse and makes it impracticable to proceed with the public
offering or delivery of the Securities on the terms and in the manner
contemplated in the Prospectus or to enforce contracts for the sale of
securities.
<PAGE>
17
(f) Opinions of Counsel for the Company. On the Closing Date, the
Representative shall have received the favorable opinion of (a) Mayer,
Brown & Platt, special counsel for the Company, dated as of such Closing
Date, the form of which is attached as Exhibit A-1 and (b)______________ ,
counsel to the Company, dated as of such Closing Date, the form of which
is attached as Exhibit A-2 (and the Representative shall have received an
additional [___] conformed copies of such counsels' legal opinions for
each of the several Underwriters).
(g) Opinion of Counsel for Underwriters. On the Closing Date, the
Representative shall have received from Simpson Thacher & Bartlett,
counsel for the Underwriters, such opinion or opinions, dated as of such
Closing Date, with respect to such matters as the Representative may
reasonably require, and the Company shall have furnished to such counsel
such documents as they reasonably request for enabling them to pass upon
such matters.
(h) Officers' Certificate. On the Closing Date, the Company shall
have furnished to the Representative a certificate, dated as of such
Closing Date, of its Chairman of the Board, its President or a Vice
President and its chief financial officer stating that (i) such officers
have carefully examined the Registration Statement and the Prospectus,
(ii) in their opinion, as of the Effective Time, the Registration
Statement and the Prospectus did not include any untrue statement of a
material fact and did not omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and since the Effective Time, no event has occurred which should have been
set forth in a supplement or amendment to the Registration Statement or
the Prospectus and (iii) to their knowledge after reasonable
investigation, as of the Closing Date, the representations and warranties
of the Company in this Agreement are true and correct, the Company has
complied with all agreements and satisfied all conditions on its part to
be performed or satisfied hereunder at or prior to such Closing Date, no
stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or,
to their knowledge, are contemplated by the Commission, and subsequent to
the date of the most recent financial statements in the Prospectus, there
has been no Material Adverse Change, except as set forth in the
Prospectus.
(i) Bring-down Comfort Letter. On the Closing Date the
Representative shall have received from Arthur Andersen, LLP, independent
public or certified public accountants for the Company, a letter dated
such date, in form and substance reasonably satisfactory to the
Representative, to the effect that they reaffirm the statements made in
the letter furnished by them pursuant to subsection (a) of this Section 6,
except that the specified date referred to therein for the carrying out of
procedures shall be no more than three business days prior to the Closing
Date (and the Representative shall have received an additional [___]
conformed copies of such accountants' letter for each of the several
Underwriters).
<PAGE>
18
(i) Recapitalization. The Recapitalization, as defined and described
in the Prospectus, shall have been, or be concurrently, completed as of
the Closing Date, including, without limitation, the Common Stock Offering
shall have been, or be concurrently, consummated and the Company shall
have entered, or be concurrently entering, into the New Credit Facility
and the proceeds therefrom shall have been applied, or are being applied
concurrently with the offering of the Securities, as described in the
Prospectus.
(j) Additional Documents. On or before the Closing Date, the
Representative and counsel for the Underwriters shall have received such
information, documents and opinions as they may reasonably require for the
purposes of enabling them to pass upon the issuance and sale of the
Securities as contemplated herein, or in order to evidence the accuracy of
any of the representations and warranties, or the satisfaction of any of
the conditions or agreements, herein contained.
(k) Legal Matters. All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement, the
Securities, the Indenture, the New Credit Facility, the Registration
Statement and the Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Underwriters, and
the Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon
such matters.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
7. TERMINATION. This Agreement shall become effective upon the later
of the date upon which (i) the Underwriter and the Company shall have received
notification of the effectiveness of the Registration Statement or (ii) this
Agreement shall have been executed by the parties hereto. The obligations of the
Underwriters hereunder may be terminated by the Representative, in its absolute
discretion, by notice given to and received by the Company prior to delivery of
and payment for the Securities if, prior to that time, any of the events
described in Sections 6(c), 6(d) or 6(e) shall have occurred.
8. DEFAULTING UNDERWRITERS. (a) Obligations of Non-Defaulting
Underwriters. If, on the Closing Date, any Underwriter or Underwriters default
in the performance of its or their obligations under this Agreement, the
Representative may make arrangements for the purchase of such Securities by
other persons satisfactory to the Company and the Representative, including any
of the Underwriters, but if no such arrangements are made by the Closing Date,
then each remaining non-defaulting Underwriter shall be severally obligated to
purchase the Securities which the defaulting
<PAGE>
19
Underwriter or Underwriters agreed but failed to purchase on the Closing Date in
the respective proportions which the principal amount of Securities set forth
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the aggregate principal amount of Securities set forth opposite
the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Securities on the Closing Date if the aggregate
principal amount of Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase on such date exceeds one-eleventh of the aggregate
principal amount of the Securities to be purchased on the Closing Date, and any
remaining non-defaulting Underwriter shall not be obligated to purchase in total
more than 110% of the principal amount of the Securities which it agreed to
purchase on the Closing Date pursuant to the terms of Section 2. If the
foregoing maximums are exceeded and the remaining Underwriters or other
underwriters satisfactory to the Representative and the Company do not elect to
purchase the Securities which the defaulting Underwriter or Underwriters agreed
but failed to purchase, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter or the Company, except that the Company
will continue to be liable for the payment of expenses to the extent set forth
in Section 13 except that the provisions of Sections 10 and 11 shall not
terminate and shall remain in effect. As used in this Agreement, the term
"Underwriter" includes, for all purposes of this Agreement unless the context
otherwise requires, any party not listed in Schedule 1 hereto who, pursuant to
this Section 8, purchases Securities which a defaulting Underwriter agreed but
failed to purchase.
(b) Liability of Defaulting Underwriter; Closing Date. Nothing
contained herein shall relieve a defaulting Underwriter of any liability it may
have for damages caused by its default. If other underwriters are obligated or
agree to purchase the Securities of a defaulting Underwriter, either the
Representative or the Company may postpone the Closing Date for up to seven full
business days in order to effect any changes that in the opinion of counsel for
the Company or counsel for the Underwriters may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus that effects any such changes.
9. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) notice shall have
been given pursuant to Section 7 preventing this Agreement from becoming
effective because of the occurrence of an event described in Section 6(c), 6(d)
or 6(e)(i) (as to the Company's securities only), (b) the Company shall fail to
tender the Securities for delivery to the Underwriters for any reason permitted
under this Agreement or (c) the Underwriters shall decline to purchase the
Securities for any reason permitted under this Agreement, the Company shall
reimburse the Underwriters for the fees and expenses of their counsel and for
such other out-of-pocket expenses as shall have been reasonably incurred by them
in connection with this Agreement and the proposed purchase of the Securities,
and upon demand the Company shall pay the full amount thereof to the
Representative. If this Agreement is terminated pursuant to Section 8 by
<PAGE>
20
reason of the default of one or more Underwriters, the Company shall not be
obligated to reimburse any defaulting Underwriter on account of those expenses.
10. INDEMNIFICATION OF UNDERWRITERS AND THE COMPANY. (a)
Indemnification of Underwriters. The Company and its subsidiaries shall
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Securities Act (collectively
referred to for the purposes of this Section 10 as the Underwriter) against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which that Underwriter may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or action arises
out of or is based upon (i) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or (ii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse each Underwriter for any
legal or other expenses reasonably incurred by that Underwriter in connection
with investigating or preparing to defend or defending against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the foregoing
indemnification agreement with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any such
loss, claim, damage or liability purchased Securities, if (i) a copy of the
Prospectus (as then amended or supplemented) was required by law to be delivered
to such person at or prior to the written confirmation of the sale of Securities
to such person, (ii) a copy of the Prospectus (as then amended or supplemented)
was not sent or given to such person by or on behalf of such Underwriter and
(iii) the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage or liability; and further provided,
however, that the Company and its subsidiaries shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon (i) that part of the Registration Statement which shall
constitute the Statement of Eligibility and Qualification (Form T-1) of the
Trustee under the Trust Indenture Act or (ii) an untrue statement or alleged
untrue statement in or omission or alleged omission from any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company through the Representative by or on behalf of any
Underwriter specifically for use therein, which information the parties hereto
agree is limited to the Underwriters' Information.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter, severally and not jointly, shall indemnify and hold harmless the
Company, each of its directors, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act (collectively referred to for the purposes of
this Section 10 as the Company), against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company may
become subject, under the Securities Act or otherwise, insofar as such
<PAGE>
21
loss, claim, damage, liability or action arises out of or is based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company through the Representative by or on behalf of that Underwriter
specifically for use therein, and shall reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or preparing to defend or defending against or appearing as third
party witness in connection with any such loss, claim, damage, liability or
action as such expenses are incurred; provided that the parties hereto hereby
agree that such written information provided by the Representative consists
solely of the Underwriters' Information.
(c) Actions; Notification. Promptly after receipt by an indemnified
party under this Section 10 of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 10, notify the indemnifying
party in writing of the claim or the commencement of that action; provided,
however, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 10 except to the extent
it has been materially prejudiced by such failure; and, provided, further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 10. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 10 for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that any indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof but the
fees and expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment thereof has been specifically authorized by the
indemnifying party in writing, (ii) such indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party and in the reasonable judgment of such counsel it is
advisable for such indemnified party to employ separate counsel or (iii) the
indemnifying party has failed to assume the defense of such action and employ
counsel reasonably satisfactory to the indemnified party, in which case, if such
indemnified party notifies the indemnifying party in writing that it elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to
<PAGE>
22
assume the defense of such action on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for all such indemnified parties, which
firm shall be designated in writing by the Representative, if the indemnified
parties under this Section 10 consist of any Underwriter or any of their
respective officers, employees or controlling persons, or by the Company, if the
indemnified parties under this Section 10 consist of the Company or any of the
Company's directors, officers, employees or controlling persons. Each
indemnified party, as a condition of the indemnity agreements contained in
Sections 10(a) and 10(b), shall use all reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. Subject to the
provisions of Section 10(d) below, no indemnifying party shall be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment for the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any indemnified
party from and against any loss or liability by reason of such settlement or
judgment.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested that an indemnifying party
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by this Section 10 effected without its written consent if
(i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the request for reimbursement, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 15
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement. Notwithstanding the immediately
preceding sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement effected
without its consent if such indemnifying party (i) reimburses such indemnified
party in accordance with such request to the extent it in its reasonable
judgment considers such request to be reasonable and (ii) provides written
notice to the indemnified party substantiating the unpaid balance as
unreasonable, in each case prior to the date of such settlement.
(e) Contribution. If the indemnification provided for in this
Section 10 is unavailable or insufficient to hold harmless an indemnified party
under Section 10(a) or (b), then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such
<PAGE>
23
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the Underwriters on the other with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Securities
purchased under this Agreement (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters with respect to the Securities purchased under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission; provided that the parties
hereto agree that the written information furnished to the Company by the
Underwriters for use in the Preliminary Prospectus, the Registration Statement
or the Prospectus consists solely of the Underwriters' Information. The Company
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 10(e) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 10(e) shall be
deemed to include, for purposes of this Section 10(e), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 10(e), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were offered to the
public less the amount of any damages which such Underwriter has otherwise paid
or become liable to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The Underwriters' obligations to contribute as provided in this
Section 10(e) are several in proportion to their respective underwriting
obligations and not joint.
The obligations of the Company and the Underwriters in this Section
10 are in addition to any other liability which the Company or the Underwriters,
as the case may be, may otherwise have.
<PAGE>
24
11. INDEMNIFICATION OF QUALIFIED INDEPENDENT UNDERWRITER. (a)
Indemnification. The Company and its subsidiaries shall indemnify and hold
harmless Societe Generale Securities Corporation in its capacity as QIU, and
each person, if any, who controls the QIU within the meaning of the Securities
Act (collectively referred to for the purposes of this Section 11 as the QIU)
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the QIU may become subject, under the Securities Act
or otherwise, insofar as such loss, claim, damage, liability or action arises
out of or is based upon (i) any untrue statement or alleged untrue statement of
a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or (ii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse the QIU for any legal or
other expenses reasonably incurred by the QIU in connection with investigating
or preparing to defend or defending against or appearing as a third party
witness in connection with any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that Societe Generale Securities
Corporation, in its capacity as QIU, shall not be entitled to indemnification
pursuant to this Section 11 in respect of any losses, claims, damages or
liabilities, joint or several, or any (action in respect thereof) to the extent
and only to the extent that it would be denied indemnification in its capacity
as an Underwriter pursuant to Section 10 hereof in respect of such losses,
claims, damages or liabilities, joint or several, or any action in respect
thereof.
(b) Actions; Notification. Promptly after receipt by the QIU under
this Section 11 of notice of any claim or the commencement of any action, the
QIU shall, if a claim in respect thereof is to be made against the Company under
this Section 11, notify the Company in writing of the claim or the commencement
of that action; provided, however, that the failure to notify the Company shall
not relieve it from any liability which it may have under this Section 11 except
to the extent it has been materially prejudiced by such failure; and, provided,
further, that the failure to notify the Company shall not relieve it from any
liability which it may have to the QIU otherwise than under this Section 11. If
any such claim or action shall be brought against the QIU, and it shall notify
the Company thereof, the Company shall be entitled to participate therein and,
to the extent that it wishes, assume the defense thereof with counsel reasonably
satisfactory to the QIU. After notice from the Company to the QIU of its
election to assume the defense of such claim or action, the Company shall not be
liable to the QIU under this Section 11 for any legal or other expenses
subsequently incurred by the QIU in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that the QIU shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof but the fees and expenses of such counsel shall be at the
expense of the QIU unless (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the QIU shall have been advised by
such counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the Company and in the
reasonable judgment of such counsel it is advisable for the QIU to employ
<PAGE>
25
separate counsel or (ii) the Company has failed to assume the defense of such
action and employ counsel reasonably satisfactory to the QIU, in which case, if
the QIU notifies the Company in writing that it elects to employ separate
counsel at the expense of the Company, the Company shall not have the right to
assume the defense of such action on behalf of the QIU, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for the QIU, which firm shall be designated in writing by the QIU. The QIU,
as a condition of the indemnity agreements contained in Section 11(a), shall use
all reasonable efforts to cooperate with the Company in the defense of any such
action or claim. Subject to the provisions of Section 11(c) below, the Company
shall not be liable for any settlement of any such action effected by the QIU
without its written consent (which consent shall not be unreasonably withheld),
but if settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the Company agrees to indemnify and hold harmless
the QIU from and against any loss or liability by reason of such settlement or
judgment.
(c) Settlement without Consent if Failure to Reimburse. If at any
time the QIU shall have requested that the Company reimburse the QIU for fees
and expenses of counsel, the Company agrees that it shall be liable for any
settlement of the nature contemplated by this Section 11 effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by the Company of the request for reimbursement, (ii) the Company shall
have received notice of the terms of such settlement at least 15 days prior to
such settlement being entered into and (iii) the Company shall not have
reimbursed the QIU in accordance with such request prior to the date of such
settlement. Notwithstanding the immediately preceding sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, an indemnifying party shall
not be liable for any settlement effected without its consent if such
indemnifying party (i) reimburses such indemnified party in accordance with such
request to the extent it in its reasonable judgment considers such request to be
reasonable and (ii) provides written notice to the indemnified party
substantiating the unpaid balance as unreasonable, in each case prior to the
date of such settlement.
(d) Contribution. If the indemnification provided for in this
Section 11 is unavailable or insufficient to hold harmless the QIU under Section
11(a), then the Company shall, in lieu of indemnifying the QIU, contribute to
the amount paid or payable by the QIU as a result of such loss, claim, damage or
liability, or action in respect thereof, (i) in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the QIU on the other with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as
<PAGE>
26
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the QIU on the other with respect to
such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities purchased under this Agreement
(before deducting expenses) received by the Company, as set forth on the cover
page of the Prospectus, bear to the fee payable to the QIU pursuant to Section 3
hereof. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the QIU on the other, the intent of
the parties and their relative knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the QIU
agree that it would not be just and equitable if contributions pursuant to this
Section 11(d) were to be determined by pro rata allocation or by any other
method of allocation which does not take into account the equitable
considerations referred to in this Section 11(d). The amount paid or payable by
the QIU as a result of the loss, claim, damage or liability, or action in
respect thereof, referred to above in this Section 11(d) shall be deemed to
include, for purposes of this Section 11(d), any legal or other expenses
reasonably incurred by the QIU in connection with investigating or defending any
such action or claim. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
The obligations of the Company under in this Section 11 are in
addition to any other liability which the Company may otherwise have.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the QIU, the
Company, and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters and the Company and their respective
successors and the controlling persons and officers and directors referred to in
Sections 10 and 11 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision contained herein.
13. EXPENSES. The Company agrees with the Underwriters to pay (a)
the costs incident to the authorization, issuance, sale, preparation and
delivery of the Securities and any taxes payable in that connection; (b) the
costs incident to the preparation, printing and filing under the Securities Act
of the Registration Statement and any amendments and exhibits thereto (including
the filing fees of the Commission); (c) the costs of distributing the
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of printing,
reproducing and distributing this Agreement and any other underwriting and
selling group documents by mail, telex or other means of communications; (e) the
filing fees incident to securing any required review by the National Association
of Securities
<PAGE>
27
Dealers, Inc. of the terms of sale of the Securities; (f) any applicable listing
or other fees; (g) the fees and expenses of qualifying the Securities under the
securities laws of the several jurisdictions as provided in Section 5(h) and of
preparing, printing and distributing Blue Sky Memoranda and Legal Investment
Surveys (including related fees and expenses of counsel to the Underwriters);
(h) any fees charged by securities rating services for rating the Securities;
(i) all fees and expenses of the Trustee and any agent thereof; and (j) all
other costs and expenses incident to the performance of the obligations of the
Company under this Agreement (including, without limitation, the fees and
expenses of counsel to the Company and the fees and expenses of Arthur Andersen
LLP); provided that, except as otherwise provided in this Section 13 and in
Section 9, the Underwriters shall pay their own costs and expenses, including
the fees and expenses of their counsel, any transfer taxes on the Securities
which they may sell and the expenses of advertising any offering of the
Securities made by the Underwriters.
14. SURVIVAL. The respective indemnities, rights of contribution,
representations, warranties and agreements of the Company and the Underwriters
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Securities and shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement or any investigation made by or on
behalf of any of them or any person controlling any of them.
15. NOTICES, ETC. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Societe Generale Securities
Corporation, 1221 Avenue of the Americas, New York, New York 10020,
Attention: Carl Mayer, Telephone: (212) 278-5423, Telecopy: (212)
278-5460;
(b) if to the QIU, shall be delivered or sent by mail, telex or
facsimile transmission to Societe Generale Securities Corporation,
Attention: Elizabeth Q. Duncan, Telephone: (212) 278-6478, Telecopy: (212)
278-7432;
(c) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: George G. Roller, Telephone: (413)
543-2400, Telecopy: (413) 543-3186;
provided, however, that any notice to an Underwriter pursuant to Section 10(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representative, which address will be supplied to any other party hereto by the
Representative upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by the Representative.
<PAGE>
28
16. DEFINITIONS OF CERTAIN TERMS. For purposes of this Agreement,
(a) "business day" means any day on which the New York Stock Exchange, Inc. is
open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of
the Rules and Regulations.
17. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
19. HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
29
If the foregoing is in accordance with your understanding of the
agreement between the Company and the several Underwriters, kindly indicate your
acceptance in the space provided for that purpose below.
Very truly yours,
FRIENDLY ICE CREAM CORPORATION
By
--------------------------------
Name:
Title:
Accepted:
SOCIETE GENERALE SECURITIES CORPORATION
By
--------------------------------
Authorized Signatory
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
--------------------------------
Authorized Signatory
NATIONSBANC MONTGOMERY SECURITIES, INC.
By
--------------------------------
Authorized Signatory
<PAGE>
SCHEDULE 1
Principal
Amount
Underwriters of Securities
------------ -------------
Societe Generale Securities Corporation.................. $
Donaldson, Lufkin & Jenrette Securities Corporation .....
NationsBanc Montgomery Securities, Inc. .................
------------
Total..................................................... $175,000,000
============
<PAGE>
EXHIBIT A-1
(a) Opinion of Counsel for Company. Mayer, Brown & Platt shall have
furnished to the Representative such counsel's written opinion, as counsel
to the Company, addressed to the Underwriters and dated the Closing Date,
in form and substance reasonably satisfactory to the Representative, to
the effect that:
(i) Assuming that the Indenture has been duly authorized,
executed and delivered by the Company and the Subsidiary Guarantor
and duly qualified under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), and, assuming due authorization,
execution and delivery thereof by the Trustee, the Indenture
constitutes a valid and legally binding obligation of the Company
and the Subsidiary Guarantor enforceable against the Company and the
Subsidiary Guarantor in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing; the Indenture
conforms in all material respects to the requirements of the Trust
Indenture Act and the applicable rules and regulations thereunder;
and assuming that the Securities have been duly authorized, executed
and issued by the Company and, assuming due authentication thereof
by the Trustee and upon payment and delivery in accordance with the
Underwriting Agreement, the Securities will constitute valid and
legally binding obligations of the Company enforceable against the
Company in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied
covenant of good faith and fair dealing and entitled to the benefits
of the Indenture.
(ii) The statements made in the Prospectus under the caption
"Description of Senior Notes," insofar as they purport to constitute
summaries of certain terms of documents referred to therein,
constitute accurate summaries of the terms of such documents in all
material respects.
(iii) Assuming that the Underwriting Agreement has been duly
authorized, executed and delivered by the Company and the Subsidiary
Guarantor, it is a valid and binding agreement of, the Company and
the Subsidiary Guarantor, enforceable in accordance with its terms,
except as rights to indemnification thereunder may be limited by
applicable law or public policy and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium, or other similar laws
<PAGE>
2
relating to or affecting creditors' rights generally or by general
equitable principles.
(iv) The execution and delivery of the Underwriting Agreement
by the Company and the Subsidiary Guarantor and the performance by
each of the Company and the Subsidiary Guarantor of its obligations
thereunder (other than performance by each of the Company and the
Subsidiary Guarantor of its obligations under the indemnification
section of the Underwriting Agreement, as to which no opinion need
be rendered) (i) will not result in any violation of the provisions
of the charter or by-laws of the Company or any subsidiary; (ii)
will not constitute a breach of, or Default or a Debt Repayment
Triggering Event under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, any Existing
Instrument identified on an annex to such opinion which the Company
has represented lists all material Existing Instruments to which the
Company or any of such subsidiaries is bound or to which any of the
property or assets of the Company or any of such subsidiaries is
subject, except for such breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result
in a Material Adverse Change; or (iii) will not result in any
violation of any federal or New York statute or any rule or
regulation that has been issued pursuant to any federal or New York
statute or any order known to such counsel issued pursuant to any
federal or New York statute by any court or governmental agency or
body or court having jurisdiction over the Company or any
subsidiary.
(v) No consent, approval, authorization or other order of, or
registration or filing with, any federal or New York court,
governmental authority or agency, is required for the Company's
execution, delivery and performance of the Underwriting Agreement
and consummation of the transactions contemplated thereby and by the
Prospectus, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD.
(vi) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if
any, has been issued under the Securities Act and no proceedings for
such purpose have been instituted or are pending or are contemplated
or threatened by the Commission. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under
the Securities Act has been made in the manner and within the time
period required by such Rule 424(b).
<PAGE>
3
(vii) The statements (i) in the Prospectus under the captions
"Risk Factors--Restrictions Imposed Under New Credit Facility" and
"-- Fraudulent Conveyance", "Management's Discussion and Analysis
and Results of Operations--Liquidity", "Description of New Credit
Facility" and "Underwriting" and (ii) in Item 14 and Item 15 of the
Registration Statement, insofar as such statements constitute
matters of law, summaries of legal matters, the Company's charter or
by-law provisions, documents or legal proceedings, or legal
conclusions, has been reviewed by such counsel and fairly present
and summarize, in all material respects, the matters referred to
therein.
(viii) The Company is not, and after receipt of payment for
the Securities and for the Common Shares will not be, an "investment
company" within the meaning of the Investment Company Act and the
rules and regulations of the Commission thereunder.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or
supplement to the Registration Statement and the Prospectus as of
their respective effective or issue dates (other than the financial
statements and supporting schedules included or incorporated by
reference therein or in exhibits to or excluded from the
Registration Statement, and the Form T-1 forming a part of the
Registration Statement, in each case as to which no opinion need be
rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act and the Trust
Indenture Act and the applicable rules and regulations of the
Commission thereunder.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
(other than as specified above in paragraphs (ii) and (vii), and any
supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which has led them to believe that either the
Registration Statement or any amendments thereto, at the time the
Registration Statement or such amendments became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, as of its date and at the Closing
Date, contained an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief as to the Form
T-1 and
<PAGE>
4
as to the financial statements or schedules or other financial or
statistical data derived therefrom, included in the Registration Statement
or the Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than
the General Corporation Law of the State of Delaware, the law of the State
of New York or the federal law of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion (which shall
be dated the Closing Date, shall be satisfactory in form and substance to
the Underwriters, shall expressly state that the Underwriters may rely on
such opinion as if it were addressed to them and shall be furnished to the
Representative) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters;
provided, however, that such counsel shall further state that they believe
that they and the Underwriters are justified in relying upon such opinion
of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
<PAGE>
EXHIBIT A-2
Opinion to be delivered pursuant to Section 6(f) of the Underwriting
Agreement by Aaron B. Parker, General Counsel of the Company and/or by
[Choate/Hall], Massachusetts counsel to the Company, which opinions may be
divided among such counsel in any manner satisfactory to counsel to the
Underwriters. References to the Prospectus in this Exhibit A-2 include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Massachusetts.
(ii) The Company has full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the States of
____________ and in each other jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions (other than the States of ___________) where the
failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, to the knowledge of
such counsel, is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(v) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued and outstanding capital
stock of each subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or, to the
knowledge of such counsel, any pending or threatened claim.
<PAGE>
2
(vi) The Indenture has been duly authorized, executed and
delivered by the Company and the Subsidiary Guarantor. The
Securities have been duly authorized, executed and issued by the
Company.
(vii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of,
the Company and the Subsidiary Guarantor.
(viii) The statements (i) in the Prospectus under the captions
"Prospectus Summary -- Recent Developments", "Risk Factors--
Relationships with Perkins; Potential Conflicts of Interest;
Dependence on Senior Management", "--Regulation" and "--Effect of
Certain Anti-Takeover Provisions", "Management's Discussion and
Analysis and Results of Operations--Liquidity", "Business--Licenses
and Trademarks" and "-- Government Regulation and Legal
Proceedings", "Management", "Certain Transactions" and
"Underwriting" and (ii) in Item 14 and Item 15 of the Registration
Statement, insofar as such statements constitute matters of law,
summaries of legal matters, the Company's charter or by-law
provisions, documents or legal proceedings, or legal conclusions,
has been reviewed by such counsel and fairly present and summarize,
in all material respects, the matters referred to therein.
(ix) The execution and delivery of the Underwriting Agreement
by the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations
under the indemnification section of the Underwriting Agreement, as
to which no opinion need be rendered) (i) have been duly authorized
by all necessary corporate action on the part of the Company; (ii)
will not result in any violation of the provisions of the charter or
by-laws of the Company or any subsidiary; (iii) will not constitute
a breach of, or Default or a Debt Repayment Triggering Event under,
or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any material Existing Instrument, except
for such breaches, Defaults, liens, charges or encumbrances as would
not, individually or in the aggregate, result in a Material Adverse
Change; or (iv) to the knowledge of such counsel, will not result in
any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any
subsidiary, except for such violations as would not, individually or
in the aggregate, result in a Material Adverse Change.
(x) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental
authority or agency, is required for the Company's execution,
delivery and performance of the Underwriting Agreement and
consummation of the transactions contemplated thereby and by the
Prospectus, except as required under the
<PAGE>
3
Securities Act, applicable state securities or blue sky laws and
from the NASD.
(xi) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto;
and the descriptions thereof and references thereto are correct in
all material respects.
(xii) To the knowledge of such counsel, neither the Company
nor any subsidiary is in violation of its charter or by-laws or any
law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary or is in Default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any material Existing Instrument, except in
each such case for such violations or Defaults as would not,
individually or in the aggregate, result in a Material Adverse
Change.
(xiii) Except as disclosed in the Prospectus, to the knowledge
of such counsel, there are no persons with registration or other
similar rights to have any equity or debt securities registered for
sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement, except for such rights
as have been duly waived.
(xiv) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened
which are required to be disclosed in the Registration Statement,
other than those disclosed therein.
(xv) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property owned by them,
in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property
by the Company and its subsidiaries; and all real property and
buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases, with
such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by
the Company and its subsidiaries.
(xvi) To such counsel's knowledge and other than as set forth
in the Prospectus, (A) the Company possesses such certificates,
authorizations or permits issued by the appropriate state, federal
or foreign regulatory agencies or bodies necessary to conduct the
business now operated by it, except where the failure to possess
such certificates, authorizations or
<PAGE>
4
permits would not be reasonably expected to result in a Material
Adverse Change, and (B) the Company has not received any notice of
proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singularly or in the
aggregate, if the subject of an unfavorable decision, ruling, or
finding, would be reasonably expected to result in a Material
Adverse Change.
(xvii) To such counsel's knowledge and other than as set forth
in the Prospectus, the Company and each of its subsidiaries own or
possess adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses
necessary for the conduct of their respective businesses and have no
reason to believe that the conduct of their respective businesses
will conflict with, and have not received any notice of any claim of
conflict with, any such rights of others.
In rendering the opinion referred to in subsection (xv) above, such
counsel may state that no examination of record titles for the purpose of
such opinion has been made, and that they are relying upon a general
review of the titles of the Company and its subsidiaries, upon opinions of
local counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
property by the Company or its subsidiaries, upon opinions of counsel to
the lessors of such property and, in respect of matters of fact, upon
certificates of officers of the Company or its subsidiaries, provided that
such counsel shall state that they believe that both the Underwriters and
they are justified in relying upon such opinions, abstracts, reports,
policies and certificates.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
(other than as specified above in paragraphs (v) and (viii), and any
supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which has lead them to believe that either the
Registration Statement or any amendments thereto, at the time the
Registration Statement or such amendments became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, as of its date and at the Closing
Date, contained an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief as to the Form
T-1 and
<PAGE>
5
as to the financial statements or schedules or other financial or
statistical data derived therefrom, included in the Registration Statement
or the Prospectus or any amendments or supplements thereto).
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
<PAGE>
EXHIBIT 4.1
STB DRAFT: OCTOBER 3, 1997
FRIENDLY ICE CREAM CORPORATION
% Senior Notes Due 2007
----------
INDENTURE
Dated as of October __, 1997
----------
THE BANK OF NEW YORK,
as Trustee
<PAGE>
CROSS REFERENCE TABLE
TIA Indenture
Section Section
- ------- -------
310(a)(1) ........................................................... 7.10
(a)(2) ........................................................... 7.10
(a)(3) ........................................................... N.A.
(a)(4) ........................................................... N.A.
(b) ..................................................... 7.8; 7.10
(c) ........................................................... N.A.
311(a) ........................................................... 7.11
(b) ........................................................... 7.11
312(a) ........................................................... 2.5
(b) ..................................................... 2.5; 11.3
(c) ........................................................... 11.3
313(a) ........................................................... 11.3
(b)(1) ........................................................... 7.6
(b)(2) ........................................................... N.A.
(c) ........................................................... 11.2
(d) ........................................................... 7.6
314(a) ............................................... 4.2; 4.12; 11.2
(b) ..............................................................N.A.
(c)(1) ........................................................... 11.4
(c)(2) ........................................................... 11.4
(c)(3) ........................................................... N.A.
(d) ........................................................... N.A.
(e) ........................................................... 11.5
(f) ........................................................... 4.12
315(a) ........................................................... 7.1
(b) ..................................................... 7.5; 11.2
(c) ........................................................... 7.1
(d) ........................................................... 7.1
(e) ........................................................... 6.11
316(a)(last sentence).................................................. 11.6
(a)(1)(A)........................................................... 6.5
(a)(1)(B)........................................................... 6.4
(a)(2) ........................................................... N.A.
(b) ........................................................... 6.7
317(a)(1) ........................................................... 6.8
(a)(2) ........................................................... 6.9
(b) ........................................................... 2.4
318(a) ........................................................... 11.1
N.A. means Not Applicable.
- ----------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions and Incorporation by Reference.............. 1
SECTION 1.1. Definitions........................................... 1
SECTION 1.2. Other Definitions..................................... 18
SECTION 1.3. Incorporation by Reference of Trust Indenture Act..... 18
SECTION 1.4. Rules of Construction................................. 19
ARTICLE 2
The Securities............................. 20
SECTION 2.1. Form and Dating....................................... 20
SECTION 2.2. Execution and Authentication.......................... 20
SECTION 2.3. Registrar and Paying Agent............................ 21
SECTION 2.4. Paying Agent To Hold Money in Trust................... 21
SECTION 2.5. Securityholder Lists.................................. 22
SECTION 2.6. Transfer and Exchange................................. 22
SECTION 2.7. Replacement Securities................................ 24
SECTION 2.8. Outstanding Securities................................ 24
SECTION 2.9. Temporary Securities.................................. 25
SECTION 2.10. Cancellation.......................................... 25
SECTION 2.11. Defaulted Interest.................................... 25
SECTION 2.12. CUSIP Numbers......................................... 25
ARTICLE 3
Redemption............................... 26
SECTION 3.1. Notices to Trustee.................................... 26
SECTION 3.2. Selection of Securities To Be Redeemed................ 26
SECTION 3.3. Notice of Redemption.................................. 26
SECTION 3.4. Effect of Notice of Redemption........................ 27
SECTION 3.5. Deposit of Redemption Price........................... 27
SECTION 3.6. Securities Redeemed in Part........................... 28
ARTICLE 4
Covenants............................... 28
SECTION 4.1. Payment of Securities................................. 28
ii
<PAGE>
Page
----
SECTION 4.2. SEC Reports........................................... 28
SECTION 4.3. Limitation on Indebtedness............................ 29
SECTION 4.4. Limitation on Restricted Payments..................... 32
SECTION 4.5. Limitation on Restrictions on Distributions from
Restricted Subsidiaries............................... 35
SECTION 4.6. Limitation on Sales of Assets and Subsidiary Stock.... 36
SECTION 4.7. Limitation on Transactions with Affiliates............ 39
SECTION 4.8. Change of Control..................................... 40
SECTION 4.9. Limitation on Liens................................... 41
SECTION 4.10. Limitation on Sale of Subsidiary Capital Stock........ 41
SECTION 4.11. Future Guarantors..................................... 42
SECTION 4.12. Compliance Certificate................................ 42
SECTION 4.13. Further Instruments and Acts.......................... 42
ARTICLE 5
Successor Company........................... 42
SECTION 5.1. When the Company May Merge or Transfer Assets......... 42
SECTION 5.2. When Subsidiary Guarantor May Merge or Transfer Assets 43
ARTICLE 6
Defaults and Remedies......................... 44
SECTION 6.1. Events of Default..................................... 44
SECTION 6.2. Acceleration.......................................... 46
SECTION 6.3. Other Remedies........................................ 46
SECTION 6.4. Waiver of Past Defaults............................... 46
SECTION 6.5. Control by Majority................................... 47
SECTION 6.6. Limitation on Suits................................... 47
SECTION 6.7. Rights of Holders To Receive Payment.................. 47
SECTION 6.8. Collection Suit by Trustee............................ 47
SECTION 6.9. Trustee May File Proofs of Claim...................... 48
SECTION 6.10. Priorities............................................ 48
SECTION 6.11. Undertaking for Costs................................. 48
SECTION 6.12. Waiver of Stay or Extension Laws...................... 49
ARTICLE 7
Trustee................................ 49
SECTION 7.1. Duties of Trustee..................................... 49
SECTION 7.2. Rights of Trustee..................................... 50
iii
<PAGE>
Page
----
SECTION 7.3. Individual Rights of Trustee.......................... 51
SECTION 7.4. Trustee's Disclaimer.................................. 51
SECTION 7.5. Notice of Defaults.................................... 51
SECTION 7.6. Reports by Trustee to Holders......................... 51
SECTION 7.7. Compensation and Indemnity............................ 51
SECTION 7.8. Replacement of Trustee................................ 52
SECTION 7.9. Successor Trustee by Merger........................... 53
SECTION 7.10. Eligibility; Disqualification......................... 53
SECTION 7.11. Preferential Collection of Claims Against Company..... 54
ARTICLE 8
Discharge of Indenture; Defeasance................... 54
SECTION 8.1. Discharge of Liability on Securities; Defeasance...... 54
SECTION 8.2. Conditions to Defeasance.............................. 55
SECTION 8.3. Application of Trust Money............................ 56
SECTION 8.4. Repayment to Company.................................. 56
SECTION 8.5. Indemnity for Government Obligations.................. 57
SECTION 8.6. Reinstatement......................................... 57
ARTICLE 9
Amendments............................... 57
SECTION 9.1. Without Consent of Holders............................ 57
SECTION 9.2. With Consent of Holders............................... 58
SECTION 9.3. Compliance with Trust Indenture Act................... 59
SECTION 9.4. Revocation and Effect of Consents and Waivers......... 59
SECTION 9.5. Notation on or Exchange of Securities................. 59
SECTION 9.6. Trustee To Sign Amendments............................ 60
ARTICLE 10
Subsidiary Guarantees......................... 60
SECTION 10.1. Subsidiary Guarantees................................ 60
SECTION 10.2. Limitation on Liability.............................. 62
SECTION 10.3. Successors and Assigns............................... 62
SECTION 10.4. No Waiver............................................ 62
SECTION 10.5. Right of Contribution................................ 62
SECTION 10.6. No Subrogation....................................... 62
SECTION 10.7. Modification......................................... 63
iv
<PAGE>
Page
----
SECTION 10.8. Release of Subsidiary Guarantor...................... 63
ARTICLE 11
Miscellaneous............................. 63
SECTION 11.1. Trust Indenture Act Controls......................... 63
SECTION 11.2. Notices.............................................. 63
SECTION 11.3. Communication by Holders with Other Holders.......... 64
SECTION 11.4. Certificate and Opinion as to Conditions Precedent... 64
SECTION 11.5. Statements Required in Certificate or Opinion........ 65
SECTION 11.6. When Securities Disregarded.......................... 65
SECTION 11.7. Rules by Trustee, Paying Agent and Registrar......... 65
SECTION 11.8. Legal Holidays....................................... 65
SECTION 11.9. Governing Law........................................ 66
SECTION 11.10. No Recourse Against Others........................... 66
SECTION 11.11. Successors........................................... 66
SECTION 11.12. Multiple Originals................................... 66
SECTION 11.13. Table of Contents; Headings.......................... 66
SECTION 11.14. Severability Clause.................................. 66
Exhibit A - Form of Security
v
<PAGE>
INDENTURE dated as of October ___, 1997, among FRIENDLY ICE CREAM
CORPORATION, a Massachusetts corporation (the "Company"), FRIENDLY'S RESTAURANTS
FRANCHISE, INC., a Massachusetts corporation, and THE BANK OF NEW YORK, a New
York banking corporation (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Company's % Senior Notes
Due 2007 (the "Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.1. Definitions.
"Acquired Indebtedness" of any specified Person means Indebtedness
of any other Person existing at the time such other Person is merged with or
into or becomes a Restricted Subsidiary of such specified Person, including
Indebtedness Incurred in connection with, or in contemplation of, such other
Person's becoming a Restricted Subsidiary of such specified Person.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Article 4, "Affiliate" shall also mean any beneficial owner of
shares representing 10% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof; provided that Donald N. Smith shall be deemed to be an
"Affiliate" so long as he is the beneficial owner of shares representing 5% or
more of the total voting power of the Voting Stock (on a fully diluted basis) of
the Company or of rights or warrants to purchase such Voting Stock (whether or
not currently exercisable).
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares), property or other assets
<PAGE>
2
(including sales and other dispositions of tangible assets to franchisees and
licensees and tangible assets at underperforming restaurants, but excluding
sales, dispositions or licenses of trademarks, service marks, tradenames and
other intangibles), including by way of a Sale/Leaseback Transaction (each
referred to for the purposes of this definition as a "disposition"), by the
Company or any of its Restricted Subsidiaries (including any disposition by
means of a merger, consolidation or similar transaction) other than (i) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of
property or assets in the ordinary course of business, (iii) dispositions of
inventory in the ordinary course of business, (iv) for purposes of Section 4.6
only, a disposition that constitutes a Restricted Payment permitted by Section
4.4, (v) the sale, lease, transfer or other disposition of all or substantially
all the assets of the Company as permitted under Article 5, (vi) the grant of
Liens permitted by Section 4.11 and (vii) sales of obsolete or worn- out
equipment.
"Average Life" means, as of the date of determination, with respect
to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i)
the sum of the product of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors or equivalent
governing body of a Person (or the general partner of such Person, as the case
may be) or any committee thereof duly authorized to act on behalf of such Board
or equivalent governing body.
"Business Day" means a day other than a Saturday, Sunday or other
day on which banking institutions in New York State are authorized or required
by law to close.
"Capitalized Lease Obligation" of a Person means an obligation of
such Person that is required to be classified and accounted for on the balance
sheet of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following
events with respect to the Company:
<PAGE>
3
(i) (A) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company and (B) the
Permitted Holders "beneficially own" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority
of the Board of Directors of the Company;
(ii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of a majority of the directors of the
Company 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;
(iii) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, the assets of the Company to any Person or group of Persons (other
than to any Wholly Owned Subsidiary of the Company);
(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company and the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the voting power of the Voting
Stock of the Company are changed into or exchanged for cash, securities or
property, unless pursuant to such transaction such securities are changed
into or exchanged for, in addition to any other consideration, securities
of the surviving corporation that represent immediately after such
transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving Person or transferee; or
(v) the adoption of a plan of liquidation of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity swap agreement, commodity
future agreement, commodity hedge agreement or other similar agreement relating
to commodities, in each case relating to those commodities used in the ordinary
course of business of the Company and its Subsidiaries.
<PAGE>
4
"Common Stock Offering" means the offering to the public by the
Company of 5,000,000 shares of its Common Stock concurrently with the offering
of the Securities, including any offering of shares pursuant to over-allotment
options.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (i) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters for which internal financial information
is available ending at least 45 days prior to the date of such determination to
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence or retirement of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment occurred on the
<PAGE>
5
first day of such period. For purposes of this definition, whenever pro forma
effect is to be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest expense on such
Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted Subsidiaries,
plus, to the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) Preferred Stock dividends in respect
of all Preferred Stock of the Company and its Subsidiaries held by Persons other
than the Company or a Wholly Owned Subsidiary and (viii) the cash contributions
to any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by such
plan or trust; provided, however, that there shall be excluded therefrom any
such interest expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.
"Consolidated Net Income" means, for any period, the net income
(loss) of the Company and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A), subject to
the limitations contained in clause (iv) below, the Company's equity in
the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted Subsidiary,
to the limitations contained in clause (iii) below) and (B) the Company's
equity in a net loss of any such Person (other than an Unrestricted
Subsidiary) for such period shall be included in determining such
Consolidated Net Income,
(ii) any net income (but not loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition,
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6
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A),
subject to the exclusion contained in clause (iv) below, the Company's
equity in the net income of any such Restricted Subsidiary for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Restricted Subsidiary during
such period to the Company or another Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend paid to another
Restricted Subsidiary, to the limitation contained in this clause) and (B)
the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of the Company or its
consolidated Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (but not loss) realized upon the sale or
other disposition of any Capital Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses, and
(viii) any income (loss) from discontinued operations.
Notwithstanding the foregoing, for the purpose of Section 4.4 only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (3)(D) of paragraph (a) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
<PAGE>
7
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement as to
which such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of
time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the Stated Maturity of the
Securities.
"EBITDA" for any period means the Consolidated Net Income for such
period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense and (v) non- cash
charges, in each case for such period. Notwithstanding the foregoing, the income
tax expense, depreciation expense and amortization expense of a Restricted
Subsidiary of the Company shall be included in EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be distributable to the Company by
such Subsidiary as a dividend.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Foreign Subsidiary" means any Subsidiary which is incorporated or
otherwise organized under the laws of any jurisdiction other than the United
States of America, any state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the date of this Indenture, including those
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. All ratios and computations based on GAAP contained in
this Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements,
<PAGE>
8
or by agreement to keep-well, to purchase assets, goods, securities or services,
to take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided,
however, that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such
Person to a counterparty (net of amounts receivable from such counterparty)
pursuant to any Interest Rate Agreement, or Currency Agreement or Commodity
Agreement.
"Holder" or "Senior Noteholder" means the Person in whose name a
Senior Note is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Disqualified Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of indebtedness
of such Person for borrowed money,
(ii) the principal of and premium (if any) in respect of obligations
of such Person evidenced by bonds, debentures, Securities or other similar
instruments,
(iii) all obligations of such Person in respect of unreimbursed
drawings under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables and accrued
expenses), which purchase price is due more that six months after the date
of placing such property in service or taking delivery and title thereto
or the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all non-contingent obligations of such Person
with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with
<PAGE>
9
respect to any Restricted Subsidiary that is not a Subsidiary Guarantor,
any Preferred Stock (but excluding, in each case, any accrued dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other
Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person,
(ix) to the extent not otherwise included in this definition,
Hedging Obligations and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indenture" means this Indenture as amended or supplemented from
time to time by one or more supplemental indentures entered into pursuant to the
applicable provisions hereof or otherwise in accordance with the terms hereof.
"Interest Rate Agreement" means with respect to any Person any
interest rate protection agreement, interest rate future agreement, interest
rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement or
other similar agreement or arrangement as to which such Person is party or a
beneficiary.
"Investment" in any Person means any direct or indirect advance,
loan (other than advances to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of such Person) or
other extension of credit (including by way of Guarantee or similar arrangement)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and Section 4.4, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an
<PAGE>
10
Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors and evidenced by a resolution of such Board of
Directors certified in an Officers' Certificate to the Trustee. For the purposes
of calculating the amount of other "Investments," including Permitted
Investments, the amount of any Investment shall be the original cost of such
Investment plus the cost of all additional Investments by the Company or any of
its Restricted Subsidiaries, without any adjustments for increases or decreases
in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income.
"Issue Date" means the date on which the Securities are originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a Senior Note or installment receivable or otherwise, but
only as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to such properties or assets or received in any other non cash form)
therefrom, in each case net of (i) all legal, accounting, investment banking,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
<PAGE>
11
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Credit Facility" means that certain credit facility to be
entered into on the Issue Date among the Company, Societe Generale, and the
lenders from time to time party thereto, including any collateral documents,
instruments and agreements executed in connection therewith, and the term New
Credit Facility shall also include any amendments, supplements, modifications,
extensions, renewals, restatements or refundings thereof and any credit
facilities that replace, refund or refinance any part of the loans, other credit
facilities or commitments thereunder, including any such replacement, refunding
or refinancing facility that increases the amount borrowable thereunder or
alters the maturity thereof.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the
Company nor any Restricted Subsidiary (a) provides any Guarantee or credit
support of any kind (including any undertaking, Guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"Officer" means the Chairman of the Board, any Vice Chairman, the
Chief Executive Officer, the Chief Financial Officer, the President, any
Executive Vice President, Vice President of Finance and Business Planning (or
any such other officer that performs similar duties), the Secretary or any
General Partner of the Company.
"Officers' Certificate" means a certificate signed by two Officers,
one of which is the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Executive Vice President, Vice
President of Finance and Business Planning (or any such other officer that
performs similar duties) or any General Partner.
"Opinion of Counsel" means a written opinion from legal counsel who
is reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee. Opinions of Counsel required to be
delivered under this Indenture may have qualifications customary for opinions of
the type required and counsel delivering such Opinions of Counsel may rely on
certificates of the Company or government or other officials customary for
opinions of the type required, including certificates certifying as to matters
of fact.
<PAGE>
12
"Permitted Holders" means Donald N. Smith, Harrah's Operating
Company, Inc., The Equitable Life Assurance Society of the U.S., the Company's
existing senior management and their respective Affiliates.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) the Company, or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) accounts and receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments and which
are readily convertible into cash in U.S. dollars in an amount equal to the fair
market value thereof as determined in good faith by the Board of Directors;
(viii) franchisees of the Company in an amount at any one time outstanding not
to exceed $10 million; (ix) Unrestricted Subsidiaries in an aggregate amount at
any one time outstanding not to exceed $10 million; (x) Guarantees permitted to
be made pursuant to Section 4.3; (xi) Investments in securities of trade
creditors received in settlement of obligations or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy of insolvency of any
trade creditors of customers, (xii) Currency Agreements, Interest Rate
Agreements and Commodity Agreements entered into in the ordinary course of
business; provided that such agreements are entered into for bona fide hedging
purposes, are not for speculation or trading purposes and are designed to
protect against fluctuations in interest rates, currency exchange rates or
commodity prices, as the case may be, and, in the case of Interest Rate
Agreements, any such Interest Rate Agreement has a notional amount corresponding
to the Indebtedness being hedged thereby, (xiii) Investments in accounts and
notes receivable from franchisees, customers, suppliers and others in the
ordinary course of business and (xiv) Investments made by the Company or a
Restricted Subsidiary in connection with an Asset Disposition made in compliance
with Section 4.6.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under workmen's compensation laws, unemployment
insurance laws or similar legislation, or good faith deposits in connection with
bids, tenders, contracts (other than for the payment of Indebtedness) or leases
to which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government
<PAGE>
13
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment of
rent, in each case incurred in the ordinary course of business; (b) Liens
imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each
case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for taxes, assessments, governmental
charges or claims not yet subject to penalties for non-payment or which are
being contested in good faith by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person, and Liens to secure bankers' acceptances, in
each case in the ordinary course of its business; (e) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens (A) securing obligations under Interest Rate
Agreements so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such obligations
and (B) securing obligations under Currency Agreements and Commodity Agreements,
provided that such Liens shall not encumber any assets or property of the
Company other than the underlying contracts and the rights thereunder; (g) Liens
existing as of the date on which the Securities are originally issued and Liens
created by the Indenture; (h) Liens created solely for the purpose of securing
the payment of all or a part of the purchase price of assets or property
acquired or constructed in the ordinary course of business after the date on
which the Securities are originally issued; provided, however, that (A) the
aggregate principal amount of Indebtedness secured by such Liens shall not
exceed the cost of the assets or property so acquired or constructed, (B) the
Indebtedness secured by such Liens shall have otherwise been permitted to be
issued under the Indenture and (C) such Liens shall not encumber any other
assets or property of the Company or any of its Restricted Subsidiaries and
shall attach to such assets or property within 90 days of the construction or
acquisition of such assets or property; (i) Liens on the assets or property of a
Restricted Subsidiary of the Company existing at the time such Restricted
Subsidiary became a Subsidiary of the Company and not incurred as a result of
(or in connection with or in anticipation of) such Restricted Subsidiary
becoming a Subsidiary of the Company; provided, however, that (A) any such Lien
does not by its terms cover any categories of property or assets after the time
such Restricted Subsidiary becomes a Subsidiary which were not covered
immediately prior to such transaction, (B) the incurrence of the Indebtedness
secured by such Lien shall have otherwise been permitted to be issued under the
Indenture, and (C) such Liens do not extend to or cover any other categories of
property or assets of the Company or any of its Restricted Subsidiaries; (j)
Liens to secure Capitalized Lease Obligations permitted to be Incurred under the
Indenture; (k) Liens securing Indebtedness outstanding under the New Credit
Facility (including, without limitation, any Refinancing Indebtedness in respect
thereof to the extent permitted under Section 4.3; (l) any
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14
interest or title of a lessor under any lease, whether or not characterized as
an operating or capital lease; (m) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual or warranty
requirements of the Company or any Restricted Subsidiary, including rights of
set-off; (n) leases or subleases granted in the ordinary course of business; (o)
Liens arising out of consignment or similar arrangements for the sale of goods;
(p) rights of set-off arising under law by banks; (q) Liens in addition to the
foregoing incurred in the ordinary course of business which are not incurred in
connection with the borrowing of money or the obtaining of advances of credit;
provided that the amount of the obligations of the Company and its Restricted
Subsidiaries secured by such Liens does not exceed in the aggregate $2 million
at any one time outstanding; and (r) Liens extending, renewing or replacing in
whole or in part a Lien permitted by this Indenture; provided, however, that (A)
such Liens do not extend beyond the property subject to the existing Lien and
improvements and construction on such property and (B) the Indebtedness secured
by the Lien may not exceed the Indebtedness secured at the time by the existing
Lien.
"Person" means any individual, corporation, partnership joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Security means the principal of the Security plus
the premium, if any, payable on the Security which is due or overdue or is to
become due at the relevant time.
"Qualified Equity Offering" means (i) an underwritten primary public
offering (other than the Common Stock Offering) of common stock of the Company
pursuant to an effective registration statement under the Securities Act or (ii)
a private offering of common stock other than issuances of common stock pursuant
to employee benefit plans or as compensation to employees.
"Refinancing Indebtedness" means Indebtedness that refunds,
refinances, replaces, renews, repays or extends (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinances," and "refinanced"
shall have a correlative meaning) any Indebtedness existing on the date of the
Indenture or Incurred in compliance with the Indenture (including Indebtedness
of the Company that refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances other
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced,
<PAGE>
15
(ii) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the Indebtedness
being refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Restricted Subsidiary that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary (unless
such Unrestricted Subsidiary is concurrently redesignated a Restricted
Subsidiary).
"Related Business" means the businesses of the Company and the
Restricted Subsidiaries on the date of the Indenture and any business related,
ancillary or complementary thereto, in each case as determined by the Company in
good faith.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"RIC" means Restaurant Insurance Corporation, the Company's
insurance Subsidiary, and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured
by a Lien.
"Senior Indebtedness" means all Indebtedness of the Company
including interest thereon, whether outstanding on the Issue Date or thereafter
Incurred, unless in the instrument creating or evidencing the same or pursuant
to which the same is outstanding it is provided that such obligations are
subordinated in right of payment to the Securities; provided, however, that
Senior Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness,
Guarantee or obligation of the Company which is subordinate or junior in any
respect to any other Indebtedness, Guarantee or obligation of the Company,
including any Subordinated Obligations, (5) any obligations with respect to any
Capital Stock, (6) Indebtedness which, when Incurred and without respect to any
election
<PAGE>
16
under Section 1111(b) of Title II, United States Code, is without recourse to
the Company, or (7) any Indebtedness Incurred in violation of this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would
be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02
under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Securities pursuant to a
written agreement.
"Subsidiary" of any Person means any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) 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 (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Subsidiary Guarantor" means Friendly's Restaurants Franchise, Inc.
and each new Subsidiary (other than Foreign Subsidiaries and Unrestricted
Subsidiaries) that guarantees the Company's obligations with respect to the
Securities.
"Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor
of the Company's obligations with respect to the Securities.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any agency
thereof or obligations Guaranteed by the United States of America or any agency
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 360 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States of America having capital, surplus and undivided
profits aggregating in excess of $250,000,000 (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act), (iii)
repurchase obligations with a term of not more than 60 days for underlying
securities of the
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17
types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's
Ratings Group, (v) investments in securities with maturities of 12 months or
less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi)
investments in shares of money market funds registered under the Investment
Company Act of 1940, as amended.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date of this Indenture.
"Trade Payables" means, with respect to any Person, any accounts
payable or any indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person arising in the ordinary course of business
in connection with the acquisition of goods or services.
"Trustee" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or
any other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board of Directors in the manner provided below and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of,
or owns or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total consolidated assets of $1,000 or less or (B) if such
Subsidiary has consolidated assets greater than $1,000, then such designation
would be permitted under Section 4.4. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
immediately after giving
<PAGE>
18
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under Section 4.3(a) and (y) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock
of such corporation then outstanding and normally entitled to vote in the
election of directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the
Company all the Capital Stock of which (other than directors' qualifying shares
and, in the case of Foreign Subsidiaries, shares required to be held by foreign
nationals representing not more than 2% of such Capital Stock) is owned by the
Company or another Wholly Owned Subsidiary.
SECTION 1.2. Other Definitions.
Defined in
Term Section
---- -------
"Affiliate Transaction"....................................................4.7
"Bankruptcy Law"...........................................................6.1
"covenant defeasance option"............................................8.1(b)
"Custodian"................................................................6.1
"Event of Default..........................................................6.1
"Global Securities"........................................................2.1
"legal defeasance option"...............................................8.1(b)
"Legal Holiday"...........................................................11.8
"Notice of Default"........................................................6.1
"Offer".................................................................4.6(b)
"Participants".............................................................2.6
"Paying Agent".............................................................2.3
"Registrar"................................................................2.3
"Restricted Payment"....................................................4.4(a)
"Securities Register"......................................................2.3
"Successor Company"........................................................5.1
SECTION 1.3. Incorporation by Reference of Trust Indenture Act. This
Indenture is subject to the mandatory provisions of the TIA which are
incorporated by
<PAGE>
19
reference in and made a part of this Indenture. The following TIA terms have the
following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.4. Rules of Construction. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof that
would be shown on a balance sheet of the issuer dated such date prepared
in accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption
<PAGE>
20
or mandatory repurchase price with respect to such Preferred Stock,
whichever is greater; and
(9) all references to $, US$, dollars or United States dollars shall
refer to the lawful currency of the United States.
ARTICLE 2
The Securities
SECTION 2.1. Form and Dating. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A,
which is hereby incorporated in and expressly made a part of this Indenture. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company is subject, if any, or usage
(provided that any such notation, legend or endorsement is in a form acceptable
to the Company). Each Security shall be dated the date of its authentication.
The terms of the Securities set forth in Exhibit A are part of the terms of this
Indenture.
Global Securities. The Securities shall be issued initially in the
form of one or more permanent Global Securities ("Global Securities") in
definitive, fully registered form without interest coupons in substantially the
form of Exhibit A, which shall be deposited on behalf of the purchasers of the
Securities represented thereby with the Trustee, at its principal corporate
trust office in New York City, as custodian for the Depositary, and registered
in the name of the Depositary or a nominee of the Depositary, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the Global Securities may from time to time be
increased or decreased by adjustments made on the records of the Trustee and the
Depositary or its nominee in the limited circumstances hereinafter provided.
Certificated Securities. Except as provided in Section 2.6, owners
of beneficial interests in Global Securities will not be entitled to receive
physical delivery of certificated securities.
SECTION 2.2. Execution and Authentication. An Officer of the Company
shall sign the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
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21
The Trustee shall authenticate and make available for delivery
Securities for original issue in an aggregate principal amount of $175,000,000,
upon a written order of the Company signed by an Officer of the Company. Such
order shall specify the amount of the Securities to be authenticated and the
date on which the original issue of Securities is to be authenticated. The
aggregate principal amount of Securities outstanding at any time may not exceed
that amount except as provided in Section 2.7.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate the Securities, upon the consent of the Company to such
appointment. Unless limited by the terms of such appointment, an authenticating
agent may authenticate Securities whenever the Trustee may do so. Each reference
in this Indenture to authentication by the Trustee includes authentication by
such agent. An authenticating agent has the same rights as any Registrar, Paying
Agent or agent for service of notices and demands.
SECTION 2.3. Registrar and Paying Agent. The Company shall maintain
an office or agency where Securities may be presented for registration of
transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar,
acting on behalf of and as agent for the Company, shall keep a register (the
"Securities Register") of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional paying
agents. The term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with
any Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.7. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries may
act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Securities.
SECTION 2.4. Paying Agent To Hold Money in Trust. On or prior to
each due date of the principal and interest on any Security, the Company shall
deposit with the Paying Agent a sum sufficient to pay such principal and
interest when so becoming due. The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the Paying Agent shall hold in
trust for the benefit of Securityholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Securities and
shall notify the Trustee of any default by the Company in making any such
payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate
the money held by it as Paying Agent and hold it as a separate trust fund. The
Company at any time may require a Paying Agent to pay all money held by it to
the Trustee and to account for any funds
<PAGE>
22
disbursed by the Paying Agent. Upon complying with this Section, the Paying
Agent shall have no further liability for the money delivered to the Trustee.
SECTION 2.5. Securityholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish to the Trustee, in writing at least five
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Securityholders;
provided that as long as the Trustee is the Registrar, no such list need be
furnished.
SECTION 2.6. Transfer and Exchange. The Securities shall be issued
in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
and the Trustee may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and the Registrar shall record in the
Securities Register the transfer as requested if the requirements of Section
8-401(1) of the Uniform Commercial Code are met, and thereupon one or more new
Securities in the same aggregate principal amount shall be issued to the
designated assignee or transferee and the old Security will be returned to the
Company. When Securities are presented to the Registrar or a co-registrar with a
request to exchange them for an equal principal amount of Securities of other
denominations, the Registrar shall make the exchange as requested, in the same
manner, if the same requirements are met. To permit registration of transfers
and exchanges, the Company shall execute and the Trustee shall authenticate
Securities at the Registrar's or co-registrar's request. The Company may require
payment of a sum sufficient to pay all taxes, assessments or other governmental
charges in connection with any transfer or exchange pursuant to this Section.
The Company shall not be required to make and the Registrar need not register
transfers or exchanges of Securities selected for redemption (except, in the
case of Securities to be redeemed in part, the portion thereof not to be
redeemed) or any Securities for a period of 15 days before a selection of
Securities to be redeemed or 15 days before an interest payment date.
Prior to the due presentation for registration of transfer of any
Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant to the
terms of this Indenture will evidence the same debt and will be entitled to the
same benefits under this Indenture as the Securities surrendered upon such
transfer or exchange.
<PAGE>
23
With respect to Global Securities:
(1) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary designated for such Global
Security or a nominee thereof and deposited with such Depositary or a
nominee thereof or custodian therefor, and each such Global Security shall
constitute a single Security for all purposes of this Indenture.
(2) A Global Security may not be transferred except as a whole by
the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary. A Global Security is exchangeable for
certificated Securities only if (i) the Depositary notifies the Company
that it is unwilling or unable to continue as a Depositary for such Global
Security or if at any time the Depositary ceases to be a clearing agency
registered under the Exchange Act, (ii) the Company executes and delivers
to the Trustee a notice that such Global Security shall be so
transferable, registrable, and exchangeable, and such transfers shall be
registrable or (iii) there shall have occurred and be continuing an Event
of Default or an event which, with the giving of notice or lapse of time
or both, would constitute an Event of Default with respect to the
Securities represented by such Global Security. Any Global Security that
is exchangeable for certificated Securities pursuant to the preceding
sentence will be transferred to, and registered and exchanged for,
certificated Securities in authorized denominations, without legends
applicable to a Global Security, and registered in such names as the
Depositary holding such Global Security may direct. Subject to the
foregoing, a Global Security is not exchangeable, except for a Global
Security of like denomination to be registered in the name of the
Depositary or its nominee. In the event that a Global Security becomes
exchangeable for certificated Securities, (i) certificated Securities will
be issued only in fully registered form in denominations of $1,000 or
integral multiples thereof, (ii) payment of principal, any repurchase
price, and interest on the certificated Securities will be payable, and
the transfer of the certificated Securities will be registrable, at the
office or agency of the Company maintained for such purposes, and (iii) no
service charge will be made for any registration or transfer or exchange
of the certificated Securities, although the Company may require payment
of a sum sufficient to cover any tax or governmental charge imposed in
connection therewith.
(3) Securities issued in exchange for a Global Security or any
portion thereof shall have an aggregate principal amount equal to that of
such Global Security or portion thereof to be so exchanged, shall be
registered in such names and be in such authorized denominations as the
Depositary shall designate and shall bear the applicable legends provided
for herein. Any Global Security to be exchanged in whole shall be
surrendered by the Depositary to the Trustee. With respect to any Global
Security to be exchanged in part, either such Global Security shall be so
surrendered for exchange or, if the Trustee is acting as custodian for the
Depositary or its nominee with respect to such Global Security, the
principal amount thereof shall be
<PAGE>
24
reduced, by an amount equal to the portion thereof to be so exchanged, by
means of an appropriate adjustment made on the records of the Trustee.
Upon any such surrender or adjustment, the Trustee shall authenticate and
deliver the Security issuable on such exchange to or upon the order of the
Depositary or an authorized representative thereof.
(4) Every Security authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any
portion mutilated thereof, whether pursuant to this Section, Section 2.7
or 2.9 or otherwise, shall be authenticated and delivered in the form of,
and shall be, a Global Security, unless such Security is registered in the
name of a Person other than the Depositary for such Global Security or a
nominee thereof.
Members of, or participants in, the Depositary ("Participants")
shall have no rights under this Indenture with respect to any Global Security
held on their behalf by the Depositary or by the Trustee as the custodian of the
Depositary or under such Global Security, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Participants, the operation of
customary practices of such Depositary governing the exercise of the rights of a
holder of a beneficial interest in any Global Security.
SECTION 2.7. Replacement Securities. If a mutilated Security is
surrendered to the Trustee or Registrar or if the Holder of a Security claims
that the Security has been lost, destroyed or wrongfully taken, the Company
shall issue and the Trustee shall authenticate a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code are met and the
Holder satisfies any other reasonable requirements of the Trustee and the
Company. Such Holder shall furnish an indemnity bond sufficient in the judgment
of the Company and the Trustee to protect the Company, the Trustee, the Paying
Agent, the Registrar and any co-registrar from any loss which any of them may
suffer if a security is replaced. The Company and the Trustee may charge the
Holder for their expenses in replacing a Security.
Every replacement Security is an obligation of the Company under
this Indenture.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.8. Outstanding Securities. Securities outstanding at any
time are all Securities authenticated by the Trustee except for those canceled
by it, those delivered to it
<PAGE>
25
for cancellation and those described in this Section as not outstanding. A
Security does not cease to be outstanding because the Company or an Affiliate of
the Company holds the security.
If a Security is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance
with this Indenture, on a redemption date or maturity date or, pursuant to
Section 8.1(a), within 91 days prior thereto, money sufficient to pay all
principal and interest payable on that redemption or maturity date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the case
may be, then on and after such date such Securities (or portions thereof) cease
to be outstanding and on and after such redemption or maturity date interest on
them ceases to accrue.
SECTION 2.9. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities and
deliver them in exchange for temporary securities.
SECTION 2.10. Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver such canceled Securities to the Company. The Trustee
shall from time to time provide the Company a list of all Securities that have
been canceled as requested by the Company. The Company may not issue new
Securities to replace Securities it has redeemed, paid or delivered to the
Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities
may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee
shall use "CUSIP"
<PAGE>
26
numbers in notices of redemption as a convenience to Holders; provided that any
such notice may state that no representation is made as to the correctness of
such numbers either as printed on the Securities or as contained in any notice
of a redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers. The Company will promptly notify
the Trustee of any change in the CUSIP numbers.
ARTICLE 3
Redemption
SECTION 3.1. Notices to Trustee. If the Company elects to redeem
Securities pursuant to paragraph 5 of the Securities, they shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and the paragraph of the Securities pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for in
this Section at least 45 days before the redemption date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an Officers'
Certificate from the Company to the effect that such redemption will comply with
the provisions herein.
SECTION 3.2. Selection of Securities To Be Redeemed. If fewer than
all the Securities are to be redeemed, the Trustee shall select the Securities
to be redeemed pro rata or by lot or by a method that complies with applicable
legal and securities exchange requirements, if any, and that the Trustee
considers fair and appropriate and in accordance with methods generally used at
the time of selection by fiduciaries in similar circumstances. The Trustee shall
make the selection from outstanding Securities not previously called for
redemption. The Trustee may select for redemption portions of the principal of
Securities that have denominations larger than $1,000. Securities and portions
of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of
$1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption. The
Trustee shall notify the Company promptly of the Securities or portions of
Securities to be redeemed. In the event the Company is required to make an offer
to redeem Securities pursuant to Sections 4.6 or 4.8 and the amount available
for such offer is not evenly divisible by $1,000, the Trustee shall promptly
refund to the Company any remaining funds, which in no event will exceed $1,000.
SECTION 3.3. Notice of Redemption. At least 30 days but not more
than 60 days before a date for redemption of securities, the Company shall mail
a notice of redemption by first-class mail to the registered address appearing
in the Security Register of each Holder of Securities to be redeemed.
<PAGE>
27
The notice shall identify the Securities (including CUSIP numbers,
if any) to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed,
the identification and principal amounts of the particular Securities to
be redeemed;
(6) that, unless the Company defaults in making such redemption
payment, interest on Securities (or portion thereof) called for redemption
ceases to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the Securities
called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.4. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date. Such
notice if mailed in the manner herein provided shall be conclusively presumed to
have been given, whether or not the Holder receives such notice. Failure to give
notice or any defect in the notice to any Holder shall not affect the validity
of the notice to any other Holder.
SECTION 3.5. Deposit of Redemption Price. Prior to 11:00 a.m. (New
York City time) on the redemption date, the Company shall deposit with the
Trustee or Paying Agent (or, if the Company or a Subsidiary is the Paying Agent,
shall segregate and hold in trust) money sufficient to pay the redemption price
of and accrued interest (if any) on all Securities or portions thereof to be
redeemed on that date other than Securities or portions of
<PAGE>
28
Securities called for redemption which have been delivered by the Company to the
Trustee for cancellation.
SECTION 3.6. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part (with, if the Company or the Trustee so
requires, due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing), the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities of any authorized denomination as
requested by such Holder, in aggregate principal amount equal to and in exchange
for the unredeemed portion of the principal of the Security so surrendered,
except that if a Global Security is so surrendered, the Company shall execute,
and the Trustee shall authenticate and deliver to the Depositary for such Global
Security, without service charge, a new Global Security in denomination equal to
and in exchange for the unredeemed portion of the principal of the Global
Security so surrendered.
ARTICLE 4
Covenants
SECTION 4.1. Payment of Securities. The Company shall promptly pay
the principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.2. SEC Reports. The Company shall file with the Trustee
and provide Holders, as their names appear in the Security Register, within 15
days after it files them with the SEC, copies of the annual reports and the
information, documents and other reports which it is required to file with the
SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that
the Company may not be required to be or remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
continue to file with the SEC and provide the Trustee and Holders with the
annual reports and the information, documents and other reports which are
specified in Sections 13 and 15(d) of the Exchange Act. The Company also shall
comply with the other provisions of TIA ss. 314(a).
Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall not
constitute constructive
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notice of any information contained therein or determinable from information
contained therein, including the Company's compliance with any of its covenants
hereunder (as to which the Trustee is entitled to rely exclusively on Officers'
Certificates).
SECTION 4.3. Limitation on Indebtedness. (a) (i) The Company will
not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock and
(ii) the Company will not permit any of its Restricted Subsidiaries that are not
Subsidiary Guarantors to issue any shares of Preferred Stock; provided, however,
that the Company and any Subsidiary Guarantor may Incur Indebtedness (including
Acquired Indebtedness) or issue Disqualified Stock if on the date thereof (and
after giving effect to the application of proceeds therefrom) the Consolidated
Coverage Ratio would be greater than 2.50:1 if such Incurrence shall occur prior
to _________, 1999 or greater than 2.75:1 if such Incurrence shall occur
thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness of the Company or any Restricted Subsidiary
(including any Guarantees thereof) under the New Credit Facility and
any Refinancing Indebtedness with respect thereto in an aggregate
principal amount outstanding at any time not to exceed $140 million,
less the aggregate amount of all proceeds from all Asset
Dispositions that have been applied since the Issue Date to
permanently reduce the outstanding amount of such Indebtedness
pursuant to Section 4.6 and less the aggregate amount of all
mandatory repayments of principal of term loans thereunder that have
been made since the Issue Date (other than repayments that are
immediately re-borrowed);
(ii) Indebtedness of the Company owing to and held by any
Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by the Company or any Wholly Owned Subsidiary;
provided, however, that (a) any such Indebtedness is made pursuant
to an intercompany note and (other than any such Indebtedness of the
Company to RIC or of RIC to the Company) is expressly subordinated
to the Securities or the applicable Subsidiary Guaranty, as the case
may be, and (b) any subsequent issuance or transfer of any Capital
Stock or any other event which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of any such Indebtedness (except to the Company or a Wholly
Owned Subsidiary) will be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Securities (including
Subsidiary Guarantees), any Indebtedness of the Company or any
Restricted Subsidiary (other than the Indebtedness described in
clauses (i)-(ii) above) outstanding on
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the Issue Date and any Refinancing Indebtedness Incurred in respect
of any Indebtedness described in this clause (iii);
(iv) (A) Indebtedness of a Restricted Subsidiary outstanding
on or prior to the date on which such Restricted Subsidiary was
acquired by the Company or a Restricted Subsidiary (other than
Indebtedness Incurred in connection with, or in contemplation of,
the transaction or series of related transactions pursuant to which
such Restricted Subsidiary became a Restricted Subsidiary or was
otherwise acquired by the Company or a Restricted Subsidiary);
provided, however, that at the time such Restricted Subsidiary is
acquired by the Company or a Restricted Subsidiary, the Company
would have been able to Incur $1.00 of additional Indebtedness
pursuant to paragraph (a) above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (iv) and
such transaction or series of related transactions and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in
respect of Indebtedness Incurred by such Restricted Subsidiary
pursuant to this clause (iv);
(v) Indebtedness (A) represented by letters of credit (and
reimbursement obligations with respect thereto) to secure the
purchase price of inventory and/or equipment in the ordinary course
of business or to secure Indebtedness (including Capitalized Lease
Obligations) otherwise permitted to be incurred under the Indenture,
(B) in respect of performance bonds (and letters of credit in
respect thereof), bankers' acceptances, letters of credit for
workers' compensation claims, and surety or appeal bonds (and
letters of credit in respect thereof) provided by the Company or any
Restricted Subsidiary in the ordinary course of its business and
which do not secure other Indebtedness and (C) under Currency
Agreements, Interest Rate Agreements and Commodity Agreements
Incurred which, at the time of Incurrence, is in the ordinary course
of business; provided that such agreements are entered into for bona
fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates,
currency exchange rates or commodity prices, as the case may be,
and, in the case of Interest Rate Agreements, any such Interest Rate
Agreement has a notional amount corresponding to the Indebtedness
being hedged thereby;
(vi) Indebtedness represented by Guarantees by the Company of
Indebtedness otherwise permitted to be Incurred pursuant to this
covenant and Indebtedness represented by Guarantees by a Restricted
Subsidiary of Indebtedness of the Company or of another Restricted
Subsidiary otherwise permitted to be Incurred pursuant to this
Section 4.3;
(vii) obligations with respect to customary provisions
regarding post-closing purchase price adjustments and
indemnification in agreements for
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the purchase or sale of a business or assets otherwise permitted by
the Indenture;
(viii) Guarantees of Indebtedness of franchisees of the
Company or a Restricted Subsidiary in an aggregate principal amount
at any one time outstanding not to exceed $20 million, provided that
any such Guarantees shall be deemed to be Incurred by the Company or
such Restricted Subsidiary at the time any such franchisee ceases to
be a franchisee of the Company or such Restricted Subsidiary;
(ix) Indebtedness Incurred by the Company or any Restricted
Subsidiary to finance the payment of property, casualty and
specialty insurance premiums in the ordinary course of the Company's
business which is repaid within 18 months of its Incurrence,
provided that such Indebtedness does not exceed $7.5 million in the
aggregate at any one time outstanding;
(x) Indebtedness of the Company Incurred to finance the
acquisition, construction or improvement of fixed or capital assets,
in an aggregate principal amount at any one time outstanding not to
exceed $15 million, provided that such Indebtedness is incurred
within 180 days after the date of such acquisition, construction or
improvement and does not exceed the fair market value of such
acquired, constructed or improved assets as determined in good faith
by the Board of Directors;
(xi) Indebtedness represented by Capitalized Lease Obligations
in respect of Sale/Leaseback Transactions involving the sale of
restaurants within 24 months of the purchase of the associated real
property, in an aggregate principal amount at any one time
outstanding not to exceed $20 million;
(xii) Indebtedness represented by Guarantees of loans to
employees of the Company or its Subsidiaries for the purpose of
paying withholding taxes incurred by such employees in connection
with the vesting of stock and/or stock options granted by the
Company, in an aggregate amount at any one time outstanding not to
exceed $3 million; and
(xiii) other Indebtedness in an aggregate principal amount at
any one time outstanding not to exceed $20 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to Section 4.3(b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
new Indebtedness shall be subordinated to the Securities to at least the same
extent as such Subordinated Obligations being Refinanced. No Subsidiary
Guarantor shall incur any Indebtedness pursuant to Section 4.3(b) if the
proceeds thereof are used, directly or indirectly, to Refinance any subordinated
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obligation of such Subsidiary Guarantor unless such Indebtedness shall be
subordinated to the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty to at least the same extent as such Subordinated Obligation
of such Subsidiary Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur
any Indebtedness other than Non-Recourse Debt, except that an Unrestricted
Subsidiary may incur Indebtedness Guaranteed by the Company or any of its
Restricted Subsidiaries to the extent such Guarantee is permitted by Section
4.4(b)(iv); provided, however, if any such Indebtedness ceases to be
Non-Recourse Debt, such event shall be deemed to constitute an Incurrence of
Indebtedness by the Company or a Restricted Subsidiary.
(e) For purposes of determining compliance with this Section 4.3,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company will classify, in
its sole discretion, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of the above clauses; (ii)
Indebtedness Incurred pursuant to the New Credit Facility prior to or on the
date of this Indenture shall be treated as Incurred pursuant to Section
4.3(b)(i) and (iii) Indebtedness permitted by this Section 4.3 need not be
permitted solely by reference to one provision permitting such Indebtedness but
may be divided and classified in more than one type and permitted in part by one
such provision and in part by one or more other provisions of this Section 4.3
permitting such Indebtedness.
SECTION 4.4. Limitation on Restricted Payments. (a) The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company) except dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase such Capital Stock and except dividends or
distributions payable to the Company or another Restricted Subsidiary (and, if
such Restricted Subsidiary making such dividend or distribution is not wholly
owned, to its other shareholders on a pro rata basis), (ii) purchase,
repurchase, redeem, retire or otherwise acquire or retire for value any Capital
Stock of the Company or any Restricted Subsidiary held by Persons other than the
Company or another Restricted Subsidiary, (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of such purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, payment or Investment being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
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(1) a Default or Event of Default shall have occurred and be
continuing (or would result therefrom);
(2) the Company and its Restricted Subsidiaries could not Incur at
least $1.00 of additional Indebtedness under Section 4.3(a); or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors of the Company, whose
determination will be evidenced by a resolution of such Board of Directors
certified in an Officers' Certificate to the Trustee) declared or made
subsequent to the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income with respect to the
period (treated as one accounting period) from the Issue Date to the
end of the most recent fiscal quarter ending at least 45 days prior
to the date of such Restricted Payment (or, in case such
Consolidated Net Income is a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company
from the issue or sale of Capital Stock (other than Disqualified
Stock and other than the Common Stock issued in the Common Stock
Offering) subsequent to the Issue Date (other than an issuance or
sale to a Subsidiary);
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange
(other than by a Restricted Subsidiary) subsequent to the Issue Date
of any Indebtedness of the Company convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company (less
the amount of any cash or other property distributed by the Company
upon such conversion or exchange); and
(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) repayments of the
principal of loans or advances or other transfers of assets to the
Company or any Restricted Subsidiary from Unrestricted Subsidiaries
or (ii) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Unrestricted Subsidiary, which
amount was previously included in the calculation of the amount of
Restricted Payments.
(b) The provisions of Section 4.4(a) will not prohibit:
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(i) any purchase, redemption, defeasance or other
acquisition of Capital Stock of the Company or Subordinated
Obligations made by exchange for, or out of the net proceeds
of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary); provided, however, that
(A) such purchase, redemption, defeasance or other acquisition
will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a)
above and (B) the Net Cash Proceeds from such sale will be
excluded from clause (3)(B) of paragraph (a) above;
(ii) any purchase, redemption, defeasance or other
acquisition of Subordinated Obligations made by exchange for,
or out of the net proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company; provided,
however, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the
Subordinated Obligations being so redeemed, repurchased,
acquired or retired for value (plus the amount of any premium
required to be paid under the terms of the instrument
governing the Subordinated Obligations being so redeemed,
repurchased, acquired or retired and related expenses), (B)
such new Indebtedness is subordinated to the Securities at
least to the same extent as such Subordinated Obligations so
purchased, exchanged, redeemed, repurchased, acquired or
retired for value, (C) such new Indebtedness has a final
scheduled maturity date later than the final scheduled
maturity date of the Securities and (D) such new Indebtedness
has an Average Life equal to or greater than the Average Life
of the Securities; provided further, however, that such
purchase, redemption, defeasance or other acquisition will be
excluded in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such
dividend would have complied with this Section; provided,
however, that the amount of such dividend will be included in
the calculation of the amount of Restricted Payments pursuant
to clause (3) of Section 4.4(a);
(iv) Investments in the form of Guarantees by the
Company or any of its Restricted Subsidiaries of Indebtedness
of an Unrestricted Subsidiary solely to the extent that the
Company or any such Restricted Subsidiary would then be
permitted to make an Investment in such Unrestricted
Subsidiary pursuant to clause (3) of Section 4.4(a); provided
that the amount of any such Investment will be included in the
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calculation of the amount of Restricted Payments pursuant to
clause (3) of Section 4.4(a);
(v) the repurchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held
by any member of the Company's management pursuant to employee
benefit plans or agreements; provided that the aggregate price
paid for all such Capital Stock shall not exceed $2 million in
any 12-month period and $5 million in the aggregate; provided
further that such amounts will be included in the calculation
of the amount of Restricted Payments pursuant to clause (3) of
Section 4.4(a); and
(vi) other Restricted Payments in an aggregate amount
not to exceed $5 million; provided that such amounts will be
included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of Section 4.4(a).
SECTION 4.5. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness or other obligation owed to the
Company, (ii) make any loans or advances to the Company or (iii) transfer any of
its property or assets to the Company or any Restricted Subsidiary, except:
(1) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date (including pursuant to the New
Credit Facility);
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted
Subsidiary and outstanding on such date (other than Indebtedness Incurred
in connection with, or in contemplation of, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or a Restricted
Subsidiary);
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (1) or (2) of this Section or contained in any
amendment to an agreement referred to in clause (1) or (2) of this
Section; provided, however, that the encumbrances and restrictions
contained in any such refinancing agreement or amendment are not
materially less favorable to the Senior Noteholders than the encumbrances
and restrictions contained in any such agreement as determined in good
faith by the Company and evidenced by an Officers' Certificate;
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(4) in the case of clause (iii), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or
transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) contained in security agreements securing Indebtedness of
a Restricted Subsidiary to the extent such encumbrance or restrictions
restrict the transfer of the property subject to such security agreements;
(5) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(6) any encumbrance or restriction arising under or by reason of
applicable law;
(7) any encumbrance or restriction contained in the Indenture;
(8) customary provisions in joint venture agreements relating solely
to the securities, assets and revenues of such joint venture or other
business venture;
(9) any encumbrance or restriction applicable to secured
Indebtedness otherwise permitted to be Incurred under the Indenture that
limits the right of the debtor to dispose of the assets securing such
Indebtedness;
(10) customary net worth provisions contained in leases and other
agreements entered into by a Restricted Subsidiary in the ordinary course
of business; and
(11) customary restrictions with respect to a Restricted Subsidiary
pursuant to an agreement that has been entered into for the sale or other
disposition of all of the Capital Stock or assets of such Restricted
Subsidiary.
SECTION 4.6. Limitation on Sales of Assets and Subsidiary Stock. (a)
The Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by senior management for Asset
Dispositions of less than $5 million and by the Board of Directors of the
Company in good faith for Asset Dispositions of $5 million or more (including in
each case as to the value of all non cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Temporary Cash Investments and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company or such
Restricted Subsidiary, as the case may be, (A)
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within 270 days from the receipt of such Net Available Cash to the extent the
Company or any Restricted Subsidiary, as the case may be, elects (or is required
by the terms of the New Credit Facility or any Senior Indebtedness), to prepay,
repay, purchase or otherwise acquire Indebtedness under the New Credit Facility
or other Senior Indebtedness or Indebtedness (other than Disqualified Stock) of
a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company); (B) to the extent of any remaining
balance of Net Available Cash after any election in accordance with clause (A),
to the extent the Company or such Restricted Subsidiary, as the case may be,
elects, to the investment by the Company or any Wholly Owned Subsidiary in
Additional Assets within 360 days from the receipt of such Net Available Cash
(except that the Company shall be deemed to have so invested such Net Available
Cash within 360 days if, within such 360 days, it has entered into a binding
commitment to invest such Net Available Cash and such Net Available Cash is
actually invested within 90 days thereafter); (C) to the extent of any remaining
balance of such Net Available Cash after any election in accordance with clauses
(A) and (B), to make an Offer (as defined below) to purchase Securities pursuant
to and subject to the conditions set forth in paragraph (b) of this covenant
within 45 days from the application of Net Available Cash in accordance with
clauses (A) and (B); and (D) to the extent of any remaining balance of such Net
Available Cash after election or application in accordance with clauses (A), (B)
and (C), to (x) the acquisition by the Company or any Wholly Owned Subsidiary of
Additional Assets, (y) the prepayment, repayment, purchase or other acquisition
of Indebtedness of the Company (other than Indebtedness owed to an Affiliate of
the Company and other than Disqualified Stock of the Company) or Indebtedness of
any Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company) or (z) general corporate purposes; provided, however
that in connection with any prepayment, repayment, purchase or other acquisition
of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause any related
loan commitment or availability (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid, purchased or acquired, except
that pending the final application of any such Net Available Cash, the Company
or such Restricted Subsidiary may temporarily reduce Indebtedness under a
revolving credit facility or otherwise invest such Net Available Cash in
Temporary Cash Investments.
For the purposes of this Section 4.6, the following are deemed to be
cash: (x) the assumption by the transferee of Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness that is subordinated to the
Securities or the Subsidiary Guarantees) and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition, (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash and (z) Additional Assets received in an
exchange of assets transaction; provided that (i) in the event such exchange of
assets transaction or series of related exchange of assets transactions (each an
"Exchange Transaction") involves an aggregate value in excess of $2,500,000, the
terms of such Exchange Transaction shall have been approved by a majority of the
disinterested members of
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the Board of Directors, (ii) in the event such Exchange Transaction involves an
aggregate value in excess of $5,000,000, the Company shall have received a
written opinion from a nationally recognized independent investment banking firm
that the Company has received consideration equal to the fair market value of
the assets disposed of and (iii) any assets to be received shall be comparable
to those being exchanged as determined in good faith by the Board of Directors,
except that up to $1,000,000 of consideration in any Exchange Transaction may
consist of marketing and similar credits in lieu of comparable assets.
(b) In the event of an Asset Disposition that requires the purchase
of Securities pursuant to Section 4.6(a)(iii)(C), the Company will be required
to purchase Securities tendered pursuant to an offer by the Company for the
Securities (the "Offer") at a purchase price of 100% of their principal amount
plus accrued interest to the date of purchase in accordance with the procedures
(including prorating in the event of oversubscription) set forth in this
Indenture. If the aggregate purchase price of Securities tendered pursuant to
the Offer is less than the Net Available Cash allotted to the purchase of the
Securities, the Company will apply the remaining Net Available Cash in
accordance with Section 4.6 (a)(iii)(D). Notwithstanding the foregoing
provisions, the Company and its Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance herewith except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this covenant exceeds $5,000,000. The Company shall
not be required to make an Offer for Securities pursuant to this covenant if the
Net Available Cash available therefor (after application of the proceeds as
provided in clauses (A) and (B)) is less than $7,500,000 (which lesser amounts
shall be carried forward for purposes of determining whether an Offer is
required with respect to the Net Available Cash from subsequent Asset
Dispositions).
(c) (1) Promptly, and in any event within 30 days after the Company
becomes obligated to make an Offer, the Company shall be obligated to deliver to
the Trustee and send, by first-class mail to each Holder, at the address
appearing in the Security Register, a written notice stating that the Holder may
elect to have his Securities purchased by the Company either in whole or in part
(subject to prorationing as hereinafter described in the event the Offer is
oversubscribed) in integral multiples of $1,000 of principal amount, at the
applicable purchase price. The notice shall specify a purchase date not less
than 30 days nor more than 60 days after the date of such notice (the "Purchase
Date") and shall contain (i) the most recently filed Annual Report on Form 10-K
(including audited consolidated financial statements) of the Company, the most
recent subsequently filed Quarterly Report on Form 10-Q of the Company and any
Current Report on Form 8-K of any the Company filed subsequent to such Quarterly
Report, other than Current Reports describing Asset Dispositions otherwise
described in the offering materials (or corresponding successor reports), (ii) a
description of material developments in the Company's business subsequent to the
date of the latest of such Reports, and (iii) if material, appropriate pro forma
financial information and all instructions and materials necessary to tender
Securities pursuant to the Offer, together with the information contained in
clause (3).
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(2) Not later than the date upon which written notice of an Offer is
delivered to the Trustee as provided below, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer
Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 4.6(a). Upon the expiration of
the period for which the Offer remains open (the "Offer Period"), the Company
shall deliver to the Trustee for cancellation the Securities or portions thereof
which have been properly tendered to and are to be accepted by the Company. Not
later than 11:00 a.m. (New York City time) on the Purchase Date, the Company
shall irrevocably deposit with the Trustee or with a paying agent (or, if the
Company is acting as Paying Agent, segregate and hold in trust) an amount in
cash sufficient to pay the Offer Amount for all Securities properly tendered to
and accepted by the Company. The Trustee shall, on the Purchase Date, mail or
deliver payment to each tendering Holder in the amount of the purchase price.
(3) Holders electing to have a Security purchased will be required
to surrender the Security, together with all necessary endorsements and other
appropriate materials duly completed, to the Company at the address specified in
the notice at least three Business Days prior to the Purchase Date. Holders will
be entitled to withdraw their election in whole or in part if the Trustee or the
Company receives not later than one Business Day prior to the Purchase Date, a
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Security (which shall be $1,000 or an integral multiple
thereof) which was delivered for purchase by the Holder, the aggregate principal
amount of such Security (if any) that remains subject to the original notice of
the Offer and that has been or will be delivered for purchase by the Company and
a statement that such Holder is withdrawing his election to have such Security
purchased. If at the expiration of the Offer Period the aggregate principal
amount of Securities surrendered by Holders exceeds the Offer Amount, the
Company shall select the Securities to be purchased on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only
securities in denominations of $1,000, or integral multiples thereof, shall be
purchased). Holders whose Securities are purchased only in part will be issued
new Securities equal in principal amount to the unpurchased portion of the
Securities surrendered.
(4) A Security shall be deemed to have been accepted for purchase at
the time the Trustee, directly or through an agent, mails or delivers payment
therefor to the surrendering Holder.
(d) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section 4.6. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section 4.6, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this Section 4.6 by virtue
thereof.
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SECTION 4.7. Limitation on Transactions with Affiliates. (a) The
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into or conduct any transaction or series of transactions
(including the purchase, sale, lease or exchange of any property, or rendering
of any service) with any Affiliate of the Company (an "Affiliate Transaction")
unless (i) the terms of such transaction are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate; (ii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $2,500,000, the terms of such
transaction shall have been approved by a majority of the disinterested members
of the Board of Directors (and such majority determines that such Affiliate
Transaction satisfies the criteria in clause (i) above) and (iii) in the event
such Affiliate Transaction involves an aggregate amount in excess of $5,000,000,
the Company has received a written opinion from a nationally recognized
independent investment banking firm that such Affiliate Transaction is fair to
the Company from a financial point of view.
(b) The foregoing provision of Section 4.7(a) shall not apply to (i)
any Restricted Payment permitted to be made pursuant to Section 4.4, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) any
fees, indemnities, loans or advances to employees in the ordinary course of
business, (iv) any transaction between the Company and a Restricted Subsidiary
or between Restricted Subsidiaries, (v) transactions with suppliers or other
purchasers of goods and services (including, without limitation, pursuant to
joint venture agreements and franchise agreements) and (vi) any agreement in
effect on the Issue Date or any amendment thereto or transaction contemplated
thereby (and any replacement or amendment of any such agreement so long as any
such amendment or replacement thereof is not materially less favorable to the
Holders than the original agreement in effect on the Issue Date).
SECTION 4.8. Change of Control. (a) Upon a Change of Control, each
Holder shall have the right to require that the Company repurchase all or any
part of such Holder's Securities at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date), in
accordance with the terms contemplated in Section 4.8(b).
(b) (i) Within 30 days following any Change of Control, the Company
shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require the Company to purchase any or all of such Holder's
Securities in denominations of $1,000 or any integral multiple thereof at
a purchase price in cash equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if
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41
any, to the date of repurchase (subject to the right of Holders of record
on a record date to receive interest on the relevant interest payment
date);
(2) the circumstances and relevant facts and pro forma financial
information regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with this
covenant, that a Holder must follow in order to have its Securities
purchased by the Company.
(c) Holders electing to have a Security purchased will be required
to surrender the Security, together with all necessary endorsements and other
appropriate materials duly completed, to the Company at the address specified in
the notice at least three Business Days prior to the purchase date. Holders will
be entitled to withdraw their election if the Trustee or the Company receives
not later than one Business Day prior to the purchase date, a facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Security which was delivered for purchase by the Holder as to
which such notice of withdrawal is being submitted and a statement that such
Holder is withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the Company
under this Section shall be delivered to the Trustee for cancellation, and the
Company shall pay the purchase price plus accrued and unpaid interest, if any,
to the Holders entitled thereto.
(e) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under this paragraph (iii) by virtue thereof.
(f) Notwithstanding the occurrence of a Change of Control, the
Company shall not be obligated to repurchase the Securities or otherwise comply
with this Section if the Company has irrevocably elected to redeem all the
Securities in accordance with Article 3; provided that the Company does not
default in its redemption obligations pursuant to such election.
SECTION 4.9. Limitation on Liens. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or permit to
exist any Lien on any of its property or assets (including Capital Stock),
whether owned on the Issue Date or thereafter acquired, securing any obligation,
other than Permitted Liens, unless contemporaneously therewith effective
provision is made to secure the Securities equally and
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42
ratably with (or on a senior basis to, in the case of Subordinated Obligations)
such obligation for so long as such obligation is so secured by a Lien on
property or assets of the Company or a Restricted Subsidiary.
SECTION 4.10. Limitation on Sale of Subsidiary Capital Stock. The
Company (i) will not, and will not permit any Restricted Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any Capital
Stock of any Restricted Subsidiary to any Person (other than to the Company or a
Wholly Owned Subsidiary) and (ii) will not permit any Restricted Subsidiary to
issue any of its Capital Stock (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Subsidiary, unless (a) after any such transfer,
conveyance, sale, lease, disposition or issuance, such Subsidiary constitutes a
Restricted Subsidiary and (b) the net cash proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
Section 4.6.
SECTION 4.11. Future Guarantors. The Company shall cause each new
Subsidiary (other than (i) a new Subsidiary designated as an Unrestricted
Subsidiary and (ii) Foreign Subsidiaries) to become a Subsidiary Guarantor under
this Indenture and thereby Guarantee the Securities on the terms and conditions
set forth in Article 10 (each a "Future Guarantor").
SECTION 4.12. Compliance Certificate. The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate, one of the signers of which shall be the principal
executive, financial or accounting officer of the Company, stating that in the
course of the performance by the signers of their duties as Officers of the
Company they would normally have knowledge of any Default and whether or not the
signers know of any Default that occurred during such period. If they do, the
certificate shall describe the Default, its status and what action the Company
is taking or proposes to take with respect thereto. The Company also shall
comply with TIA ss. 314(a)(4).
SECTION 4.13. Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE 5
Successor Company
SECTION 5.1. When the Company May Merge or Transfer Assets. Except
as otherwise provided in Section 4.13, the Company will not consolidate with or
merge with or into, or convey, transfer or lease all or substantially all its
assets to, any Person, unless:
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43
(i) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the laws of
the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) will expressly
assume, by supplemental indenture, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Securities and the Indenture;
(ii) immediately after giving pro forma effect to such transaction
(and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such
transaction as having been Incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default or
Event of Default will have occurred and be continuing;
(iii) immediately after giving pro forma effect to such transaction,
the Successor Company would be able to Incur an additional $1.00 of
Indebtedness under Section 4.3(a);
(iv) immediately after giving effect to such transaction, the
Successor Company will have a Consolidated Net Worth in an amount which is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction; and
(v) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture, as set forth in the Indenture.
The Successor Company will succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Securities.
Notwithstanding the foregoing clauses (iii) and (iv), any Wholly
Owned Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
SECTION 5.2. When Subsidiary Guarantor May Merge or Transfer Assets.
No Subsidiary Guarantor may consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all of its assets to any Person unless (i) the resulting,
surviving or transferee Person (if not such Subsidiary Guarantor) shall be a
Person organized and existing under the laws of the jurisdiction under which
such Subsidiary Guarantor was organized or under the laws of the United States
of America, or any State thereof or the District of Columbia, and, subject to
Section 10.8, such Person shall expressly assume, by a supplement to the
Indenture, in a form satisfactory to the
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44
Trustee, all the obligations of such Subsidiary Guarantor under its Subsidiary
Guaranty; (ii) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the resulting, surviving or transferee Person as a result of
such transaction as having been incurred by such Person at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing; and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer, if any, complies with this Indenture;
ARTICLE 6
Defaults and Remedies
SECTION 6.1. Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 30 days;
(2) the Company (i) defaults in the payment of the principal or
premium, if any, of any Security when the same becomes due and payable at
its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise or (ii) fails to redeem or purchase
Securities when required pursuant to this Indenture or the Securities;
(3) the Company fails to comply with Article 5;
(4) the Company fails to comply with Section 4.2, 4.3, 4.4, 4.5,
4.6, 4.7, 4.8, 4.9, 4.10 or 4.11 (other than a failure to purchase
Securities when required under Section 4.6 or 4.8) and such failure
continues for 30 days after the notice specified below;
(5) the Company fails to comply with any of its agreements in the
Securities or this Indenture (other than those referred to in (1), (2),
(3) or (4) above) and such failure continues for 60 days after the notice
specified below;
(6) the Company or any Significant Subsidiary of the Company fails
to pay any Indebtedness within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $10,000,000 or its foreign currency
equivalent at the time;
(7) the Company or any Significant Subsidiary of the Company
pursuant to or within the meaning of any Bankruptcy Law:
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45
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in
an involuntary case in which it is the debtor;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary of the Company in an involuntary case;
(B) appoints a Custodian of the Company or any Significant
Subsidiary of the Company or for any substantial part of the
property of the Company or Significant Subsidiary; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary of the Company;
(or any similar relief is granted under any foreign laws) and the order or
decree remains unstayed and in effect for 60 days; or
(9) any final, non-appealable judgment or decree for the payment of
money in excess of $10,000,000 or its foreign currency equivalent at the
time is entered against the Company or any Significant Subsidiary of the
Company and such judgment or decree remains unpaid and outstanding for a
period of 60 days following such judgment and is not discharged, waived or
stayed; or
(10) a Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of this Indenture) or a
Subsidiary Guarantor denies or disaffirms its obligations under its
Subsidiary Guarantee.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
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46
The term "Bankruptcy Law" means Title 11, United States Code, as
amended, or any similar federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clause (4) or (5) is not an Event of Default until
the Trustee or the Holders of at least 25% in aggregate principal amount of the
outstanding Securities notify the Company of the Default and the Company does
not cure such Default within the time specified after receipt of such notice.
Such notice must specify the Default, demand that it be remedied and state that
such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) and any event which with the giving of
notice or the lapse of time would become an Event of Default under clause (4),
(5) or (9), its status and what action the Company is taking or proposes to take
with respect thereto.
SECTION 6.2. Acceleration. If an Event of Default (other than an
Event of Default specified in Section 6.1(7) or (8) with respect to the Company)
occurs and is continuing, the Trustee by notice to the Company, or the Holders
of at least 25% in aggregate principal amount of the outstanding Securities by
notice to the Company and the Trustee, may declare the principal of and accrued
but unpaid interest on all the Securities to be due and payable. Upon such a
declaration, such principal and interest shall be due and payable immediately.
If an Event of Default specified in Section 6.1(7) or (8) with respect to the
Company occurs and is continuing, the principal of and accrued interest on all
the Securities shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in aggregate principal amount of the outstanding
Securities by notice to the Trustee may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
SECTION 6.3. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Securities or does not produce any of them in the proceeding. A delay
or omission by the Trustee or any Securityholder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are, to the extent
permitted by law, cumulative.
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47
SECTION 6.4. Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of the Securities then outstanding by notice to the
Trustee may waive any past or existing Default and its consequences except (i) a
Default in the payment of the principal of or interest on a Security or (ii) a
Default in respect of a provision that under Section 9.2 cannot be amended
without the consent of each Securityholder affected. When a Default is waived,
it is deemed cured, and any Event of Default arising therefrom shall be deemed
to have been cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.5. Control by Majority. The Holders of a majority in
aggregate principal amount of the Securities then outstanding may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or, subject to Section 7.1, that the Trustee determines is
unduly prejudicial to the rights of other Securityholders or would involve the
Trustee in personal liability; provided, however, that the Trustee may take any
other action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification from the Securityholders satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
SECTION 6.6. Limitation on Suits. A Holder may not pursue any remedy
with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in aggregate principal amount of the
Securities then outstanding make a written request to the Trustee to
pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in aggregate principal amount of the
Securities then outstanding do not give the Trustee a direction
inconsistent with the request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the rights
of another Securityholder or to obtain a preference or priority over another
Securityholder.
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48
SECTION 6.7. Rights of Holders To Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Securities held by such Holder, on
or after the respective due dates expressed in the Securities, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of such Holder.
SECTION 6.8. Collection Suit by Trustee. If an Event of Default
specified in Section 6.1(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
7.7.
SECTION 6.9. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.7.
SECTION 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 6, it shall pay out the money or property in
the following order, subject to applicable law:
FIRST: to the Trustee for amounts due under Section 7.7;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company.
The Trustee may, upon prior written notice to the Company, fix a
record date and payment date for any payment to Securityholders pursuant to this
Section. At least 15 days before such record date, the Company shall mail to
each Securityholder and the Trustee a notice that states the record date, the
payment date and amount to be paid.
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49
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a Holder pursuant to Section 6.7 or a suit by
Holders of more than 10% in aggregate principal amount of the outstanding
Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
SECTION 7.1. Duties of Trustee. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, in the case of any such certificates or opinions which by any
provision hereof are specifically required to be furnished to the Trustee,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
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(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(g) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.2. Rights of Trustee. (a) The Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper person. The Trustee need not investigate any fact or matter stated in
the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on the
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible
for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
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51
(e) The Trustee may consult with counsel of its selection, and the
advice or opinion of counsel with respect to legal matters relating to this
Indenture and the Securities shall be full and complete authorization and
protection from liability in respect to any action taken, omitted or suffered by
it hereunder in good faith and in accordance with the advice or opinion of such
counsel.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction.
SECTION 7.3. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its respective Affiliates with the
same rights it would have if it were not Trustee. Any Paying Agent, Registrar,
co-registrar or co-paying agent may do the same with like rights. However, the
Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.4. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in this Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.5. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within the earlier of 90 days after it
occurs or 30 days after it is known to a Trust Officer or written notice of it
is received by the Trustee. Except in the case of a Default in payment of
principal of, premium (if any) or interest on any Security (including payments
pursuant to the mandatory redemption provisions of such Security, if any), the
Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is in the
interests of Securityholders.
SECTION 7.6. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with the May 15 following the date of
this Indenture, and in any event prior to July 15 in each year, the Trustee
shall mail to each Securityholder a brief report dated as of May 15 that
complies with TIA ss. 313(a). The Trustee also shall comply with TIA ss. 313(b).
The Trustee shall promptly deliver to the Company a copy of any report it
delivers to Holders pursuant to this Section 7.6.
A copy of each report at the time of its mailing to Securityholders
shall be filed with the SEC and each stock exchange (if any) on which the
Securities are listed. The
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52
Company agrees to notify promptly the Trustee whenever the Securities become
listed on any stock exchange and of any delisting thereof.
SECTION 7.7. Compensation and Indemnity. The Company shall pay to
the Trustee from time to time such compensation for its services as the Company
and the Trustee shall from time to time agree in writing. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust. The Company shall reimburse the Trustee upon request for all
reasonable out-of-pocket expenses incurred or made by it, including costs of
collection, in addition to such compensation for its services, except any such
expense, disbursement or advance as may arise from its negligence, wilful
misconduct or bad faith. Such expenses shall include the reasonable compensation
and expenses, disbursements and advances of the Trustee's agents, counsel,
accountants and experts. The Trustee shall provide the Company reasonable notice
of any expenditure not in the ordinary course of business; provided that prior
approval by the Company of any such expenditure shall not be a requirement for
the making of such expenditure nor for reimbursement by the Company thereof. The
Company shall indemnify each of the Trustee and any predecessor Trustees against
any and all loss, damage, claim, liability or expense (including attorneys' fees
and expenses) (other than taxes applicable to the Trustee's compensation
hereunder) incurred by it in connection with the acceptance or administration of
this trust and the performance of its duties hereunder. The Trustee shall notify
the Company promptly of any claim for which it may seek indemnity. Failure by
the Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend the claim and the Trustee may
have separate counsel, which counsel must be reasonably acceptable to the
Company and the Company will pay the reasonable fees and expenses of such
counsel. The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.1(7) or (8) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
SECTION 7.8. Replacement of Trustee. The Trustee may resign at any
time by so notifying the Company. The Holders of a majority in principal amount
of the Securities then outstanding, may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with Section 7.10;
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(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee
or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders
of a majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.7.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company, obligations under Section 7.7 shall continue for the
benefit of the retiring Trustee.
SECTION 7.9. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee, provided that such corporation shall
be eligible under this Article Seven and TIA Section 3.10(a).
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the
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54
name of any predecessor hereunder or in the name of the successor to the
Trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Securities or in this Indenture provided that the
certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall at
all times satisfy the requirements of TIA ss. 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
ss. 310(b); provided, however, that there shall be excluded from the operation
of TIA ss. 310(b)(1) any indenture or indentures under which other securities or
certificates of interest or participation in other securities of the Company are
outstanding if the requirements for such exclusion set forth in TIA ss.
310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with ss. TIA 311(a), excluding any creditor relationship
listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA ss. 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.1. Discharge of Liability on Securities; Defeasance. (a)
When (i) the Company delivers to the Trustee all outstanding Securities (other
than Securities replaced pursuant to Section 2.7) for cancellation or (ii) all
outstanding Securities have become due and payable, whether at maturity or as a
result of the mailing of a notice of redemption pursuant to Article 3 hereof or
the Securities will become due and payable at their Maturity within 91 days, or
the securities are to be called for redemption within 91 days under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and, in each case of
this clause (ii), the Company irrevocably deposits or causes to be deposited
with the Trustee funds sufficient to pay at maturity or upon redemption all
outstanding Securities, including interest thereon to maturity or such
redemption date (other than Securities replaced pursuant to Section 2.7), and if
in either case the Company pays all other sums payable hereunder by the Company,
then this Indenture shall, subject to Section 8.1(c), cease to be of further
effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Company accompanied by an Officers' Certificate and
an Opinion of Counsel from the Company that all conditions precedent provided
herein for relating to satisfaction and discharge of this Indenture have been
complied with and at the cost and expense of the Company.
(b) Subject to Sections 8.1(c) and 8.2, the Company at any time
may terminate (i) all of its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 4.2, 4.3,
4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.10, 4.11, 4.12 and 4.13 and the operation of
Sections 6.1(4), 6.1(5), 6.1(6), 6.1(7) (but only with
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55
respect to a Significant Subsidiary), 6.1(8) (but only with respect to a
Significant Subsidiary), 6.1(9) and 5.1(iii) and 5.1(iv) ("covenant defeasance
option"). The Company may exercise its legal defeasance option notwithstanding
its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the Company
exercises its covenant defeasance option, payment of the Securities may not be
accelerated because of an Event of Default specified in Section 6.1(4), 6.1(5),
6.1(6), 6.1(7) (but only with respect to a Significant Subsidiary), 6.1(8) (but
only with respect to a Significant Subsidiary) or 6.1(9) or because of the
failure of the Company to comply with Sections 5.1(iii) and 5.1(iv). If the
Company exercises its legal defeasance option, each Subsidiary Guarantor will be
released from all of its obligations under its Subsidiary Guarantee.
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the discharge
of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 7.7, 7.8, 8.4, 8.5 and 8.6
shall survive until the Securities have been paid in full. Thereafter, the
Company's obligations in Sections 7.7, 8.4 and 8.5 shall survive.
SECTION 8.2. Conditions to Defeasance. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits or causes to be deposited in
trust with the Trustee money or U.S. Government Obligations which through
the scheduled payment of principal and interest in respect thereof in
accordance with their terms will provide cash at such times and in such
amounts as will be sufficient to pay principal and interest when due on
all outstanding Securities (except Securities replaced pursuant to Section
2.7) to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all outstanding Securities (except Securities replaced pursuant to
Section 2.7) to maturity or redemption, as the case may be;
(3) 91 days pass after the deposit is made and during the 91-day
period no Default specified in Section 6.1(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
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56
(4) the deposit does not constitute a default under any other
material agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or
is qualified as, a regulated investment company under the Investment
Company Act of 1940;
(6) in the case of the legal defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company have received from, or there has been published by, the Internal
Revenue Service a ruling, or (ii) since the date of this 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 Securityholders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and 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 deposit
and defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders 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 deposit and covenant
defeasance had not occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
8 have been complied with.
Opinions of Counsel required to be delivered under this Section may
have qualifications customary for opinions of the type required and counsel
delivering such Opinions of Counsel may rely on certificates of the Company or
government or other officials customary for opinions of the type required,
including certificates certifying as to matters of fact.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.3. Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S. Government
Obligations either directly or through the Paying Agent (including the Company
acting as its own Paying Agent as the Trustee may determine) and in accordance
with this Indenture to the payment of principal of and interest on the
Securities.
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SECTION 8.4. Repayment to Company. The Trustee and the Paying Agent
shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and
the Paying Agent shall pay to the Company upon written request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Securityholders entitled to the money must look to the
Company for payment as general creditors.
SECTION 8.5. Indemnity for Government Obligations. The Company shall
pay and shall indemnify the Trustee against any tax, fee or other charge imposed
on or assessed against deposited U.S. Government Obligations or the principal
and interest received on such U.S. Government Obligations other than any such
tax, fee or other charge which by law is for the account of the Holders of the
defeased Securities; provided that the Trustee shall be entitled to charge any
such tax, fee or other charge to such Holder's account.
SECTION 8.6. Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, (a) if
the Company has made any payment of interest on or principal of any Securities
following the reinstatement of their obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent and (b) unless otherwise required by any legal proceeding or any
order or judgment of any court or governmental authority, the Trustee or Paying
Agent shall return all such money and U.S. Government Obligations to the Company
promptly after receiving a written request therefor at any time, if such
reinstatement of the Company's obligations has occurred and continues to be in
effect.
ARTICLE 9
Amendments
SECTION 9.1. Without Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without notice to or consent of any
Security-holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
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(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are as described in Section 163(f)(2)(B) of the Code;
(4) to add additional guarantees with respect to the Securities;
including any new Subsidiary Guarantees;
(5) to secure the Securities;
(6) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company;
(7) to make any change that does not adversely affect the rights of
any Securityholder; or
(8) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this section.
SECTION 9.2. With Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without notice to any Securityholder
but with the written consent of the Holders of at least a majority in principal
amount of the Securities then outstanding. However, without the consent of each
Securityholder affected, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) reduce the premium payable upon the redemption of any Security
or change the time at which any Security may be redeemed in accordance
with Article 3;
(5) make any Security payable in money other than that stated in the
Security;
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(6) impair the right of any Holder to receive payment of principal
of and interest on such Holder's Securities on or after the due dates
therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Securities; or
(7) make any change in Section 6.4 or 6.7 or the second sentence of
this Section; or
(8) make any change in any Subsidiary Guarantee that would adversely
affect the Holders.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Securityholders a notice briefly describing such amendment. The
failure to give such notice to all Securityholders, or any defect therein, shall
not impair or affect the validity of an amendment under this Section.
SECTION 9.3. Compliance with Trust Indenture Act. Every amendment to
this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.4. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. After an
amendment or waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
SECTION 9.5. Notation on or Exchange of Securities. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee
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so determine, the Company in exchange for the Security shall issue and the
Trustee shall authenticate a new Security that reflects the changed terms.
Failure to make the appropriate notation or to issue a new Security shall not
affect the validity of such amendment.
SECTION 9.6. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.1) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment complies with the provisions of this Article 9.
ARTICLE 10
Subsidiary Guarantees
SECTION 10.1. Subsidiary Guarantees. Each Subsidiary Guarantor
hereby unconditionally and irrevocably Guarantees, jointly and severally, to
each Holder and to the Trustee and its successors and assigns (a) the full and
punctual payment of principal of and interest on the Securities when due,
whether at maturity, by acceleration, by redemption or otherwise, and all other
monetary obligations of the Company under this Indenture and the Securities
(including obligations to the Trustee) and (b) the full and punctual performance
within applicable grace periods of all other obligations of the Company under
this Indenture and the Securities (all the foregoing being hereinafter
collectively called the "Obligations"). Each Subsidiary Guarantor further agrees
that the Obligations may be extended or renewed, in whole or in part, without
notice or further assent from such Subsidiary Guarantor, and that such
Subsidiary Guarantor will remain bound under this Article 10 notwithstanding any
extension or renewal of any Obligation.
Each Subsidiary Guarantor waives presentation to, demand of, payment
from and protest to the Company of any of the Obligations and also waives notice
of protest for nonpayment. Each Subsidiary Guarantor waives notice of any
default under the Securities or the Obligations. The obligations of each
Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any right or
remedy against the Company or any other Person under this Indenture, the
Securities or any other agreement or otherwise; (b) any extension or renewal of
any Obligation; (c) any rescission, waiver, amendment, modification or
supplement of any of the terms or provisions of this Indenture (other than this
Article 10), the Securities or any other agreement; (d) the release of any
security held by any Holder or the Trustee for the Obligations or any of them;
(e) the failure of any Holder or Trustee to exercise any right or remedy against
any other guarantor of the Obligations; or (f) any change in the ownership of
the Company or such Guarantor.
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Each Subsidiary Guarantor further agrees that its Guarantee herein
constitutes a guarantee of payment, performance and compliance when due (and not
a guarantee of collection) and waives any right to require that any resort be
had by any Holder or the Trustee to any security held for payment of the
Obligations.
Except as expressly set forth in Sections 8.1(b), 10.2 and 10.8, the
obligations of each Subsidiary Guarantor hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, including any
claim of waiver, release, surrender, alteration or compromise, and shall not be
subject to any defense, setoff, counterclaim, recoupment or termination
whatsoever or by reason of the invalidity, illegality or unenforceability of the
Obligations or otherwise. Without limiting the generality of the foregoing, the
obligations of each Subsidiary Guarantor herein shall not be discharged or
impaired or otherwise affected by the failure of any Holder or the Trustee to
assert any claim or demand or to enforce any remedy under this Indenture, the
Securities or any other agreement, by any waiver or modification of any thereof,
by any default, failure or delay, willful or otherwise, in the performance of
the Obligations, or by any other act or thing or omission or delay to do any
other act or thing which may or might in any manner or to any extent vary the
risk of such Subsidiary Guarantor or would otherwise operate as a discharge of
such Subsidiary Guarantor as a matter of law or equity.
Each Subsidiary Guarantor further agrees that its Guarantee herein
shall continue to be effective or be reinstated, as the case may be, if at any
time payment, or any part thereof, of principal of or interest on any Obligation
is rescinded or must otherwise be restored by any Holder or the Trustee upon the
bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any other
right which any Holder or the Trustee has at law or in equity against any
Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay
principal of or interest on any Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Obligation, each Subsidiary Guarantor hereby
promises to and will, upon receipt of written demand by the Trustee, forthwith
pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal
to the sum of (i) the unpaid principal amount of such Obligations, (ii) accrued
and unpaid interest on such Obligations (but only to the extent not prohibited
by law) and (iii) all other monetary Obligations of the Company to the Holders
and the Trustee.
Each Subsidiary Guarantor agrees that, as between such Subsidiary
Guarantor, on the one hand, and the Holders and the Trustee, on the other hand,
(x) the maturity of the Obligations guaranteed hereby may be accelerated as
provided in Article 6 for the purposes of such Subsidiary Guarantor's Guarantee
herein, notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the Obligations guaranteed hereby, and (y) in
the event of any declaration of acceleration of such Obligations as provided in
Article
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6, such Obligations (whether or not due and payable) shall forthwith become due
and payable by such Subsidiary Guarantor for the purposes of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees) incurred by the Trustee or any
Holder in enforcing any rights under this Section.
SECTION 10.2. Limitation on Liability. Any term or provision of this
Indenture to the contrary notwithstanding, the maximum aggregate amount of the
obligations guaranteed hereunder by any Subsidiary Guarantor shall not exceed
the maximum amount that can be hereby guaranteed without rendering this
Indenture, as it relates to such Subsidiary Guarantor, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally (taking into account, for purposes
of such determination, the full amount, without any reduction, of such
Subsidiary Guarantor's liability under its guarantee of the New Credit
Facility).
SECTION 10.3. Successors and Assigns. This Article 10 shall be
binding upon each Subsidiary Guarantor and its successors and assigns and shall
enure to the benefit of the successors and assigns of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights and privileges conferred upon that party in this
Indenture and in the Securities shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions of this
Indenture.
SECTION 10.4. No Waiver. Neither a failure nor a delay on the part
of either the Trustee or the Holders in exercising any right, power or privilege
under this Article 10 shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege. The rights, remedies and benefits of the Trustee and the
Holders herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article 10 at law,
in equity, by statute or otherwise.
SECTION 10.5. Right of Contribution. Each Subsidiary Guarantor
agrees that to the extent that such Subsidiary Guarantor shall have paid more
than its proportionate share of any payment made hereunder, such Subsidiary
Guarantor shall be entitled to seek and receive contribution from and against
any other Subsidiary Guarantor hereunder who has not paid its proportionate
share of such payment. Each Subsidiary Guarantor's right of contribution shall
be subject to the terms and conditions of Section 10.6. The provisions of this
Section shall in no respect limit the obligations and liabilities of any
Subsidiary Guarantor to the Trustee and the Holders and each Subsidiary
Guarantor shall remain liable to the Trustee and the Holders for the full amount
guaranteed by such Subsidiary Guarantor hereunder.
SECTION 10.6. No Subrogation. Notwithstanding any payment or
payments made by any Subsidiary Guarantor hereunder, no Subsidiary Guarantor
shall be entitled to be
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subrogated to any of the rights of the Trustee or any Holders against the
Company or any collateral security or guarantee or right of offset held by the
Trustee or any Holder for the payment of the Obligations, nor shall any
Subsidiary Guarantor seek or be entitled to seek any contribution or
reimbursement from the Company in respect of payments made by such Subsidiary
Guarantor hereunder, until all amounts owing to the Trustee and the Holder by
the Company on account of the Obligations are paid in full. If any amount shall
be paid to any Subsidiary Guarantor on account of such subrogation rights at any
time when all of the Obligations shall not have been paid in full, such amount
shall be held by such Subsidiary Guarantor in trust for the Trustee and the
Holders, segregated from other funds of such Subsidiary Guarantor, and shall,
forthwith upon receipt by such Subsidiary Guarantor, be turned over to the
Trustee in the exact form received by such Subsidiary Guarantor (duly indorsed
by such Subsidiary Guarantor to the Trustee, if required), to be applied against
the Obligations.
SECTION 10.7. Modification. No modification, amendment or waiver of
any provision of this Article 10, nor the consent to any departure by any
Subsidiary Guarantor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Trustee, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given. No notice to or demand on any Subsidiary Guarantor in any case shall
entitle such Subsidiary Guarantor to any other or further notice or demand in
the same, similar or other circumstances.
SECTION 10.8. Release of Subsidiary Guarantor. Upon the sale or
other disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company), such Subsidiary Guarantor shall be deemed released and relieved
from all its obligations under its Subsidiary Guaranty; provided that such sale
or disposition shall constitute an Asset Disposition under, and the Net
Available Cash from such sale or disposition shall be applied in accordance
with, Section 4.6. At the request of the Company, the Trustee shall execute and
deliver an appropriate instrument evidencing such release.
ARTICLE 11
Miscellaneous
SECTION 11.1. Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control. If this Indenture excludes any provision of the TIA that is
required to be included, such provision shall be deemed included herein.
<PAGE>
64
SECTION 11.2. Notices. Any notice or communication shall be in
writing and delivered in person, by overnight courier or facsimile (if to the
Company, with receipt confirmed by an Officer) or mailed by first-class mail
addressed as follows:
if to the Company or any Subsidiary Guarantor:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Aaron B. Parker
if to the Trustee:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed or sent by overnight courier or
facsimile to a Securityholder shall be sent to the Securityholder at the
Securityholder's address as it appears on the registration books of the
Registrar and shall be sufficiently given if so sent within the time prescribed.
Failure to send a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is sent in the manner provided
above, it is duly given, whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice.
SECTION 11.3. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 11.4. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, each the Company shall furnish to
the Trustee:
<PAGE>
65
(1) an Officers' Certificate (which in connection with the original
issuance of the Securities need only be executed by one Officer for the
Company) in form and substance reasonably satisfactory to the Trustee
stating that, in the opinion of the signers, all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have
been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 11.5. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 11.6. When Securities Disregarded. In determining whether
the Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Securities which the Trustee actually knows are so owned shall be so
disregarded. Also, subject to the foregoing, only Securities outstanding at the
time shall be considered in any such determination.
SECTION 11.7. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Securityholders.
The Trustee shall provide the Company reasonable notice of such rules; provided
that neither prior notice to the Company of such rules nor prior approval by the
Company of such rules shall be a requirement for their effectiveness. The
Registrar and the Paying Agent may make reasonable rules for their functions.
<PAGE>
66
SECTION 11.8. Legal Holidays. A "Legal Holiday" is a Saturday, a
Sunday or a day on which banking institutions are not required to be open in the
State of New York. If a payment date is a Legal Holiday, payment shall be made
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period. If a regular record date is a Legal Holiday,
the record date shall not be affected.
SECTION 11.9. Governing Law. This Indenture and the Securities shall
be governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflict of laws to
the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 11.10. No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company or any Subsidiary Guarantor
shall not have any liability for any obligations of the Company or any
Subsidiary Guarantor under the Securities or this Indenture or for any claim
based on, in respect of or by reason of such obligations or their creation. By
accepting a Security, each Securityholder shall waive and release all such
liability. The waiver and release shall be part of the consideration for the
issue of the Securities.
SECTION 11.11. Successors. All agreements of the Company and the
Subsidiary Guarantor in this Indenture and the Securities and Subsidiary
Guarantees shall bind their respective successors. All agreements of the Trustee
in this Indenture shall bind its successors.
SECTION 11.12. Multiple Originals. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture.
SECTION 11.13. Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
SECTION 11.14. Severability Clause. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
<PAGE>
67
IN WITNESS WHEREOF, the parties have caused this Indenture to be
duly executed as of the date first written above.
FRIENDLY ICE CREAM CORPORATION
By:
---------------------------------------
Name:
Title:
FRIENDLY'S RESTAURANTS FRANCHISE,
INC.
By:
---------------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By:
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FACE OF SECURITY
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.
No. 1 $175,000,000
___% Senior Notes Due 2007
CUSIP No. _________
FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation,
promises to pay to [ ], or registered assigns, the principal sum of Two Hundred
Million Dollars on ______________, 2007.
Interest Payment Dates:
Record Dates:
<PAGE>
2
Additional provisions of this Security are set forth on the other
side of this Security.
FRIENDLY ICE CREAM CORPORATION
By:
---------------------------------------
Name:
Title:
Dated: [ ], 1997
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
THE BANK OF NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the within-mentioned
Indenture.
By:
--------------------------------
Authorized Signatory
<PAGE>
REVERSE OF SECURITY
_____% Senior Note Due 2007
1. Interest
FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (such
entity, and its successors and assigns under the Indenture hereinafter referred
to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above. The Company
will pay interest semiannually on __________ and ________________ of each year
commencing ____________________. Interest on the Securities will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from _____________. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. The Company shall pay interest on overdue
principal at the rate borne by the Securities, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the _______ or ___________ next preceding the interest payment
date even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States that at the time of payment is legal tender for payment of
public and private debts. However, the Company may pay principal and interest by
check payable in such money and may mail an interest check to a Holder's
registered address. All payments of principal of, premium, if any, and interest
on the Securities will be made by the Company in immediately available funds.
3. Paying Agent and Registrar
Initially, The Bank of New York, a New York banking corporation
("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as of
___________, 1997 (the "Indenture"), among the Company, Friendly's Restaurants
Franchise, Inc. and the Trustee. The terms of the Securities include those
stated in the Indenture and
<PAGE>
2
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the
"TIA"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Securityholders are referred to the Indenture and the TIA for a statement of
those terms. Any conflict between this Note and the Indenture will be governed
by the Indenture.
The Securities are general unsecured senior obligations of the
Company limited to $175,000,000 aggregate principal amount (subject to Section
2.7 of the Indenture). The Indenture imposes certain limitations on the
Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the
existence of liens, the payment of dividends on, and redemption of, the Capital
Stock of the Company and its Subsidiaries and the redemption of certain
subordinated obligations of the Company and its Subsidiaries, restricted
payments, the sale or transfer of assets and Subsidiary stock, the issuance or
sale of Capital Stock of Restricted Subsidiaries, the investments of the Company
and its Restricted Subsidiaries, consolidations, mergers and transfers of all or
substantially all the assets of the Company, and transactions with Affiliates.
In addition, the Indenture limits the ability of the Company and certain of its
Subsidiaries to restrict distributions and dividends from Subsidiaries.
5. Optional Redemption
Except as set forth in the next paragraph, the Securities may not be
redeemed prior to __________, 2002. On and after that date, the Company may
redeem as provided in, and subject to the terms of, the Indenture the Securities
in whole at any time or in part from time to time at the following redemption
prices (expressed in percentages of principal amount), plus accrued interest to
the redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date):
if redeemed during the 12-month period beginning ________________,
Period Percentage
- ------ ----------
2002......................................
2003......................................
2004......................................
2005 and thereafter.......................
In addition, at any time and from time to time prior to
______________, 2000, the Company may redeem in the aggregate up to $70 million
principal amount of the Securities with the proceeds of one or more Qualified
Equity Offerings, at a redemption price (expressed as a percentage of principal
amount) of ___% plus accrued interest, if any, to the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due
<PAGE>
3
on the relevant interest payment date) as provided in, and subject to the terms
of, the Indenture; provided, however, that at least $130 million principal
amount of the Securities must remain outstanding after each such redemption.
6. Notice of Redemption
Notice of redemption will be mailed by first-class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his registered address. Securities in denominations
larger than $1,000 may be redeemed in part but only in whole multiples of
$1,000. If money sufficient to pay the redemption price of and accrued interest
on all Securities (or portions thereof) to be redeemed on the redemption date is
deposited with the Paying Agent on or before the redemption date and certain
other conditions are satisfied, on and after such date interest ceases to accrue
on such Securities (or such portions thereof) called for redemption. If a notice
or communication is sent in the manner provided in the Indenture, it is duly
given, whether or not the addressee receives it. Failure to send a notice or
communication to a Securityholder or any defect in it shall not affect its
sufficiency with respect to other Securityholders.
In addition, in the event of certain Asset Dispositions, the Company
will be required to make an offer to purchase Securities at a purchase price of
100% of their principal amount plus accrued interest to the date of purchase
(subject to the rights of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date) as provided in, and
subject to the terms of, the Indenture.
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have the
right to require the Company to repurchase all or any part of the Securities of
such Holder at a repurchase price in cash equal to 101% of the principal amount
of the Securities to be repurchased plus accrued interest to the date of
repurchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the related interest payment date) as provided
in, and subject to the terms of, the Indenture.
8. Guarantees
To guarantee the due and punctual payment of the principal and
interest, if any, on the Securities and all other amounts payable by the Company
under the Indenture and the Securities when and as the same shall be due and
payable, whether at maturity, by acceleration or otherwise, according to the
terms of the Securities and the Indenture, Friendly's Restaurant Franchise, Inc.
has unconditionally guaranteed such obligations on an unsecured, senior basis
pursuant to the terms of the Indenture. In addition, the Company shall cause
each new
<PAGE>
4
Subsidiary (other than (i) a new Subsidiary designated as an Unrestricted
Subsidiary and (ii) Foreign Subsidiaries) to become a Subsidiary Guarantor under
the Indenture and thereby Guarantee the Securities on the terms and conditions
set forth in the Indenture.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or
exchange Securities in accordance with the Indenture. The Registrar may require
a Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture, including any transfer tax or other similar governmental charge
payable in connection therewith. The Registrar need not register the transfer of
or exchange any Securities selected for redemption (except, in the case of a
Security to be redeemed in part, the portion of the Security not to be redeemed)
or any Securities for a period of 15 days before a selection of Securities to be
redeemed or 15 days before an interest payment date.
10. Persons Deemed Owners
The registered Holder of this Security may be treated as the owner
of it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent shall pay the money back to the
Company at its written request unless an abandoned property law designates
another Person. After any such payment, Holders entitled to the money must look
only to the Company and not to the Trustee for payment.
12. Discharge and Defeasance
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
<PAGE>
5
13. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
and (ii) any default or noncompliance with any provision may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities. Subject to certain exceptions set forth in the Indenture,
without the consent of any Securityholder, the Company and the Trustee may amend
the Indenture or the Securities to cure any ambiguity, omission, defect or
inconsistency, or to comply with Article 5 of the Indenture, or to provide for
uncertificated Securities in addition to or in place of certificated Securities,
or to add guarantees with respect to the Securities, or to secure the
Securities, or to add additional covenants or surrender rights and powers
conferred on the Company, or to make any change that does not adversely affect
the rights of any Securityholder or to comply with any request of the SEC in
connection with qualifying the Indenture under the TIA.
14. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for 30
days in payment of interest on the Securities; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraphs
5 or 6 above, upon acceleration or otherwise, or failure by the Company to
redeem or purchase Securities when required; (iii) failure by the Company to
comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (iv) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company and any Significant Subsidiary if the amount
accelerated (or so unpaid) exceeds $10 million; (v) certain events of bankruptcy
or insolvency with respect to the Company and its Significant Subsidiaries; (vi)
certain judgments or decrees for the payment of money is in excess of $10
million; and (vii) any Subsidiary Guaranty by a Significant Subsidiary ceases to
be in full force and effect (except as contemplated in the Indenture) or any
Subsidiary Guarantor that is a Significant Subsidiary denies or disaffirms its
obligations under the Indenture or its Subsidiary Guaranty.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Securities then outstanding
may declare all the Securities to be due and payable. Certain events of
bankruptcy or insolvency are Events of Default which will result in the
Securities being due and payable immediately upon the occurrence of such Events
of Default.
Securityholders may not enforce the Indenture or the Securities
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of the
Securities may direct the Trustee in its exercise of any trust
<PAGE>
6
or power. The Trustee may withhold from Securityholders notice of any continuing
Default (except a Default in payment of principal or interest) if it determines
that withholding notice is in the interest of the Holders.
14. Trustee Dealings with the Company
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or any of its Affiliates and may otherwise deal with the
Company or any of its Affiliates with the same rights it would have if it were
not Trustee.
15. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the
Company or the Trustee shall not have any liability for any obligations of the
Company under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The waiver
and release are part of the consideration for the issue of the Securities.
16. Governing Law
The Indenture and the Securities shall be governed by, and construed
in accordance with, the laws of the State of New York but without giving effect
to applicable principles of conflict of laws to the extent that the application
of the laws of another jurisdiction would be required thereby.
17. Authentication
This Security shall not be valid until an authorized signatory of
the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
18. Abbreviations
Customary abbreviations may be used in the name of a Securityholder
or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
<PAGE>
7
19. CUSIP Numbers
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and have directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Securityholder upon written request
and without charge to the Securityholder a copy of the Indenture which has in it
the text of this Security in larger type. Requests may be made as follows:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Aaron B. Parker
-----------------------------------------------------
<PAGE>
8
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to
transfer this Security on the books of the Company. The agent may substitute
another to act for him.
________________________________________________________________________________
Date:_______________________ Your Signature:________________________________
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed)
________________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
<PAGE>
9
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.6 or 4.8 of the Indenture, check the box:
|_|
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the
amount: $
Date:_________________ Your Signature:_________________________________________
(Sign exactly as your name appears on the
other side of the Security)
Signature Guarantee:____________________________________________________________
(Signature must be guaranteed)
<PAGE>
EXHIBIT 12.1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
1992 1993 1994 1995 1996 JUNE 30, 1996 JUNE 29, 1997
--------- --------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ (12,121) $ (30,670) $ (8,597) $ (25,234) $ (13,640) $ (14,180) $ (7,864)
Interest and amortization of deferred
finance costs........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Implicit rental interest expense.......... 4,986 5,171 5,590 5,729 5,990 2,924 2,937
--------- --------- --------- --------- --------- ------------- -------------
Total earnings.......................... 30,495 13,287 42,460 22,399 36,491 10,882 17,311
--------- --------- --------- --------- --------- ------------- -------------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Capitalized interest...................... 128 156 176 62 49 35 17
Implicit rental interest expense.......... 4,986 5,171 5,590 5,729 5,990 2,924 2,937
--------- --------- --------- --------- --------- ------------- -------------
Total fixed charges..................... 42,744 44,113 51,233 47,695 50,180 25,097 25,192
--------- --------- --------- --------- --------- ------------- -------------
Earnings insufficient to cover fixed
charges................................... $ 12,249 $ 30,826 $ 8,773 $ 25,296 $ 13,689 $ 14,215 $ 7,881
--------- --------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- --------- ------------- -------------
Pro forma Data (a):
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ 3,284 $ (218)
Interest and amortization of deferred
finance costs........................... 28,163 14,156
Implicit rental interest expense.......... 5,990 2,937
--------- -------------
Total earnings.......................... 37,437 17,311
--------- -------------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 28,163 14,156
Capitalized interest...................... 49 17
Implicit rental interest expense.......... 5,990 2,937
--------- -------------
Total fixed charges..................... 34,202 17,110
--------- -------------
Earnings sufficient to cover fixed
charges................................... $ 3,235 $ (201)
--------- -------------
--------- -------------
Ratio of earnings to fixed charges.......... 1.1x 1.0x
--------- -------------
--------- -------------
<CAPTION>
TWELVE MONTHS
ENDED
JUNE 29, 1997
---------------
<S> <C>
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ (7,324)
Interest and amortization of deferred
finance costs........................... 44,241
Implicit rental interest expense.......... 6,003
-------
Total earnings.......................... 42,490
-------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 44,241
Capitalized interest...................... 31
Implicit rental interest expense.......... 6,003
-------
Total fixed charges..................... 50,275
-------
Earnings insufficient to cover fixed
charges................................... $ 7,355
-------
-------
Pro forma Data (a):
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ 9.164
Interest and amortization of deferred
finance costs........................... 28,226
Implicit rental interest expense.......... 6,003
-------
Total earnings.......................... 43,393
-------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 28,226
Capitalized interest...................... 31
Implicit rental interest expense.......... 6,003
-------
Total fixed charges..................... 34,260
-------
Earnings sufficient to cover fixed
charges................................... $ 9,133
-------
-------
Ratio of earnings to fixed charges.......... 1.3x
-------
-------
</TABLE>
- ------------------------------
(a) As adjusted to give effect to the Recapitalization and the changes in
accounting principel for pensions. See Note 10 of Notes to Consolidated
Financial Statements.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF COMPANY PLACE OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Restaurant Insurance Corporation Vermont
Friendly's Restaurants Franchise, Inc. Delaware
Friendly's International, Inc. Delaware
Friendly Holding (UK) Limited United Kingdom
Friendly Ice Cream (UK) Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all reference to our Firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
October 3, 1997
<PAGE>
EXHIBIT 25.1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d)
OF REGULATION S-T
==============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
FRIENDLY ICE CREAM CORPORATION
(Exact name of obligor as specified in its charter)
Massachusetts 04-2053130
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1855 Boston Road
Wilbraham, Massachusetts 01095
(Address of principal executive offices) (Zip code)
______________________
FRIENDLY'S RESTAURANTS FRANCHISE, INC.
(Exact name of obligor as specified in its charter)
Delaware 51-0296446
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1855 Boston Road
Wilbraham, Massachusetts 01095
(Address of principal executive offices) (Zip code)
______________________
% Senior Notes due 2007
(Title of the indenture securities)
===============================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
- -------------------------------------------------------------------------------
Name Address
- -------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 3rd day of October, 1997.
THE BANK OF NEW YORK
By: /s/ THOMAS E. TABOR
---------------------------
Name: THOMAS E. TABOR
Title: ASSISTANT TREASURER
-4-
<PAGE>
Exhibit 7
------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 7,769,502
Interest-bearing balances .......... 1,472,524
Securities:
Held-to-maturity securities ........ 1,080,234
Available-for-sale securities ...... 3,046,199
Federal funds sold and Securities pur-
chased under agreements to resell...... 3,193,800
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................35,352,045
LESS: Allowance for loan and
lease losses ..............625,042
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 34,726,574
Assets held in trading accounts ...... 1,611,096
Premises and fixed assets (including
capitalized leases) ................ 676,729
Other real estate owned .............. 22,460
Investments in unconsolidated
subsidiaries and associated
companies .......................... 209,959
Customers' liability to this bank on
acceptances outstanding ............ 1,357,731
Intangible assets .................... 720,883
Other assets ......................... 1,627,267
-----------
Total assets ......................... $57,514,958
-----------
-----------
LIABILITIES
Deposits:
In domestic offices ................ $26,875,596
Noninterest-bearing ......11,213,657
Interest-bearing .........15,661,939
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 16,334,270
Noninterest-bearing .........596,369
Interest-bearing .........15,737,901
Federal funds purchased and Securities
sold under agreements to repurchase. 1,583,157
Demand notes issued to the U.S.
Treasury ........................... 303,000
Trading liabilities .................. 1,308,173
Other borrowed money:
With remaining maturity of one year
or less .......................... 2,383,570
With remaining maturity of more than
one year through three years.......... 0
With remaining maturity of more than
three years ......................... 20,679
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,377,244
Subordinated notes and debentures .... 1,018,940
Other liabilities .................... 1,732,792
-----------
Total liabilities .................... 52,937,421
-----------
EQUITY CAPITAL
Common stock ........................ 1,135,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,721,258
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ 1,948
Cumulative foreign currency transla-
tion adjustments .................. ( 12,272)
-----------
Total equity capital ................ 4,577,537
-----------
Total liabilities and equity
capital ........................... $57,514,958
-----------
-----------
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
\
Alan R. Griffith |
J. Carter Bacot |
Thomas A. Renyi | Directors
/
------------------------------------------------------------------
<PAGE>
EXHIBIT 99.1
CONSENT TO BE NAMED IN THE REGISTRATION STATEMENTS
To: Friendly Ice Cream Corporation
The undersigned hereby consents to be named as a Director in the
Registration Statements on Form S-1 (the "Registration Statements"), as first
filed by Friendly Ice Cream Corporation (the "Company") on August 29, 1997, and
to the statements in such Registration Statements concerning the undersigned's
intended nomination to the Board of Directors of the Company.
Dated: Sept. 29, 1997
By: Michael J. Daly
Name: Michael J. Daly
